FOREMOST-MCKESSON v. PROVIDENT SECURITIES
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Morton Moskin
Chief Justice Warren E. Burger: We will hear arguments first this morning in 74-742, Foremost-McKesson, Inc. against Provident Securities Co.
Mr. Moskin, you may proceed whenever you are ready.
Mr. Morton Moskin: Mr. Chief Justice and may it please the Court.
This case is here on a petition for certiorari to the Ninth Circuit Court of Appeals.
It arises under Section 16 (b) of the Securities Exchange Act of 1934.
The Court of Appeals found that a holder of more than 10% that is to say, a beneficial owner of more than 10% of the equity securities of petitioner, within six months of that purchase which made respondent such an equity owner, sold certain of those equity securities and realized a profit thereby.
Nevertheless, it found that there was no liability under the statute because it concluded that the transaction by which respondent became a 10% beneficiary was not one that met the requirements of a Section 16 (b) purchase.
To come to that conclusion, it relied upon a proviso in Section 16 (b) which provides that the subsection shall not be construed to cover any transaction where such beneficial owner was not such, both at the time of the purchase and sale or the sale and purchase of the security involved.
This decision of the Court of Appeals was contrary to all of the preexisting authority, particularly that of the Second and Eighth Circuits and the Stella case was the case which we contend is the -- was and should remain the prevailing authority on the point.
The key facts all arose in a two-month period in September and October of 1969.
On September 25 in 1969, petitioner and respondent entered into an agreement.
I should pause to note that the statute provides that a purchase is defined to include an agreement to purchase and a sale is defined to include an agreement to sell.
The agreement was one by which respondent would exchange some $54 million of its assets, roughly two-thirds of this personal holding company’s assets, in exchange for $4.25 million in cash and just under $50 million of debentures which were immediately convertible into common stock of Foremost-McKesson.
On the 13th of October, two days before the closing under that agreement, the shareholders of Provident met informally to consider what their agenda described as the Section 16 (b) problem.
They went on two days later to close this transaction and acquired at that point in time $40 million of immediately convertible debentures.
Five days later, another $7.5 million of these convertible debentures were delivered pursuant to adjustments in the closing price under the agreement.
The next day, on October 21, respondent entered into agreement along with petitioner and Dillon, Read & Company on behalf of an underwriting group to sell $25 million of these convertible debentures and the closing under that underwriting agreement took place on October 28.
The respondent would undoubtedly stress two additional facts and I would like to put those before the bench at this time as well.
They argued that on October 13, the day when the shareholders informally met to consider the “Section 16 (b) problem,” the Board of Provident also adapted a so-called liquidating dividend, one which did not fix any specified date for the liquidating dividend and which was subject to various contingencies and other legal requirements, including the fact that, under California law, debtors and others with claims against the company would have to be satisfied before any liquidation could take place.
The second point which perhaps they will stress or emphasize or report to you is that on October 24, between the date underwriting agreement was signed and the date it was closed, there was distribution of 2,225,0000 face amount of these debentures to shareholders of Provident, and we concede --
Chief Justice Warren E. Burger: You are speaking now of the seven days between the 21st and the 28th?
Mr. Morton Moskin: Yes, Your Honor and we concede that had that liquidating distribution taken place before the 21st there would not be Section 16 (b) liability.
We concede that on the authority of the Reliance Electric case.
Now then, this case began when respondent sought a declaratory judgment in the Federal District Court because it wished to liquidate and dissolve.
That Court on what it considered equitable considerations found for respondent.
The Ninth Circuit opinion affirmed, but in the process rejected all of the arguments that had been made by the respondent and they said, among other things, that there was sufficient cooperation between the parties prior to the purchase such as, it could give rise to the possibility of obtaining inside information at that point in time.
They also said that between the purchase date and the sale date that there was an opportunity to engage in speculative abuse and they went on to add, that it was the very kind of speculative abuse with which the statute was designed to cope.
I would like to just stress a few brief factual items in the appendix on the first of those two points, the pre-purchase cooperation because Provident’s brief at page 38 states that it is undisputed that negotiations only involve in evaluation of Provident's assets.
Not only is there nothing in the record to support that, but there is, indeed items or there are not any items in the record to support the contrary inference.
I would call your attention to page A41 in the record where Mr. Haskel (ph) of Dillon, Read, appearing before the Department of Corporations of California on the 25th of September, points out that Provident had hired Dillon, Read the previous September to explore possibilities and that they went into a great detail with a number of these companies and “examined” all of these companies.
