Heli-Coil Corporation v. Reginald Webster

HELI-COIL CORPORATION

Reginald WEBSTER, Appellant.

No. 14809. States Court of

United Third Circuit.

Argued Oct. 1964.

Reargued May 1965.

Decided Oct.

McLaughlin, Staley, Hastie and Kal-

odner, Judges, part. Circuit dissented Danzig, Riker, Danzig,

Charles Scherer Deitz, Brown, Newark, J., (Cole N. & & brief), counsel, New York City, appellant. for Dill, Emory Risley, Stryker, C. Tams & Newark, J., (William Sutphin, N. T. Ne- wark, brief), J., appellee. N. for Loomis, Counsel, Philip Jr., A. Gen. Washington, (David Sol., Ferber, D. C. Phillips, Sp. Counsel, Richard M. J.Gus Bennett, Atty., S.E.C., Washington, C.,D. brief), on the for amicus curiae. BIGGS, Judge, Before and MC- Chief LAUGHLIN, STALEY, KALODNER, HASTIE, GANEY, SMITH and FREED- MAN, Judges. Circuit Judge. BIGGS, Chief brought Corporation Heli-Coil suit Reginald directors,'Mr. one of its short-swing alleged Webster, to recover 'of Exchange Act of 15 U.S.C.A. § (b) (b). pertinent portion 78p of 16§ upon is set out below.1 All of the events place which the is based took suit bar prior to dates Securi- effective Acts Amendments of ties Pub.L. Cong.2d Sess., 88th Act of Au- No. gust 20, 565. We 1964, 78 Stat. there- prior fore take the statute as it existed just to. amendments referred Webster, industrialist, di- became rector Heli-Coil soon after com- organized pany on October suggestion Langley at the & of W. C. Co., (Langley) for investment bankers pertinent part 1. In previously contracted, reads as fol a debt shall inure preventing : lows “For issuer, to and be recoverable ir- may respective any unfair use of part information which intention on the owner, been obtained owner, director, such beneficial such beneficial or officer director, entering or officer reason rela into such transaction hold- tionship issuer, any profit ing security purchased realized or of not re- any purchase sale, him purchasing period sold for purchase, any equity exceeding sale and se six months. Suit to recover curity (other profit may of such issuer than an ex such equity be instituted at law inor empted security) any period competent jurisdic- less ** months, than six unless such the issuer acquired good faith connection with company. company of his election sheet of the time would “make bet- At many years ter On March statement.” all his in- the board Webster converted debentures still chairman Corporation, Standard-Thompson to 3600 of Heli-Coil shares money receiving upon is traded on the the conversion. common stock of which Exchange. On At de- Novem- Webster converted his American Stock time 20, 1958, purchased par bentures, prin- at holders of debentures in ber Webster cipal totaling interest, $60,000 prin- plus $185,000 amount al- value accrued had ready cipal into amount Convertible converted their debentures of Heli-Coil 5% 1, 1973, by April 30, 1959, and common and Debentures due November $283,000 at principal in shares of common stock amounts of deben- Heli-Coil per share, par tures so value had converted. $14.50 being per common The stock share. $1 eight July 16, 1959, approximately On aggregate limited debentures were purchased months had his after Webster $1,300,000 were and principal amount of debentures, he sold 1000 shares of Heli- any company time at its at callable Coil common for stock in the amount cash prices in deben- at as fixed election $69,470.60. Thereafter, August 26, redemption. for None called ture. were 1959, Webster sold shares of Heli- to mature in No- The debentures were Sep- $14,293.55, Coil common for and on vember, Any at 1973. debenture holder 1,1959, tember he sold 100 Heli- shares of any No- option or time on before his $7,096.86. Coil common for Prior 1,1973, a debenture could convert vember sale of the 1000 shares of com- Heli-Coil company “at a of the into common stock mon, partner Webster consulted with a in principal price equal to conversion $16% Langley, Mellor, and with own ac- for each countant, amount of share Debentures as to whether or not he “at adjusted Stock, to sell the at the con- stock.” liberty Common or in effect at date version respecting Information Heli-Coil’s provided in said conversion determined its financial condition was submitted to noted that Indenture.” It should be and board of from time to time directors typical contains debenture indenture appears nothing that in this there was protecting provisions anti-dilution information to indicate that retention rights hold- Heli-Coil of the debenture common stock was unwise conversion that investment that stock was ers.2 jeopardy. Indeed, company was in shares On December good already condition and had declared for listed common stock were Heli-Coil a dividend. The common ris- stock was trading Exchange. on the American Stock ing charged steadily in value. It is not registered on never debentures were time there is evidence that at the exchange any national but were securities July- period Webster sold his stock in the traded over-the-counter market. September, 1959, inspired his sales were Langley February, informed by- any posses- information that was not customers that of their some Webster sed other stock- available into the debentures Heli-Coil converted holder, other or that Webster acted in sug- company and stock of the common selling good In- faith in stock. gested de- convert his that he to Webster deed testified that sold Webster suggestion of the basis bentures. pay stock to cash some raise according conversion, un- for expenses operation of his incurred in the testimony Webster, contradicted racing stable. Langley pros- Heli-Coil’s considered opinion, 222 pects the elimina- filed court below excellent gave F.Supp. 831, judgment from the balance favor tion of indebtedness P2, III, Indenture, Exhibit Article “Conversion of Debentures”. See $116,544.36 16(b), sum of further determined Heli-Coil nei- appealed. good acquired has without interest.3 ther “securities Webster previous- faith connection with debt the Parties Contentions arbitrage ly clause, contracted” nor the (1) volun- 16(d) that the exemption applicable. contends Heli-Coil were tary of his deben- holding conversion Webster sum of the lower court’s the subse- into stock and tures that Webster was liable de- quent sale of that common disposition rived him from “purchase upon and sale” within debentures conversion six voluntary statute; (2) them, acquisition months after his the debentures common stock within six “sale” common stock was a within months after the de- Act; <3) purview bentures into common stock. note See profits resulting supra. from Webster’s volun- tary acquisition upon of common stock po- The Commission’s counsel take of convertible deben- sition that court below was correct subsequent tures and his of 1300 sales concluding voluntary in that Webster’s of shares common stock less than six into common conversion of debentures conversion, months after ex- were not stock constituted a sale of the deben- empted by profits 16(b) as on securi- § purchase and a of tures acquired good ties “in faith in connection 16(b), purview stock of and within § contracted”; previously with a debt and also correct in that the below was (4) that the of de- convertible concluding that the marks and bentures into common stock is not arbi- (d) exemptions above were referred to trage exemp- and does fall within the not applicable, Commission’s but provision 16(d), tion of 15 U.S.C.A. § § profit counsel concluded that no 78p(d). by disposition realized from Webster upon conversion, in substance endeavours to the debentures their negate accordingly judgment each of these contentions. and that against $45,- him should be reduced to rehearing Prior to the en banc we re- 144.36, the amount of the which he quested Exchange the Securities and realized from the sale of the common give Commission to brief file a and to stock within six months of the conver- argument the court the benefit oral as sion. amicus curiae. The Commission has through position coun- done this the Commission’s its con- counsel. We believe, soundly is, position by on both sel we based clude taken the Com- language legis- and mission’s its counsel statute correct for 16d-l, history, Rule lative as on reasons set out well hereinafter. by 240.16d-l, promulgated 17 CFR Statement Pertinent Statutes authority pursuant Commission Regulations Exchange the Act. The Act Securities dispute. by Congress The facts are not in The court “to 1934 was intended de- below held that the conversion of the of fair and honest insure the maintenance * * * into common stock constituted in trans- bentures markets [securities] provisions purchase a sale of debentures and actions.”4 § designed implement stock within the this inten- § were gave judgment 3. The court below for Heli- between the common the value of Coil, opinion, have on the and the as we said conversion date $116,544.36, by subsequently without which the the amount of inter- stock was sold represents est. This amount the sum of Webster. $71,400.00, (1) difference between purchase price Exchange the initial 2§ of the deben- See Act 1934,15 tures their value 78b. U.S.C.A. § plus $45,144.36, date, (2) the difference making holdings by unprofitable reports in- for and trans- file their engage short-swing specula- any equity corporation’s siders to actions preamble 16(b) expressly 16(b) provides securities.6 tions. Section § recovery by corporation “For states the section framed preventing use or director the unfair realized officer may “any of information which ob- sale, have been * ** purchase” within of such securities owner beneficial [a] tained 3(a) (13), period. six-months’ statute], di- defined [to the extent 78c(a) (13), “pur- defines 15 U.S.C.A. rector, or officer reason his rela- * * buy, including “any contract chase” tionship to *The the issuer acquire,” purchase, or otherwise led abuses which the enactment 78c(a) (14), 3(a), (14), 15 U.S.C.A. 16(b) were manifold and have docu- “any con- a “sale” includes states history fully legislative mented so dispose of.” tract to sell or otherwise of the Act and in the decisions5 that “profits” term is not defined in the they exhaustively not be enumerated need Act. fully or discussed here. 16(b) provides indicated § As Prior to the diffi- Securities Acts the regu- by rúles and