They then settled upon Foremost as the most likely participant in a transaction to provide liquidity to its shareholders and on A46 they go on to say, Mr. Haskel does, that we think the deal is fair because quality of the securities that we are getting, that is to say petitioners’ securities, is of sufficient quality and condition where we think that they represent a fair marketable security for the Provident shareholders.
And then on A74 the Chief Executive Officer of Provident observes in an affidavit that when the Foremost partnership, if you will, or deal had been decided as the most promising, “there followed throughout the late summer and early fall intense negotiations between Foremost and Provident.”
Justice Harry A. Blackmun: What page did you say that was?
Mr. Morton Moskin: That last was an affidavit at page A74, Mr. Dillon Warren’s affidavit.
The Ninth Circuit relied, I think, on two things.
First, it purported to find legislative history to support its conclusion in respect to the proviso.
There are a number of answers to this contention.
Perhaps the most compelling is that this Court in Reliance Electric said that the legislative history does not explain the proviso.
Moreover, neither the District Court nor the Court of Appeals in the Stella case found any legislative history that bore on the explanation of the proviso back in 1956 and the Securities and Exchange Commission, which has submitted amicus briefs to this Court in Reliance and earlier to the Second Circuit Court in Stella, found some scratch of legislative history to the contrary to support petitioners’ contention here.
In addition to which, the dissent in the Stella case by Judge Hanks (ph) was one that conceded that there was no applicable legislative history in respect to the proviso.
It is an interesting point to note that Judge Hanks in his dissent concluded that the principal reason for his judgment that the proviso required that there would be a purchase subsequent to becoming a 10% stockholder was of that, in his mind, was clearly required in respective directors and officers, a position that Mr. Chief Justice Burger found in error three years later when he sat and decided in the Second Circuit for Unanimous Court, in the case of Adler against Klawans.
Moreover, Judge Wallace himself in the Ninth Circuit, I think, was a little inconsistent on this legislative history point because when he came to consider the meaning of “at the time of purchase” and “at the time of sale,” he decided that in respect to the sale, “sale” meant “simultaneously with” rather than ‘prior to.”
Therefore, he looked to the purposes of the statute rather than to the legislative history to define the same words, both at the time of purchase and sale, differently in respect to the purchase and in respect to the sale.
It is also interesting that neither Provident nor Gulf & Western, in the case that was decided last week in the Seventh Circuit, saw fit to urge the point about this proviso and the meaning of both at the time of purchase and sale.
It was never argued in the Ninth Circuit by either party and in the Gulf & Western case in the Seventh Circuit, it was only after the Provident case was decided in the Ninth Circuit that supplementary papers were submitted by the Gulf & Western and consequently, by Allis-Chalmers to support the then novel theory of the Ninth Circuit.
And, incidentally, the Seventh Circuit has found still another view of the meaning of these words both at the time of purchase and sale, a meaning which I suggest and believe is at odds with the teaching of this Court in the Reliance Electric case.
Staying for a moment with the legislative history, I would like to elude to footnote 13 in this Court’s recent decision in Blue Chip where it is said of another party, but I think equally applicable in respect to Provident that they seek reinsertion of language into the Act that Congress had before it, but deleted prior to passage, that is the very end of footnote 13 in Blue Chip.
So, we have in respect of legislative history something that Gulf & Western and Provident emphasized different aspects of the alleged legislative history in respect of and that neither the Ninth nor the Seventh Circuit agreed on as to what it might be.
The second reason that the Ninth Circuit found, that there was no liability in this case, was based upon some language in this Court’s decision in Kern County.
The language was that they could not have been inside information obtained from substantial stock holdings that did not yet exist.
The Second Circuit in American Standard against Crane said, and I trust and hope that they are correct, that the Kern County decision was sui generis to a defensive merger situation.
in any event, there is ample reason in the statute to conclude that in a factual situation, such as ours at least, that there is no requirement that there would be substantial stock holdings at the time of the purchase or neither at the time of a purchase or a sale.
You remember, earlier, I spoke about the statute defining contract to buy and a contract to sell as including purchases and sales and surely, a director or an officer could buy himself a contract without ever obtaining an equity position and still liability would attach under the statute.
Justice William H. Rehnquist: How would that be?
Mr. Morton Moskin: The statute defines directors, officers, and 10% beneficial owners as fiduciaries.
It makes --
Justice William H. Rehnquist: You are talking about a director or someone separately defined as --
Mr. Morton Moskin: Yes, Mr. Justice Rehnquist.
Justice William H. Rehnquist: Will you say in a factual situation such as ours, are you suggesting that we ought to have a number of case by case analysis of these things?
Mr. Morton Moskin: I am not, Your Honor.
I am simply, in all candor, trying to protect my flank.
I think that if you chose to go that route, you could still find for petitioner in this case.
I do not think that is the appropriate way to go.
Justice William H. Rehnquist: That certainly does not seem what Congress had in mind.
They wanted a flat rule?
Mr. Morton Moskin: I believe you are absolutely correct and I agree with that conclusion.
I think, hopefully, it has been established that in this case there was at least an ambiguity in what the key statutory words mean.
That being so, it is appropriate to look to the statute as a whole and to consider the results of the alternative constructions.
And I suggest that the one that best carries out rather than defeats the statutory purposes is the one that should be adapted.
I would like to offer a few illustrations.
Under the Ninth and Seventh Circuit views, if within six months there was a purchase of 50% of the stock of an issuer and all of it was sold within that time at a profit, there will be no liability.
Similarly, if 9.9% of the stock had been acquired and then an addition 40% had been acquired and then all of it had been sold within the same six-month period, again, there will be no liability.
And yet, if you added one share before the sale, there would be liability for the profit of that one share.
Justice William H. Rehnquist: Of course, if the sale were deferred so that it took place in seven months rather than six, there would be no liability?
Mr. Morton Moskin: That is true.
The statute is arbitrary.
It is designed to deter and I think the purposes of deterrence, the court -- the Congress, as a matter of fact concluded that they had to evaluate on the one hand the beneficial purposes of the statute and also on the other, the beneficial purposes of long-term investments and concluded that a six-month cut off would be appropriate to meet both of those countervailing objectives.
In each of these cases that I have postulated, the director or officer would be liable, at least under the Doctrine of Adler against Klawans.
That was a case in which the defendant bought stock, 60 days later became a director, and then within six months of the purchase sold the shares and the Second Circuit found liability should attach because of the purposes of the statute.
And as a matter of fact, in that case Mr. Chief Justice Burger wrote that “at some moment before making a sale of stock, the insider was in an official position which he could have used to influence the sale price.”
That brings me to what I think is the appropriate interpretation of this statute, to with that it does not matter whether you acquire this information before or after the initial transaction so long as it exists prior to the closing transaction, the second of the two transactions.
And there is again -- authority as legion to support that view.
Not only the Adler against Klawans case, but I think that in Kern County this Court looked to, at least examined into the question of whether or not there was a possibility of abuse between the date of the purchase and the date of the sale.
I think, if you consider the language in Adler and other places to the effect that the theory here is the director, officer or the beneficial holder is a fiduciary and look to common law concepts, it should not matter whether the fiduciary abuses this trust before or after he becomes a fiduciary so long as the abuse of trust has taken place prior to the point when the sale occurred and the profit was realized.
Justice Lewis F. Powell: Mr. Moskin, I suppose you are coming to this, but why do you think the statute through the proviso draws a distinction between a 10% holder and an officer and a director?
Mr. Morton Moskin: I think the statute draws that distinction, Mr. Justice Powell, because there is some difference between a holder of something under 10%, be it 1 or 8 or 9 and the Congress said 10, and a director or officer.
The legislative history makes clear that once you get to 10%, and at one point it was 5% that they were talking about, that you have the potential to control for manipulation that justifies your being treated the same as a director or officer.
Now, Reliance Electric made it quite clear that this means that in a step-up or step-down transaction that there cannot be a liability attached if the transaction is structured in an appropriate way so that one -- I will put it this way, if this purchase here had been 9.9% in one transaction and then some additional amount in the second transaction, this proviso would only catch the profit on the second transaction.
Just as in Reliance, this Court found that the profit was only caught on the step-down transaction that got you from, whatever it was, 12.something to 9.9.
Justice Lewis F. Powell: But the statute does make a distinction between --
Mr. Morton Moskin: Absolutely.
Justice Lewis F. Powell: -- the security holder on the hand, the officer and director on the other?
It does only in respect to the proviso.
I think, for example, earlier where the statute talks about the purpose, it is kind of a preamble in 16 (b) which says “for the purpose of preventing any unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, etcetera.”
Now, there is no distinction made there and there is no distinction made in respect of reporting.
The reporting requirements in 16 (a) apply without difference to an officer, director, and 10% stockholder.
That reporting is required the moment one becomes a 10% stockholder or rather within 10 days thereafter.
Justice Lewis F. Powell: Right, but the basic purpose of the Act is to reach people who have inside information.
Now, tell me as a practical matter how a 10% stockholder who does not have a representative on the Board obtains inside information lawfully?