culty maintaining the Commission corpora- a suit exempt any may transactions tion, suit, lations or a stockholders’ derivative purview of comprehended an officer or director who 16(b) exempts from profited also knowledge section. Section from inside any provisions corporation’s “securi- of the section posi- business or financial * * * good acquired tion, faith proving was in that it was ty intent previously con- a debt of connection with speculate officer or director to * * 16(d) pro- *Section tracted of basis his inside information. provisions 16 of “shall designed § vides Section to obliterate foreign apply domestic arbi- difficulty. not to or this 16(a), 15 U.S. trage made contra- 78p(a), transactions unless required C.A. and di- § officers regulations as any rules and of such corporation vention rectors of the securities may adopt registered in order to the Commission of pursuant which had to carry purposes Act, out the of this section.” 12 of the § U.S.C.A. § 781, adopted pur- The Commission Rule 16d-l well as beneficial of than owners more authority.7 every suant securities, of class of such 10% . equity security regis- example S.Rep.No.1455, issuer of an 5 See for 73rd exchange Cong. (1934); S.Rep.No. tered on a national securities 2d 55-68 Sess. any foreign arbitrage 792, Cong. (1934); effect or domestic 73rd 2d Sess. 7-9 equity security Cong. transaction in an of such H.R.Rep.No.1383, 73rd 2d Sess. issuer, not, registered (1934). whether unless 13-14 Judge he shall include such transaction in the summary also the See excellent of required 16(a) Corporation, statements section of Clark Smolowe v. Delendo 231, the act and 240.16a-l shall § account 136 F.2d A.L.R. profits arising denied, to such for the from issuer cert. 64 S.Ct. U.S. provided transaction, (1943). such in section 88 L.Ed. 446 provisions of act. The of sec- 6. The Securities Acts Amendments of 16(c) apply act shall not Cong. Sess., Pub.L. August 20, 88th 2d Act of arbitrage provi- such transactions. providing Stat. § sions 240.16a-l and of section registration for § under 12 of the ofAct apply the act not shall bona fide equity securities, extended all se- foreign arbitrage or domestic transaction “registered pursuant curities to section by any person insofar as it is effected oth- 12.” er than such director or officer of the is- provided: security.” “It Rule 16d-l un- suer such shall be 17 CFR 240.16d- for an lawful director or officer of they privilege, contending sion were Law redemption forced to convert because Debentures A. The Conversion of value of was less the market and a Was a the Debentures Sale of common. then sold The Schultes Stock Purchase Common their six months Congress “purchase” and defined large profit. It their conversion at a 3(a) “sale” in terms. Sections broad reading opinion apparent seems (13) 3(a) opinion (14) in cover our the Schultes’ only purchase contracts of and sale gained knowledge the exercise ” agreements but also “otherwise ac gleaned position, from their “insiders’ quire” dispose of” se or to “otherwise operative present an fact in the case purview of curities within the Act. at bar. The circumstance that “inside True, language of re the sections last knowledge” obviously use of made executory ferred to con seems to refer to not, in the Park & Tilford how- case tracts but it must be that these concluded ever, the basis of decision of the provisions of Act were intended Court Circuit. Second apply to executed transactions. If point parenthetically We out were all otherwise relief the Act Schultes’ transactions the court was injunction way would to be dealing with were executed rather than surely prohibition, impermissible con executory. clusion. The conclusion the court be of the character On issue low that Webster’s his de speaking transaction, Clark, bentures into stock was a sale the de court, stated, “We 987: bentures and a of the stock preferred think a into com- within the definitions of the Act seems to mon within six stock followed a sale indubitably us to be correct. ‘purchase months and sale’ within the statutory language are, What- aware, There insofar as we are might directly exist as to but four ever doubt otherwise decided cases which rule ‘purchase’ whether applicability the is a issue of conversion of § dispelled ‘purchase’ by definition to to a conversion transaction. The ‘any buy, purchase, include contract to trial ruling bar case at based its 3(a) (13). largely acquire.’ De- § otherwise Park & Tilford v. Schulte, (2 not 1947), fendants did own the commonstock they 160 F.2d 984 Cir. cert. question denied, op- their 332 U.S. exercised before S.Ct. L.Ed. convert; they (1947). did afterward. to We shall discuss this case they acquired first. with- Therefore meaning in the The Act cer- Act. some, In Park & but Tilford, tainly acquisi- applies as well to executed all, means of the facts involved in the executory tions to contracts to ac- present. instant case were In that case quire. Not could Act ac- otherwise brothers, three of whom Schulte one Congressional complish plaintiff corporation, a director of the as protect outside stockholders trustees of a trust created their fa- short-swing speculation by at least in- ther, majority were the owners of a siders information.” with advance plaintiff common stock of the and sub- preferred plaintiff-appellant stantial of its stock the case at owners privilege. Webster, points & with a The common in Park conversion that out bar, enjoying stock was a substantial rise brothers Tilford defendant Schulte they issuer; market value. While this increase that were in control outstanding progress, pre- market pany, was in the com- value of its owned almost all subject stock; preferred which was to the control of stock ferred 90-day Schultes, readily notice of served a “arid since the was not marketable redemption preferred. protected privilege In about conversion against dilution, preferred month the conver- Schultes exercised stock action, he equivalent’ of the comm mitted intervene not the ‘economic appealed. points further out that on.”8 Webster preferred converted their the Schultes Appeals for the Sixth Cir- Court greater of much stock into common stock Justice, by Judge, speaking Mr. cuit, now sold of the common value and then all could be Stewart, stated that Potter within stock obtained gathered record “abbreviated” six months of the conversion. In the case very direc- inactive was a that Newman at bar it is be noted that Webster sold in fact that he was of Ashland and tor only 1300 out of the total of shares privy information concern- inside by the he obtained common stock ing company, such considera- albeit undenied that and that it is applicability irrelevant tions were the sales of common he made Judge 16(b). went on Stewart § in con him liabilities incurred meet presented say question the narrow racing Rob stable. with nection acquisition of his Newman’s was whether (2 Eaton, Cir. erts F.2d awas common stock 1954), 827, 75 S.Ct. cert. denied 348 U.S. “purchase” pointed out the court 99 L.Ed. pointed statute out that He able to work their were Schultes would furnished no definition that itself through corporation on the the board

will easy question.” supply answer to the “an and that such control is ab directors in his that while He noted that view from the case at This has been sent bar. includes, “purchase” as recited term considered a critical factor. See “any buy, purchase, Act, contract Regulation Loss, (2d acquire,” 1069-70 78c 15 U.S.C.A. otherwise indicating 1961). (a) (13), ed. transaction ordinary falling was not within the one second case is Ferraiolo v. New concept “purchase,” of a nonetheless man, 259 F.2d 342 cert. necessarily statutory did not definition 606, 3 L.Ed. denied 359 U.S. 79 S.Ct. Citing exclude Newman’s transactions. 2d 629 In 1948 ac Newman decisions of the Court of for the quired 43,720 shares of the convertible Judge Circuit, took the Second Stewart preferred stock of Ashland Oil Re & position that each case had decided fining merger Company as the result of a ru- on its own facts and a “black letter time became a director of was to bric” be avoided. years later, Ashland. More than three 23, 1951, on November exercised Stewart concluded that right 48,092 applied, simply stated, to convert these shares standard to be every shares of Ashland common stock. Within that transaction can reason ably conversion, “purchase” six months after the he sold be defined should be 20,000 of shares Ashland common so “if of stock defined the transaction is prices 23, possibly at in excess of kind the November which can lend itself to the prices. Ferraiolo, speculation encompassed by of a stockholder Pointing Ashland, (b) pre demanded that Ashland sue .”10 out that Newman’s 1948, shares, acquired re ferred him in Newman recover Newman’s sulting subject from the transaction which we were at future time to call gave redemption by Ashland, described. trial that the con Newman, summary privilege judgment undilutable, of version in favor ruling preferred “objective that the in that the transaction was not cover stock the judgment per place” of ed Ferraiolo had the market was the been quire appellant something 8. See at own act or Webster’s brief 15. one’s agreement price.” for a Drey Citing 9. definition from Shaw v. the Citing fus, (2 Scope F.2d 142 Cir. 10. “The of cert. ‘Purchase Ex- denied U.S. Sale’ Under Section S.Ct. Act,” generally change (1949): un 59 Yale L.Ed. 1719 “The L.J. ‘purchase’ meaning derstood ac- however, power declare smaller equivalent” common had “economic common than on sub on the effect of Ashland’s dividends the real simply preferred A ex- sequent stock. common was made “was class call of changeable and, preference for class A at time force the surrender substantially preferred.” plan, in accordance with the features Stew public emphasis im- laid all of stockholders almost art on the fact that Tilford, mediately exchanged Schulte, common stock Park & Inc. con their A, wholly voluntary appellees, how- version was for class the individual insiders, retaining Schultes, ever, appear- complete their common. It had con corporation trol of the and could deter ed all relevant times individual preferred mine therefore whether appellees owned more than 75% redemp would would be called for voting stock and constituted than more By way contrast, Judge tion. Stewart majority directors, and of the board of concluded that Newman’s able, therefore, to wheth- were determine very involuntary” “in real sense be power er and to what extent to de- approximately cause would have lost clare lesser dividends common on the preferred a share if he had $9 allowed his appeared stock would be exercised. It stock to be redeemed. the dividends also declared on Newman, sum of the decision materially common were in less fact it, read no “sale” is that there is with- paid on A those class stock. type in the when one appellees individual “in- were indeed equity is converted an- charge company. siders” and in if other are the securities substantial equivalents appellees In economic and the the individual de- “involuntary” portion in the sense if cided offer of their stock in- there public, conversion the terest to the owner will suffer March contemplation Obviously public substantial economic loss. sale right rule Perraiolo v. would be Newman the exercise conferred equally applicable company’s incorpora- a situation in which certificate of they tion, exchanged 200,000 debentures convertible into common stock shares 200,000 were fact so their common stock for converted. shares class A stock and sold the latter to The third Blau decision is v. Max Fac- public April 18, Company, tor & 342 F.2d 304 1965). corporation In prior this case the The Court Ninth Cir- family company. by Judge Browning, pointed to 1947 had been a out that cuit, 1947 Max Factor common stock of- ex- stock involved public change to the acquired fered and class A stock was had the individ- following year part years earlier, appellees issued the as a of a from 5 to ual plan permit company pay acquired maxi- one of them nonfamily mum dividends to stockhold- class A stock within months of the six retaining ers, earnings exchange. except by while otherwise It con- payable family stockholders, appellees ceded that the made a “sale” appellees, purpose of defendants for the class A their stock less than six months avoiding exchange taxes. The class A stockholders the of their common stock after equal voting rights com- with class A stock the the the but trial court ; subject exchange mon neither class of stock was concluded that of class the the “purchase” redemption, ful- A and both classes were was not a of class A ly directors, 16(b).11 The of transferable. board the of The Court of § exempts 11. The trial court held also that the trans- in the court below. Rule 16b-9 purview operation 16(b) action excluded from of was the §of the ex- 16(b) by change Rule 16b-9 Securities of shares of one class of stock for Exchange promulgated corpo- and Commission shares another class in the same filing pursuant right four after months the the suit ration to a conversion in appeals adopted the in this case must turn was substance think decision what reasoning purpose of trial court and on the basic the statute. result. The Court reached the same Obviously, purpose? is What exchange Appeals A of class held that the already stated, prevent it was to those interrupt stock for common did not passage prior abuses which existed to the “continuity appellees’ investment” Exchange Act of exchange and that the did increase greatest one of the of which the ac- decrease the amount invested or alter any way short-swing quisition profits by spec- by appel- the risk assumed ulations insiders. Act renders The “long years lees before.” court con- speculations unprofitable. such But the timing cluded its appeals trial courts and the courts of must be deemed to be “irrelevant divergent taken roads to two what use insider information in short-term they deem to same end. road be the One speculation problem with which —the Tilford; leads out of & the other Park 16(b) concerned”, section and that from Ferraiolo v. Newman. test of liability imposed should be on the individ- largely very objective; the first appellees. ual second, least, subjective. at seems part, following standard, Ferraiolo rests on the a con fourth case which involved “Every 259 F.2d at 345: Babbitt, Lachner, transaction Inc. version B. T. v. reasonably pur- which can be as a 1964). defined (2 332 F.2d Cir. The court defined, chase will be so if the transaction 16(b) applied to held that conver possibly is of a kind can lend which itself preferred sion speculation encompassed to the citing Sec- insider, an Smolowe v. Delendo citing 16(b).”, Scope of tion Corp., “The ‘Pur- A.L.R. 300 chase and denied, Sale’ Under Section cert. U.S. Exchange Act”, 59 Yale L.J. (1943). S.Ct. 88 L.Ed. 446 But the focusing not a Whether or transaction its attention on the possibly specula- “can lend itself to parallel nature and transactions effect encompassed by 16(b)” must opinion Kaufman’s degree be place determined some least intended to and does not in focus the minds of finders of fact. To the issue of constitutes a what sale with extent purview test standard Ferraiolo of the statute. subjective must be deemed be a rather drawn from What conclusions are be objective than an one. On the other foregoing? We have reduced employed hand the in Park test Tilford & opinion in this citation of authorities employs language 3(a) (13) §§ rulings of a minimum for the views and 3(a) (14) in the manner which application on the of § numerous courts Congress we think be intended it to used transactions to various diverse subjective and that is in no one. sense part of are “insiders” contained copious the common stock ac- footnotes It is cases set out true just quired opinions the economic we have cited believe, prior would, equivalent of his debentures discussed. It perceive conversion and it is difficult serve no to discuss here useful advantage very could de- how economic these numerous authorities. We company’s the Ninth Cir- charter Court of if classes presented by exchanged possess substantially cuit did not issue decide shares except rights privileges facet of the trial decision same court, for, points out, may it did not have as it board of declare a lesser directors light decision. See to do so in the its dividend on the class surrendered Company, exchange acquired, n. Blau Max Factor & cit- and if the class text, contemplation public at 306. ed to the in effected a acquired. rule of the shares expressly made retroactive. CFR § 240.16b-9 conversion, portion a by statute rather from the the rived Webster tive think, which, descriptive part cannot ac- thereof. but suggests We there one situation we trading clearly cept argument do possible for so would advan- such an to a holding suing tage again put corporation in the dif- in common stock rather than If, insider, position, would have an an in- ficult in which it debentures. Act, knowledge prior passage prior has date to the dividual of the been having by prove use” of cor- debentures will called “unfair be insider; by corporation, in porate can there be an advan- information effect, corporation tage, true, believe, require and this can would be we insider, prove even if the the intent of the and there- debenture indenture contains fore, degree least, provisions anti-dilution to a at was in his as in what the case bar, require proof for when the called mind. To such would viti- debentures are they longer Congress price are tied ate that § We conclude using phrases quoted re- last stock. In advance information making being premise specting public, if the call made declaration as to the knowledge proceeding, saying any it has af- which was insider that will sub- prevent prac- stance that to the unfair fect future necessary paid insiders, it such an tices was deemed increased dividend to be retired, after the senior has been lay any down a rule hard fast that by position profit he would be his profits insider who obtained within the conversion. This seems be an instance statutory period, example, from a when a decision to convert could involve securities, “purchase and sale” of should speculative subjective judgment or as to liable to issuer for his be trading advantages anticipated in to be he did not in- whether did or make use of holding stock rather than de- convertible knowledge. Congress, opin- our side bentures. ion, expressing premise the broad imply short-swing way or mean only We do not state that this could by a mo that was actuated such speculations by rendered un- insiders be suggested tive as we could animate have profitable and and was curbed, hence speculate an insider to circum stating that should be the law. preceding para stances outlined in the graph. opinion Congress none But short, we are intended In entirely theless it Con objective that was the intention of We one. to be an test repeat, perhaps gress any enacting needlessly, to obviate it is our § necessity for a search motives realizes if an individual view that investigation require sale, insider or an purchase or the profit or any equity or whether not his animated actions were sale any possess by gain specula inside information to issuer in to which relation argued Act, by profit. may prescribed tive bring It be es status opera provided period § the sanction of time of § 16(b), pur 16(b), of his tion the words of to the extent “For the he is liable § pose preventing profit falls within the unfair of in use unless transaction may exemptions provided formation which by been obtained one owner, point director, that the such beneficial of out In this connection 16(b) to relationship ficer reason of to the Commission is authorized exempt by issuer,” require deemed proof transactions that the informa rules comprehended un “not within the obtained insider was used seem, fairly by there It him to obtain this subsection.” would fore, Congress employ if infor had confided the insider did not so Congress courts the mation render than to the did intend to rather Commission par corporation determining him for his those liable to the difficult task of justi profits. short, may contended circumstances which would ticular phrases opera- fy exemption quoted certain transactions last are 166 Congress by and was intended of thumb” purview of We