Mr. Morton Moskin: Well, I would answer that in several ways.
One, the statutory history suggest that one need not be a director or officer when he owns as much as 10% of a public company to control the election of directors and officers, to manipulate the behavior of the management in a way that would be down to his benefit.
In addition to that, the Ninth Circuit Court found the potential perspective of abuse in this very case both before, as I said earlier, in respect to the intense negotiations and the cooperation between the parties and subsequent when it said the assets in the Provident passed on to Foremost, included a large bundle of real estate and some relatively illiquid securities.
That real estate was such that it could have required, and Provident would have known this better than anybody else, substantial expenditures of cash to develop that property.
So that, they might have learned in these negotiations that Foremost would not pay a dividend next time because it needed to preserve the cash so that it could proceed to develop these properties.
What Provident was doing here was protecting itself against a market risk.
Chief Justice Warren E. Burger: Would you have had to have inside information to draw that inference from the cash picture here?
Mr. Morton Moskin: Would you have had to?
No, you would not have had to, but the statute does not speak in terms of “would have had to.”
It speaks in terms of possibilities, potentials, and presumptions.
Chief Justice Warren E. Burger: But it is certainly an inference which any sophisticated businessman could have drawn?
Mr. Morton Moskin: If he knew the nature of the assets that were transferred from Provident to Foremost.
Chief Justice Warren E. Burger: That would not be necessarily inside information though, would it?
Mr. Morton Moskin: No, it would not.
Justice Lewis F. Powell: Mr. Moskin, if you were counsel to a corporation that had a 10% stockholder not represented on the Board, would you advise the corporation to make any information available to that 10% stockholder that was not available to all stockholders?
Mr. Morton Moskin: Not at this point in time, Your Honor, I would not.
Justice Lewis F. Powell: Not in light of 10 (b) (5)?
Mr. Morton Moskin: Not in light, but I would however, and have any number of times advised a client in that position that he had better not sell within six months of that purchase because if he did, it was my opinion and remains my opinion that he would be liable for any profit he realized..
Justice Lewis F. Powell: That is a different question entirely though, is it not?
Mr. Morton Moskin: A different question.
Justice Lewis F. Powell: Right, that is the question before us here?
Mr. Morton Moskin: It is indeed.
Justice Lewis F. Powell: I see.
Mr. Morton Moskin: I am not alone in contending that a construction other than the one for which I contend would destroy the effectiveness of the statute.
I think, I hope I have given you some examples to demonstrate that.
Justice Harry A. Blackmun: Mr. Moskin, was it not this entire transaction one for the primary benefit of Foremost in its convenience?
Mr. Morton Moskin: I think you are alluding to the fact that the negotiations resulted in securities rather than cash being transferred in exchange for the assets.
To that extent, that is true.
The transaction was, nevertheless, 100% voluntary.
There was no gun to the head of the respondent.
It was free to enter into this contract or not as it saw fit and moreover, it was free to wait six months before it sold.
And, as the Seventh Circuit said in the Bershad case, the responsibility under this statute rests with the fiduciary to structure the transaction in a way to avoid the prohibitions of the statute because the deterrent effect of the statute requires that one do that.
Justice Harry A. Blackmun: It is a little strange for the fiduciary relationship, however, to run the Foremost, is it not when it is --
Mr. Morton Moskin: No, I think not, Your Honor.
As a matter of fact, if you will look at the statutory language, the statutory language in respect of the profit says the profit shall inure to and be recoverable by the issuer.
It has been written and suggested, and you will find a reference to it in the American Standard case, that that word “inure” was intended to create a constructive trust for the benefit of the issuer and that ties right in with my contention that this is a presumed fiduciary relationship to which the statute addresses itself.
If you look at the alternatives, perhaps you are suggesting that this may be a windfall profit to the issuer, if that be so the alternative is to permit speculation in inside information within a six-month period by statutory insiders with impunity unless one can meet the evidentiary standards of Rule 10 (b) (5).
Justice Harry A. Blackmun: Well, I guess I am having the same trouble with some of the others indicated as to the source of the inside information here?
Mr. Morton Moskin: Let me say this that all of the history of the cases under the statute says that one presumes the misuse of inside information except in the so-called unorthodox transaction.
The unorthodox transaction test goes not to whether or not there was a profit or whether or not there was an abuse, but the Courts have said “we will look to the definition of purchase and sale in an unorthodox transaction” and conclude in two categories, I believe, of cases and I have analyzed them that we may not, under the pragmatic theory, find a purchase or a sale.