from statute.12 precisely up that.13 16(b) “rule to do does set conclude that § Commit- to Conference the bill went Rules 12. 240.16b-5 § It is of noted Cong.Rec. 8766, May 14, Exchange on 78 tee 8788 1934. Commis- of and the Securities Report (1934). “Commodity relating The Conference on and to Securi- sion passed by and page both the Senate National Securities Exchanges,” 331, bill Octo- CPR ties ber operations 17 House, 4, 1952, provides exemption and the the Exchange from the became law on June Act 1934 of 16(b) transac- of §of certain 10269, 10185, Cong.Rec. by 6, 1934. 78 in which are received tions securities (1934). redeeming 10847 Excluded other securities. equities exemption 16(b) Ex- securities the Securities of are security 404, 16(b), change 1934, than a or a by a 48 § “other right convertible Act of ch. security” perti- purchase 896, appears to to resemble such Stat. part 15(b) It issuer. would Mr. Cor- director or officer of the appear, 2693. § nent S. pro- therefore, 2693, Commission of S. which § coran read upon any as that direc- ruled such transaction “It unlawful for has vided: shall be securities, tor, officer, and decided that it should own- at bar be has or owner of exempted purview beneficially ing more § as of record and/or any per Blau Cf. cited the text in Note 5 to than five centum of class of 304, security Company, any any issuer, Max & Factor 1965). registered a national ex- 307 on securities any regis- change (1) such To— security intention or ex- tered with the legislative following 13. The a brief his- pectation selling the same tory Exchange of the National Securities by months; any profit and made within 6 According Congres- of 1934: to Act any person on transaction such such by Record, sional S. 2693 was introduced security extending peri- registered over a Senator Fletcher of Florida in 2nd than 6 months shall inure od less February Congress Session 73rd on issuer, irrespec- and recoverable 9, and 1934 was referred to the Senate expectation his on intention or tive Banking Currency. and Committee on Cong.Rec. 78 part entering transaction of into such (1934). Extensive hear- 2264 pe- security purchased holding for a ings bill, were held on the and Thomas G. exceeding 6 riod months.” Corcoran, Esq., testified before the Com- 27, February “That is to Mr. then stated: Corcoran on 1934. Cor- mittee Mr. receiving prevent drafting the benefits directors coran had been instrumental speculative swings 2693, testimony on the se- short-term S. was for the his companies, explanation because of their own curities and clarification. hearings, Exchange on such information. The of inside See Practices”, entitled “Stock go transaction under bill would before the Currency, on Committee director, corporation. Banking irre- You hold the United States Sen- expectation spective ate, Cong., 15, intention or Part Secu- 73rd National after, February Exchange 1934, within 6 months sell Act 26 rities absolutely impossible pp. because it will be to March 6463-6581. The prove testimony concerning 16(b) of such intention or the existence be- of what you expectation, Act, have to have came bill the final you thumb, cannot crude rule of because before Senate then discussion prove having pages the burden of Committee, undertake that the director S. is found on intended, Following hearings, at the time on 6556-6561. April swing.” bought, get out on a short Senator Fletcher intro- Exchange hearings Prac- duced S. 3420 as a for S. 2693. See “Stock substitute on Cong.Rec. (1934). supra, tices”, 6556-57. bill, hearings Bulkley, intro- The House H.R. At Senator the same Representative Rayburn April Oarey duced and Mr. dis- Senator Corcoran 25, 1934, transactions, referred and was Com- such cussed several kinds of Foreign mittee on Interstate and merce. 78 Com- an insider the box as sales with (1934). Cong.Rec. company go- knowledge H.R. his passed ing pass dividend, House amended was intention with the May Cong.Rec. “purchasing” the stock after news of (1934). Carey public. dividend Senator something happened May up 12, 1934, “If so then said: took On Senate bill, insider] that he had to raise some [the H.R. House consideration penalized by money, dif- he would be amend- S. 3420 as was substituted high Cong.Rec. low his ference between ed in the Senate. replied: price.” “Yes. Mr. Corcoran versions The House and Senate

167 appellant m the conversion which the it. After We have noted that converted compulsory one in- Ferraiolo was in effect a retained his position in Tilford in substance vestment in the securities of Park while & may issuer, Heli-Coil, not, though profits had and and what we think compul- “paper” importance, profits accrued to held a distinction of some him were by in him at and or lack of it is not a factor the case the risk of the market sion disappear our conclusion which could the market at bar. We base if de- therefore clined to a sufficient extent. on the of thumb” as stated. We “rule in hold the case at bar that the conversion Congress Since did not define was a sale the debentures Webster may term in “realize” we assume that it and a debentures ordinary tended word to its have common stock. meaning employed and that was as it term art. means “to “[R]ealization” Appellant B. Did Not Realize realize”, says Webster’s International at the Time the Con- Profits (2d Dictionary giving 1948), ed. as the version the Debentures meaning: term’s first “To convert an appellant of whether The issue intangible right property or into real profit “realized” (tangible) property; hence, to convert Act the debentures is a novel one. The property money.”14 kind of into provides “prof- no definition of the term “realize”, “profit”, being or can it” term we The term unde find no cited fined decision and none has been must Act, also be assumed meaning. directly point. ordinary to us which seems in its to be or usual plain, “profit” facts are however. When word au defined same thority meaning “gain” Webster converted his debentures as as well as “the 18, selling ap- 1959, they price price March at excess were received over the paid proximately goods for each of face sold.” Bouvier’s Law $2100 $1000 value, clearly reflecting Dictionary (Rawle’s fact that the Third Revision selling approxi- “profit” common stock describes as “the advance mately goods compared price beyond in with the conver- $36 sold the cost price spec- purchase.”15 Measuring sion For or market the terms $16%. purposes, therefore, “profit” conjunction, ulative each deben- “realize” Congress ture was at that think it time the substantial eco- is clear that intended equivalent ordinarily gain nomic of the common in- value of se to which it was into convertible and curities should be to be realized deemed general par- (1947), “Money,