Those categories are, one, an involuntary transaction such as you had in Kern and, two, a situation where, in effect, the economic equivalent of what you had before is essentially that which you had later such as Mr. Justice Stewart’s decision in Ferraiolo against Newman in the Sixth Circuit.
Moreover, Blau against Lehman is another case where, simply, there was a transfer of corporate securities from one subsidiary to another subsidiary and the Court, I think, properly concluded that there was no change in a general sense of the term, and therefore, that was not said to be a purchase.
But, here, we have a clear purchase and a clear sale and I submit that all of the cases say that that is where your inquiry ends in respect of whether in fact there was a potential for misuse of inside information.
Justice William H. Rehnquist: But you are asking us to resolve an ambiguity in the statute.
I do not think it is unreasonable for us to ask ourselves in this situation what you want covered, but which your opponent does not, is there a potential for abuse, even though if it were clearly within the statute there is no doubt that the congressional presumption would cover it?
Mr. Morton Moskin: It is not unreasonable, but I am suggesting it is clearly within the statute because it is clearly a purchase and clearly a sale.
And moreover, I would like, if I may, to refer to some language that you, Mr. Justice Rehnquist, wrote again in Blue Chip and simply substitute Stella for the word Birnbaum and 16 (b) for 10 (b).
The long-standing acceptance by the Courts coupled with Congress’ failure to reject Stella’s reasonable interpretation of the wording of 16 (b), then I will line the words that deal what 10 (b) meant, argue significantly in favor of acceptance of the Birnbaum, excuse me, Stella rule by this Court citing Blau against Lehman which, in fact, was a Section 16 (b) case.
There is a long-standing settled acceptance of the law on this point.
Justice William H. Rehnquist: Okay, but Stella was the other end of the six-month period, was it not?
Mr. Morton Moskin: It was the sale.
Justice William H. Rehnquist: Well, then the reasoning that Judge Kaufman used at any rate was applicable to the other end of the six-months, but you have got an Eighth Circuit case.
Do you have any more Court of Appeals authorities in that?
Mr. Morton Moskin: The Second Circuit has decided this question at least three times.
Perine against Norton is one.
Stella is another.
Newmark against RKO is the third.
Justice William H. Rehnquist: What do you have besides a Second and the Eighth Circuit, granted that the Eight Circuit as well as the Second is a very respectable Court?
Mr. Morton Moskin: Do I need more?
Justice Potter Stewart: You have this case in the Ninth Circuit and now, is there not a recent Seventh Circuit?
Mr. Morton Moskin: Yes, the Seventh Circuit --
Justice Potter Stewart: Decision against you, so you do not have this unbroken line of consistent Court of Appeals authority of the kind that was referred to in Mr. Justice Rehnquist’s opinion in Blue Chip, do you?
Mr. Morton Moskin: Well, we did until the Ninth Circuit decision.
Justice Potter Stewart: Until recently?
Mr. Morton Moskin: Yes.
Justice Lewis F. Powell: Mr. Moskin, I know your time is running short, but I am interested in the date of sale question in this case.
I would like you to comment on that before you conclude.
Mr. Morton Moskin: I will do that now, Your Honor.
The underwriting agreement was an agreement to sell.
On October 21st when that agreement was executed, all of respondents’ rights and obligations were fixed.
The profit was locked insofar as it was concerned.
To be sure there was a condition, a market out as it were that it is standard in underwriting agreements from beginning of time and which never almost is used and which would have given the underwriters a right in an extreme circumstance in that six or seven-day period not to continue the transaction, not to close it.
But, if agreement to purchase and agreement to sell is to mean anything, and in the context of the statutory definition of purchase and sale, it would be a very simple matter indeed for a lot of meaningless conditions to be inserted into a contract and to ignore the whole intent of the statute.
Justice Lewis F. Powell: You are really not suggesting that the market out, as you call it, is meaningless, are you?
Mr. Morton Moskin: It is meaningless in 99.4% of the cases when underwriting agreements are signed.
Justice Lewis F. Powell: You have testified as to your experience and now I will testify as to mine.
I have seen them exercised.
Mr. Morton Moskin: Well, that is the 0.6% that I was describing, Your Honor.[Laughter]
Justice Lewis F. Powell: Well, your answer is that although they are valid conditions to the obligation of the underwriters to buy and although the underwriting agreement states that the date of purchase shall be the 28th, that because these conditions are extremely unlikely to happen, nevertheless, the sale occurred on October 21?
Mr. Morton Moskin: That is my answer.
Justice Lewis F. Powell: Right.
Mr. Morton Moskin: And I must say, it was also Judge Wallace’s answer in the Ninth Circuit.
I would like to take a moment before I conclude to refer also to Rule 16 (b) (2) which was adapted in 1935 in response to an article in the Virginia Law Review by Mr. Eustace Sullivan in which he pointed out that, as he read it then contemporaneously with the adaption of the statute, the construction for which I contend was required and it would have prevented underwriters from acquiring securities and distributing them in an underwriting unless the exemption would provide it, and the SEC obviously agreed with that construction of the statute and under any number of cases with which this Court is familiar, an agency that is charged with administering a statute, its views are entitled to the special weight under an ambiguous situation such as this.
May I spend a moment on the Seventh Circuit decision?
I take it the silence is yes and I would proceed to do so.
Chief Justice Warren E. Burger: Your time is almost up.
You can make your own choice about that.
Mr. Morton Moskin: I will do that if I may.
I said a while back that it rejects the teaching of reliance as well as its analysis because it says that a closing transaction in a sale first-purchase later is caught notwithstanding the fact that at the time of that second transaction the beneficial owner may own 9.9 or less of the stock.
I believe that to be squarely in the teeth of the holding of this Court in Reliance Electric.
Chief Justice Warren E. Burger: Very well, Mr. Moskin.
Argument of Noble K. Gregory
Mr. Noble K. Gregory: Mr. Chief Justice and may it please the Court.
I would like to start with emphasizing a factual point, although it is not crucial to the main argument, but it came up and I think it is very important in this case, at least from the so-called Kern County argument.
Provident was never a fiduciary of this corporation, Foremost-McKesson.
It was only a creditor.
All it had acquired were convertible debentures which are covered by Section 16 (b) because of their convertible nature, but I think it is important to understand that a person coming under 16 (b) as a beneficial owner technically is not always a fiduciary, and this is a perfect example of it.
The relationship is very clearly pointed out in many of the cases of a convertible debenture owner is that of a creditor and all they had was the information after they became a credit that a creditor normally would have.
Now, they had knowledge of their own assets of course, but that was not knowledge that they received as a result of the relationship, which brings me to what I think is the key provision in Section 16 (b).
For the purpose of preventing the unfair use of information which may have been obtained by a beneficial owner that is more than a 10% stockholder, director or officer by reason of his relationship to the issuer.
I think that is the key to interpreting the so-called proviso or exemption that the Section 16 (b) shall not be construed to cover any transaction were such beneficial owner, that is the more than 10% stockholder, was not such both at the time of the purchase and the sale.
Now, Foremost attempts to make a great deal of statement in the Reliance Electric case that there is no legislative history of the proviso, and that is correct.
There is very legislative history of the proviso, but it even goes so far as to take that out of context because what the opinion says that although there may be, I am not putting, I am paraphrasing, no legislative history of the proviso, nonetheless that does not justify the parting from the clear purpose of the statute.
I will read what the Court said so I would not unfairly paraphrase it.
“The proviso cannot be disregarded simply on the ground that it may be inconsistent with our assessment, the Court’s assessment of the wholesome purposes of the Act.”
Now, more important that, as I suggest, it is the legislative history of the statute and nobody could deny it, and this purpose clause, I think, exemplifies that legislative history and it is helpful as applied to the facts of the case at bar.
Both the Seventh Circuit and the Ninth Circuit had gone into it at length and I would not go into the detail, but I think I can clearly state with confidence that it shows that Congress was concerned with the use of the inside information by one who is a substantial stockholder before, and I emphasize there the before, he had made a purchase or an acquisition or before with the intent to sell at a quick profit.
Now, I realize that it took the intent language out of the statute and put in a rule of thumb, but the point and the purpose of the statute which is still in its purpose clause which was added when it took out the rule and put in the rule of thumb, or before he sold at a high price with the expectation of making a quick repurchase at a lower price, both of these, as the Seventh Circuit points out, are one ends of a swing and that is what we are talking about, a short-swing transaction.
It shows, in other words, that the aim of Section 16 (b) was to discourage large stockholders, and I am only talking for the moment about stockholders, from making quick profits by entering into the short-swing transaction because of inside information received by reasons of their relationship to the corporation.
That is the proviso which was interpreted in Kern County Land, and I will not paraphrase that and I will try not to.
In Kern County Land, this Court pointed out that the aim of that statute is the misuse of information obtained after the acquisition of substantial stockholdings, not purchases “based on inside information obtained from stockholdings that did not yet exist.”
Now, that is the situation here.