You have to P.2d have a rule. 623 states that might property, usually ticular transactions it work a hard- or ‘realized’ ship, brought possession, but these are a means transactions and the hardship represent paper profits word sacrifice to does include or necessity having general profits, usually rule.” estimated but is used in Hearings hope anticipation Exchange Practices,” contrast “On Stock but supra, at need not be 6558. cash in hand to be realized also, gain Cooney, See Meeker and “Insiders” income.” The decision cited 16(b), ap- a tax case but 951-52 definition seems Va.L.Rev. posite (1959). here. (1962), citing 15. Words and Mc Words and Phrases Phrases states that “Profit Avoy Schramme, pecuniary gain,” citing Feine v. 264 N.Y.S. means v. Mc Gowan, 1951). App.Div. (1933), states “profit” ordinarily receipt Words and Phrases “‘[R]ealize’ defines means points hand”, “the excess of received cash but out purchasing handling over cost word was not used in a sense in the such Cartmell, goods”, citing attorney’s Stratton retainer under consid contract Vt. A.2d eration in that case. given by cited are tax cases cases but their Another Words definition helpful Phrases, citing Smelting, Refining here. & definitions U.S. seem Haynes, 111 Utah Min. Co. v. as a until period under the Act there sion within six months’ dis- been a definitive the owner of act tinct from the decision to sell the con- whereby paper security”; securities value of verted other words Park in- securities has become a real and Tilford “a new investment risk was by bar, undertaken, one —in cludible the at a sale new, limited, op- case and a if by of common stock cash. portunity presented profit, the for Webster to realize through loss, or avoid the of use insider doubt, we not be and do One cannot information.” 342 F.2d at 309. We can- successfully lieve it can be contended that not, deference, agree with all with the contrary, sale of com that the the the reasoning Appeals of the Court of for the sale, by a mon was indeed stock Webster case, Ninth Circuit in the Max Factor for the “sale” be defined. no matter term how opinion are of the that since Webster problem presented, and But another did make an decision exe- investment requires Blau further discussion of cuting security acquiring it and a new Company, supra. In Factor & v. Max when he the converted debentures again point this connection we out the necessary common it follows as a relating of to the secur time-table events legal prof- conclusion that the short-term by The ities held Webster. debentures by during it realized him the six months purchased were on November 18, 1959, after March is recoverable from by and on March were converted him him unless fall his transactions conversion, therefore, took 1959. The statutory exemptions. one of the The place pur days 3 months and 26 after the making of the decision investment and chase The first sale debentures. the its by execution are the incidents place which common stock took July 16, 1959, application the the sale oc actuate and last September 1, 1959, profits gained curred on Webster Webster’s him from the selling, as has 1300 said, shares. sale of the common stock. period The between date of the con the version, 18, 1959, The Not and C. Common Stock Was March the date July Exempt sale, 16,1959, the the first was months Under Provisions of days, period and 28 Act the the between the and the last sale stock appellant’s first contention days. period months and be acquired him stock that purchase tween the of the debentures and acquired exempt “as stock, of the time of the first sale good pre faith in connection with debt course, months. But exceeded 6 viously contracted.” conclude that We Appeals Court of for Ninth Circuit correctly the district decided this exchange in Max Factor treated unnecessary to dis issue Class A stock for common stock in length cuss it at here. cases relied continuity interrupting case as not “the appellant, v. Delendo Smolowe appellees’ investment,” ex Manufacturing Corp., supra, and Rheem change reality “in deemed be] [to (9 Rheem, 295 F.2d Cir. Co. v. only process step of sale —and exemption in which were decisions * * unnecessary one at that Blau applicable was deemed because secu Company, supra, v. Max Factor & F. rities were of ma received settlement at 2d transactions that case apart debts tured which existed from were held to be six-months’ without existing obligation to securi transfer period prescribed by the statute. Associates, ties. Booth v. Varían See difficulty 1964). distin We F.2d Asso Varían guishing Max the circumstances quoted ciates Court of with bar, approval opinion Factor at case those case of the lower Judge Browning points stating court, re F.Supp. 225, albeit as out at ferring Tilford, argument urged accept Park & “required there, appellants deci- an investment case defendants open trage. m the door the case at would also a bar, third, There is somewhat widespread act, common, arbitrage. since evasion less form —kind acquisition of stock could This take consists of a of a is, form of a in which the seller contract without other restriction debt, exchangeable payment money, owe would is would have obligation firm deliver the stock convertible within a reasonable time into date, buyer together security, some future * * * would a second with a simul- obligation correponding offsetting have a taneous the second pay security. at a future date [Citation authorities.] money property.” arbitrager may buy or other The state- Thus an warrants rights buy stock, simultaneously ment court in trial Varían Associ- sell- ates, ing supra, itself, subsequent- as it continues at 227 is most short the stock apposite: “Clearly ly covering exercising by ex- [to fall within short emption] right the debt referred in his to or warrant.” obligation independent must be an very In the instant case essence obligation very to deliver stock in- arbitrage lacking for there in- was an purchase.” volved in the We conclude nearly terval four months between the appellant’s position upon this purchase time of the of the debentures issue is without merit. conversion, and their and an interval acquisition several months between appellant also claims that the the common stock and its sale. conversion of debentures into common points Other parties raised do exempt arbitrage stock was as an trans require discussion. agree 16(d). action under cannot We below, judg for the reasons stated the court For the reasons stated the F.Supp. at 836-837. In addition we ment of the court below will modified be provide recovery $45,144.36 state that Webster seems to concede that to for the only by Regi Corporation the conversion of the debentures does from Heli-Coil examples Webster, profits fall within nald realized him arbitrage necessary and, and this is a con from sale of the common stock Arbitrage modified, judgment cession. is defined as a “si will be affirmed. purchase multaneous and sale of the same (con- McLAUGHLIN, Circuit equivalent security, commodity, or con dissenting). curring and tract, exchange insurance, foreign or on exact same or before us is the different The transaction markets in order profit insider sort of to obtain discrepancies.”16 scheme dealings by short term in convertible practice is described in Falco Donner v. and common stock that Sec- debentures Foundation, Inc., 600, 603, 208 F.2d Exchange of the Securities (2 1953) A.L.R.2d 1340 Cir. where it (15 78p(b)) pro- of 1934 Act U.S.C.A. § “Arbitrage stated: is nowhere defined Exchange Com- hibits. The & in ordinary usage the statute. In it re- mission, at our filed invitation specialized trading fers a form of fully agrees appeal, brief in with a dispar- which is upon said to be based opinion, that conclusion as does the court ity quoted prices the same or plain rightness conclusion is equivalent commodities, securities, convincingly set out latter and exchange. bills In its most common needs no further discussion. purchase commodity form involves present Commission, however, sale of the identical went commodity delivery argue appellant future its brief in this —time arbitrage; purchase gains or a mar- one should not assessed his instance be ket, say York, against operation because, New a sale ac- another, space cording Commission, such as arbi- did not London — Dictionary (3d 1961). 16. Webster’s International ed. Lachner, recognizable (1962); profit B. Inc. v. Babbitt,

make T. (2 1964). might attempting F.2d 255 Cir. In arrive at what golden Commis- as a mean, described exchange affirming like another reasoning, sion’s followed in the court sale, Circuit the Second opinion, pur- is at odds with the conceded said, only one “There is Court of pose statute, utterly unrealistic way manipulation prevent and, ascribing profit lack of realized informa- confidential insiders to whom maneuver, appellant debenture squeeze available, is to tion is impossible to follow. every profit possible penny out of such supra, Lehman, transactions.” Blau explain has been made Some effort Though p. the use 286 F.2d away dis- calculation the accurate knowledge is not of inside information judge appellant’s on his trict necessary application prerequisite for the sequence has never the fact debenture but Newman, 16(b), Ferraiolo v. disproven. (6 cert. den. 259 F.2d Cir. Admittedly appellant’s 606, L.Ed.2d 629 U.S. S.Ct. guide voluntary. The the debentures was (1957); Corporation, Smolowe v. Delendo isus before in the situation line decision A.L.R. 300 Schulte, 160 F.2d Tilford v. Park & 56, 1943), den. 64 cert. 320 U.S. S.Ct. 1947), (2 332 U.S. den. 987 cert. Cir. Mfg. (1943). 88 L.Ed. 446 Rheem v.Co. (1947). There 68 92 L.Ed. 347 S.Ct. Rheem, (9 1961), 295 F.2d Cir. 473 pre voluntary conversion a similar unmistakable fact defendant that this followed common ferred stock into had such inside a matter information is “a to be months was held six sale within of record in this case. statutory ‘purchase and sale’ within majority substantially repeats the language 16(b).” As to this of § argument defense that Webster might doubt court said: “Whatever “ * * * opportunity either realize a conver exist as to whether otherwise trading gain speculative judgment dispelled ‘purchase’ defini sion is a is pur- exercised when the debentures were ‘any ‘purchase’ contract tion to include speculative judg- chased or to exercise acquire.’ buy, purchase, or otherwise informa- ment anew on the basis inside 3(a) did not own the Defendants possessed at the conversion.” time they question before common stock happened appellant, What here was that they option convert; exercised their holding instead of the debentures or sell- they acquired did afterward. Therefore ing them converted them common into meaning of the Act. within the thus, cor- stock and as the district court certainly applies exe The Act as well to rectly ruled, “engaged in a transaction executory acquisitions cuted as to con which could have resulted the short acquire. tracts Not otherwise could speculation 16(b) term which section Congressional accomplish Act designed converting prevent.” By protect the outside stock debentures, money appellant took the short-swing spec holders at least them, effect received for he bought informa common stock it and ulation insiders with advance with then sold 1300 six shares of that stock within tion.” From that time down to doing months thereafter. In com- so including present Tilford the Park & pleted cycle purchase and sale of holding that conversion of a senior his debentures and common stock con- pur security security junior trary to Section meaning of chase latter within the 16(b) accepted appellant’s possibly as the If has been tactic could have general Lehman, speculation 286 F.2d rule. Blau v. been used for short it is term affirming F.Supp. prohibited by statute. Ferraiolo v. (D.C.S.D.N.Y.1959), Newman, supra, p. affirmed In the light this, appellant simply proclaims U.S. 7 L.Ed.2d 403 S.Ct. purchased clear than court’s above noted six months after he had the district ploy of his financial factual resolvement convertible debentures. dissent We holding possibly appellant’s from the does not find that it could speculation and been used for short term that common stock less than 6 months come the ban of the statute. after so under conversion violated section 16 anony- (b). Appellant quotes Accordingly, join setting and relies on comment) (student piece part money judgment Yale mous in 59 aside (1950) Scope L.J. titled “The of was recovered below but dissent 16(b) ‘Purchase and Sale’ affirmance the remainder Exchange authority for con- Act” as his award. cluding profit, that “No either position Our normally accepted or within the sense 18,1959 March was neither nor a “sale” realized “purchase” of securities within mean- as a result of his Webster ing proscription of section debenture into stock.” Exchange Act of opinion proposition embraces that 78p(b). U.S.C. § And since more completely. sharp contra distinction elapsed six months between the objective, combined view is the the convertible and the sale of computation basic the district court equivalent May 18, 1959, which reveals that on the which it had exchanged, appel- reasonably Webster debentures were to be engaged lant in no such in and out trad- $131,400, representing valued the value ing period within a six month as the stat- shares of common stock at prevent. ute seeks to original received for them. The 36% majority The district court and a $60,- cost of those debentures had been this court view March 18 conversion gave statutory 000. That debentures, as both a which had “profit $71,400 realized” for from this purchased less than six months ear branch of his venture. It was for this lier, stock, and a of common judgment amount was entered on which was sold less than six months lat against phase They er. reason that a convertible de the district court. There is no authentic property is benture a form of distinct challenge of those nor of their figures from the common stock of the same cor rightful against appellant assessment be- poration which, by terms, for its it can be illegal manipulation cause of ap- his exchanged. “equity And each is an se pellee’s debentures and stock. curity” 3(a) (11) section of the judgment I would therefore affirm the Exchange 1934, Act of court, $71,400 the district i. for e. 78c(a) U.S.C. Therefore, em profit realized on the conversion of the ploying meaning the normal of words in plus $45,144.36 profit debentures sales, the law of one can ex describe the making realized on the sale of the change of such a debenture for common $116,544.36. a total of equity security stock as a “sale” of one “purchase” and a of another. In this Judge joins in STALEY this concur- view, the “sale” of the debentures occur rence and dissent. red less than six months after Webster bought them, “pur had simultaneous Judge, HASTIE, Circuit with whom chase” of common stock occurred less Judge, KALODNER, joins (dis- Circuit it, than six months sold before Webster senting concurring part part). paired each set transactions vio Judge join Moreover, support I in the lated for KALODNER and the statute. 16(b) holding analysis appears that no of section this in a considered de violation appellant occurred when surrendered cision of the for the Court Tilford, his and received convertible debentures Second Circuit. Park & Inc. v. equivalent Schulte, 1947, 984, their in common stock less 160 F.2d cert. denied fairly taking 64, 761, on said tó be his 92 L.Ed. 347. be 332 U.S. 68 S.Ct. time, and, Lehman, the oth- 2d Cir. investment at that But cf. Blau v. er, 786, aff’d, whether the to convert could F.2d U.S. decision S.Ct. Eaton, judgment 403; speculative possibly L.Ed.2d Roberts v. involve denied, any trading advantage anticipat- 2d Cir. cert. be acquiring common stock and sub- L.Ed. 652. ed from 75 S.Ct. U.S. selling sequently rather than converti- that, and I think KALODNER 16(b) not, If section ble debentures. present ease, ra- context of the concepts “purchase” should “sale” and majority an over- tionalization of the including not be construed as such ex- simplication problem leads of the change. unjust result. to an and unwarranted here, In circumstances such as we have a director This is a situation where op- the conversion affords the insider no bought acquired in when he convertible gain portunity trading to realize a either disposed debentures and sold out when he speculative judgment exercised when of conversion the words stock. Whether purchased or ex- the debentures were “purchase” “sale” and as used in section speculative judgment ercise on the anew 16(b) ex- also include the intermediate possessed basis of inside information change for the convertible the time of conversion. The debentures is to us a debatable readily adequately were salable and were question statutory construction, protected dilution their both any rationally inescapable foreclosed provisions by provisions own by Congress. of the words used underlying They indenture. would con- Therefore, these words should be inter- immediately tinue be convertible. Be- light preted objectives Con- features, price cause of these the market gress sought through to realize this stat- of the common would continue to re- ute. fully flected market com- statute, Congress indicated security. manded the convertible recognized consistently courts dispute There is no about these facts. that the whole of section Actually, economics, in terms of market discourage corporate insiders concerned, with which section swing trading on the short security holder, having surrendered corporate of information about cir basis preferred position creditor, cumstances, prospects plans converting less after than he had before. public. to the v. De available Smolowe compensating posi- fact that his new 231, Corp., 1943, lendo 2d Cir. tion as stockholder was attended new 235, 300, 320 U.S. 148 A.L.R. cert. denied rights corporation voting within the — 446; &Cook 64 S.Ct. 88 L.Ed. sharing, example and dividend —was Feldman, Trading Insider Under the Se trading advantage and, not a market or Exchange Act, 1953, Harv.L. curities therefore, present relevant to our purpose For Con this 386-87. Rev. problem. In circumstances of this compelling gress provision fashioned case, continuing market rela- stable disgorge an insider to whatever tionship security and con- convertible through might acquire short term —less security version decisive remains trading in months —in-and-out than six against characterizing consideration equity corporation’s It securities. his exchange their as a section sale. Congress is in this context that used the “purchase” question “sale” to describe With to the whether words reference prohibit 16(b) “pur- terminal conversion was a transactions section trading. Therefore, chase” ed it is relevant of common consid- have hand, might consider, ered that one whether involve speculative judg- accom could intermediate conversion exercise anew change if, posi despite price equivalence, plish ment in the economic a com- such security quickly mon that he could stock tion of the holder could sold more be ability involving calls, to cases could unlisted debentures. Such when such a case might quickly important to before us. sell be speculatively preparing minded insider foregoing considerations have led influencing upon any trade infor- market “pur us to the conclusion that “sale” and might mation which become available chase” as used in section should only very public him short time before exchange not be construed to include the But a convertible debenture disclosure. securities involved such a conver quickly holder could act as a stockhold- presents. sup sion as this case We find selling er and achieve the same result port for our view of this case in the de exchange shares on the and at the same Appeals cision of the Court of for the disposing equivalent so time his con- Newman, Sixth Circuit in Ferraiolo v. statutory satisfy as to vertible rule Cir., 1958, 6th F.2d cert. denied selling.1 short 359 U.S. 79 S.Ct. L.Ed.2d approach reasoning majority suggest in The one situation of the Fer ing which tures not obtain the that the insider ture, imminent, the market curity. ation in which a call has been at least something likely dividend, inside may they such as the declaration they debentures facilitate new within a few information. which and the insider these stock with known prices think such same been or might to occur circumstances, probably advantage by since convert the insider to be months. He could speculation That is a conversion as are view it is conversion also knows will about to of a premised made, or it is said near increase retain- selling deben- based large situ- fu- se- raiolo ing excerpts (now primarily a semantic will be is of a kind which can itself be resolved in the lative reasonably speculation by insiders. “The standard that “ ^[*] “[T]he [is]: Mr. case ^[*] Every so Justice) question ^[*] are summarizd in the defined, 16(b).” be defined as a speculation encompassed transaction which can —to Stewart: is not in light if the transaction curb short emerges 259 F.2d at 345. opinion one, possibly but must * * swing legis- event follow lend * called. noteworthy only It is also a few ago months the Court of for the only Our concern here is with the situ- Circuit, considering Ninth a case essen- ation in call is made before tially ours, like has reasoned the same price soon after way and has concluded that the conver- the convertible maintains a sion “purchase” in its case was not a specified relationship stable and direct the conversion stock under section price Co., Blau v. Max Factor & 9th Cir. all relevant The full benefit times. 342 F.2d 304. any anticipated increase in the be ob- conversion stock can well majority reject approach by holding the problem tained convertible conversion under section by exchanging as it for the in the Ferraiolo and Blau cases as “sub- If, security. majority suggest, jective”, characterizing as the analy- their own sis, patterned added fact of the or imminence issuance after Park & Tilford possibility reasoning, “objective”. of a call speculative conversion, some However, would create as we approaches apply objective there be will think both enough contention, time choice, to consider this standards and tests. The as we along pertinent it, with other matters see is between “a rule of thumb” —as 16(c) prohibits 1. While section short sales sells if he and has tendered owns a se- curity Loss, an insider of securities not owned convertible into it. See 2 him, Regulation, 1961, 1090, under the rules Commission 2d ed. person a is deemed i t- 1231-32. bility. Perhaps majority of the situations their solution—and some describe involving designed a re- conversions after calls con rule reason achieve appropriate just respectful for ad sult that is both vertible securities are legislative language exemption ministrative because the risk and intendment. considering a is But now we are small. Undoubtedly, in conversion situations statutory type of in which the imposes upon rule of reason danger language is not decisive judge applies who it the burden of deter- section is concerned with which mining the character- from case case small. seems nonexistent rather involved, the con- istics securities conclude, therefore, We the ex tinuing se- relation of convertible change accomplished present con security, curity to “purchase” version neither a nor involved short term what unattainable otherwise “sale” within section trading any, might advantage, if result 16(b). course, in Of this conclusion exchange oth- of the one judgment volves no whether such a trans analysis sophisticated er. But such sale, action would or a be very required properly of a often and both, context other than section judge apply as he statute seeks way systematic, just respect- language statutory ful of and manifest Finally, agree other mem- with the legisative will. separate bers of the court that grounds other urged by appel- for reversal Accordingly, preferring more dis- merit, although lant are without if our criminating analysis of Ferraiolo prevailed necessary view it would not be simplistic Blau to a rule thumb de- pass upon Tilford, those contentions. from Park we treat rived & our conclusion that the decisive reasoned was not such a transac- conversion here could, words