Certainly, as I said a moment ago, Provident had knowledge of its own assets, but it did not have that knowledge as a result of any relationship to Foremost.
Now, Mr. Moskin in his brief before the Court of Chambers on the tail of hearts, I should say, and any statute does not apply to everything.
There are always situations where it is not going to apply.
That was recognized clearly in Reliance.
It is recognized by some of the questions from the Court.
Obviously, the statute never applies if a stockholder never gets more than 9%.
He can speculate all he wants as far as 16 (b) is concerned, as long as he never gets more than 9% or he can wait for the six months.
There are a lot of other things he can do and some of the things he can do under the statute and under the purpose is, acquire information, not as a result of his relationship to the corporation, but for a (Inaudible).
There were provisions in the, and I think that again goes back to the legislative history, their original provisions or early provisions would have prohibited that because he might have a relationship not to the corporation by stockholding, but by some other relations, and get the inside information and make a killing and, of course, there are remedies for that.
Congress did not stop the 16 (b), but 16 (b) cannot be made into a device to solve all problems of inside information or the misuse them.
It is only designed by its very terms and its purpose to prevent the unfair use of the inside information arising by reason of the relationship with the corporation to the person making the short-swing transaction.
I think I would like to go on now to the other ground, but I would like first to make one point which I think should be made.
Mr. Moskin keeps making a great deal of the fact that I did not argue this point strenuously in the Ninth Circuit.
He says we did not make it.
We made it, but we did not urge it orally.
The reason, I think, is obvious.
We had a conflict with the Second Circuit if we went on that ground, and although, I am highly honored to be arguing the case here, my client is less than happy of the expense..
I, naturally, tried to win on the ground which I thought would end the case.
But the potential for speculative abuse point is the main argument that I have made in the Ninth Circuit and, that based on the Kern County Land case I think fits this case very well.
It does not fit to a T, it is not a white horse case.
There never are any, but there are two facts that both the Ninth Circuit in rejecting it and Mr. Moskin tends to brush over.
The most important one is the one I started with, this lack of any fiduciary relationship.
This was not stock.
The Ninth Circuit opinion treats Provident as a stockholder.
Now, as I say, I do not deny that 16 (b) applies because of the convertible nature, but that is the only reason it applies not because Provident went out to buy stock.
Provident went out to sell assets as a part of the liquidation.
The corporation was going into liquidation.
The sole purpose of this transaction, as far as Provident was concerned and this is an objective fact, was to liquidate this corporation to avoid tax consequences and this was a legitimate method of complying with the tax laws.
Justice Potter Stewart: Who were in fact beneficial owners of Provident?
Mr. Noble K. Gregory: Heirs of the Crocker estate, Your Honor.
Justice Potter Stewart: Including Mr. Frederick C. Whitman?
Mr. Noble K. Gregory: I do not recall the name.
I am sorry.
I did not bother to check who the particular stockholders were, but they were all heirs and that is all I can tell you.
It may be in the record, I am just not sure, but they were heirs of the Crocker estate and formed a family corporation to hold certain assets of the Crocker family and they found tax problems and they wanted to liquidate.
Now, their desire to liquidate was to sell the assets and they hired Dillon Reed to find somebody that would buy the assets and the only people that were satisfactory were Foremost and they thought they had an arrangement with Foremost whereby they could avoid any problems.
Other problems arose, if they had carried it out as they originally designed, unfortunately they did not, they would have no 16 (b) problem.
I would like to mention too that although there is an agenda in which at the bottom is a mention of 16 (b), the impression I am sure Mr. Moskin did not intend to give, that this was all designed to get around 16 (b) is not borne out by the record.
All it was is that apparently, somebody mentioned there might be a 16 (b) problem.
The case came up on summary judgment so we do not have a full detail of that.
Now, the other point is, again, the convertible debentures.
That was the condition to the whole agreement to sell the assets to Foremost, and I am not trying to be a picayune in calling it a sale of assets.
I realize that, under one possible normal construction of any sale of assets for a stock it is a technical purchase, but that is the whole point I believe occurred that where you have something that technically may be a purchase if it is not within the potential for speculative abuse, then you look at the realistic transaction.
Now, the day after the agreement to sell, the corporation went into liquidation and a corporation in liquidation does not normally engage in speculation and, under California law, it is not permitted to engage in speculation.
The liquidation of the corporation was never a stockholder of Foremost.
And, as a debenture holder, Provident was only a creditor, as I said.
There was, as the District Court pointed out and I should say this is the ground on which the District Court decided the case, that it was not a potential for speculative abuse, Foremost made no claim in the Trial Court, as the District Court pointed out, that provident derived inside information profit or advantage “from its all but monetary status as an insider of Foremost.”