tion as Stewart’s “possibly speculation lend itself 16(b).”

encompassed by Section requires brief other consideration

One 16(b) authorizes the

comment. Section Exchange Commission to

Securities and proscrip

exempt transactions expert Froylan MARIN, tion of the section where its Jose Manuel Diaz Appellant, judgment exemption is consistent legislation. purpose of It is with the arguable, therefore, that a court should America, UNITED STATES of general prohibitory construe lan Appellee. guage broadly permits, as reason leav No. 21718. judg ing any narrowing expert United Court of States think, how ment of the Commission. We Fifth Circuit. ever, ample appro room for that there is Nov. judg priate exercise of administrative possibility in situations where the ment profitable speculation on inside based slight too information but seems exists trading prohibited,2 require that such “pur indisputably a where what possi presents no such

chase” and “sale” Cooney, Dietz, Meeker & The Problem Defi dictum in Greene 2. But see the 692-694, Determining nition in Insider Liabilities fol- F.2d 2d Cir. 16(b), 1959, Timberlake, Under Section 949, 45 Va.L.Rev. S.D.N.Y. lowed Perlman v. 1959, F.Supp. 246, criticized 971-975. but

Case Details

Case Name: Heli-Coil Corporation v. Reginald Webster

Court Name: Court of Appeals for the Third Circuit

Date Published: Oct 1, 1965

Citation: 352 F.2d 156

Docket Number: 14809

Court Abbreviation: 3rd Cir.