Foremost claims that Provident had inside information, I think I covered that, it was inside information that had by reason of the fact that it was selling it.
Now, even if the information as its own assets could have given Provident an opportunity, it was not an opportunity that arose out of the stockholdings.
Justice Powell, I think, asked about the other ground that was considered in the Ninth Circuit.
The point there, again, we must look at this case in view of the facts and the purposes and I think, as Kern County applies, the agreement was very clear that the time and date of sale was after the, I believe it was October 28 was to be the date of sale, I think this date is wrong, and before that, more than half of these debentures were distributed to the stockholders of Provident.
Now, there are cases of both ways.
There are cases that Mr. Moskin relies on that you disregard all, but the contract controls, but I submit if we follow the teaching of Kern County that you look at the transaction realistically where there is no potential for speculative abuse and you also look at it technically from the contract law point of view, there was no sale until all of these conditions had passed.
Now, there are two other arguments.
Neither one of which, I think Mr. Moskin misspoke himself, he said the Ninth Circuit passed on and neither the Trial Court nor the Ninth Circuit passed on the other two arguments.
I think they are perhaps not ones that this Court does not want to pass on, but I do want to mention that there are questions of whether this comes within the exception for a liquidating agent under California law when this liquidation plan was adapted.
The directors became liquidating agents.
They held the stock only for the beneficiaries.
In addition, under California law once they passed a dividend which they did in distributing dividend the debentures in Foremost evolved upon the beneficiaries and there was no beneficial interest.
Those are matters primarily of California law.
Neither the District Court nor the Court of Appeals passed on and I hope they never have to.
I think that the other arguments are sufficient and I suggest that this Court should follow the clear learning of the legislative history and the clear purpose of this statute and if so, they will find that this does not come within Section 16 (b).
Chief Justice Warren E. Burger: When were the conditions met, at what point after October 21?
Mr. Noble K. Gregory: The conditions were inexistent until the actual transfer of the debentures under the underwriting, Your Honor because there was that condition.
It has provided the expressed date.
This would be the date of sale and until that time, the underwriting could be set aside for various conditions and prior to that time, over half the stock or over half the debentures were distributed to the individuals.
As you may recall, originally, all of the debentures --
Justice William J. Brennan: That was October 24 --
Mr. Noble K. Gregory: I believe 24 was when --
Justice William J. Brennan: And that was pursuant to, as I understand it, liquidating resolution of October 13, was it?
Mr. Noble K. Gregory: That is right, Your Honor.
Justice William J. Brennan: That preceded the actual agreement, the underwriting agreement which was October 21?
Mr. Noble K. Gregory: That is correct.
Justice William J. Brennan: nd then on October 24, the liquidating resolution was executed, is that it?
Mr. Noble K. Gregory: That is correct, and then the sale actually took place on, I believe it was, the 31st.
Justice Lewis F. Powell: Mr. Gregory.
Mr. Noble K. Gregory: Yes, sir?
Justice Lewis F. Powell: You rely on Kern County.
My recollection is that the issue there was involved with sale and that was an involuntary sale resulting from a merger?
Mr. Noble K. Gregory: I would say involuntary in one term.
That was an involuntary conversion.
There was a voluntary aspect to that case.
There was an option agreement which was completely voluntary in the same sense that this was voluntary.
They did not even have to enter into it.
Once they entered into it, of course, they were bound by it, but the only involuntary thing that Occidental could not do anything about this was the conversion, but this Court had two sales in the Kern County case.
One was the conversion and the other was the option agreement which was entered into willingly, but under the duress of the commercial transaction.
But, I could hardly call that involuntary any more than Mr. Moskin seems to think that we are claiming that Provident involuntarily sold its assets.
It did not involuntarily sell its assets and in the sense that it could have not taken this offer and not liquidate it, it was voluntary, but the form of the transaction was not the one it chose.
It was the one that it had to accept under the exigencies of the moment, Your Honor, which I think are equally applicable to the Kern case and this case.
Justice Lewis F. Powell: It was a result of a negotiation between the parties, was it not?
Mr. Noble K. Gregory: In both cases, Your Honor.
The option was a negotiation between Kern and Occidental.
Justice Lewis F. Powell: But not the merger in Kern County?
Mr. Noble K. Gregory: Not the merger, that is correct.
Justice Lewis F. Powell: Alright.
Chief Justice Warren E. Burger: Thank you, Gentlemen.
The case is submitted.