The opinion of the court was delivered by: MURPHY
Plaintiff moves for summary judgment in an action under § 16(b), Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), and see § 27, Id. § 78aa, to recover profit realized by a former treasurer from the sale and purchase of its common stock on the open market within less than six months. In opposition defendant denies engaging in short swing trading for speculative purposes;
and moves for dismissal of the action because of the statute of limitations.
Assuming, as we must, for present purposes, defendant's version as to the motive for the sale and purchase, Zell v. American Seating Co., 2 Cir., 1943, 138 F.2d 641, at page 642; United States v. Haynes School Dist., D.C., 102 F.Supp. 843, at page 848, under the terms of § 16(b), considering the legislative history of the Act, plaintiff should ordinarily recover.
Although § 16(b) was apparently specifically designed to protect 'outside' shareholders against short swing speculation by insiders with advance information (see 59 Yale L.Jnl. 511, footnote 11), the only remedy deemed effective was the imposition of liability based upon an objective measure of proof. Smolowe v. Delendo Corp., 2 Cir., 1943, 136 F.2d 231, at pages 234-236, 148 A.L.R. 300, certiorari denied 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446; Falco v. Donner Foundation, Inc., 2 Cir., 1953, 208 F.2d 600, at page 604; Walet v. Jefferson Lake Sulphur Co., 5 Cir., 1953, 202 F.2d 433, at page 434, certiorari denied 346 U.S. 820, 74 S. Ct. 35, 98 L. Ed. -- ; Pellegrino v. Nesbit, 9 Cir., 1953, 203 F.2d 463, at page 468; Magida on Behalf of Vulcan Detinning Co. v. Continental Can Co., D.C.S.D.N.Y.1951, 12 F.R.D. 74, at page 78; Truncale v. Blumberg, D.C.S.D.N.Y.1948, 80 F.Supp. 387, at page 392. 'Abuse of corporate position, influence, and access to information may raise questions so subtle that the law can deal with them effectively only by prohibitions not concerned with the fairness of a particular transaction.' Securities and Exchange Commission v. Chenery Corp., 1943, 318 U.S. 80, at page 92, 63 S. Ct. 454, at page 461, 87 L. Ed. 626.
If Congress intended that only profits from an actual misuse of inside information and from short swing speculation by insiders should be recoverable it would have been simple enough to say so. See Smolowe v. Delendo Corp., supra, 136 F.2d at page 236; Pellegrino v. Nesbit, supra, 203 F.2d at page 468.
Defendant had a duty under § 16(a)
to report to the Exchange and the Commission within 10 days after the month in which the change in ownership occurred. He was three months late in doing so. His position is that the delay occurred through sheer inadvertence and without any intent or desire to conceal the matter from anyone.
He asserts that the president and secretary (director and counsel) of plaintiff company knew about the sale and purchase when they occurred; that contemporary proxy statements were already printed preventing his reporting the change in ownership therein. Finally that the present action is a reprisal measure because he unsuccessfully attempted to oust the management and resigned from the company.
Applying the same tests and objective standard, plaintiff's motive in bringing the action would not affect the result. See Pellegrino v. Nesbit, supra, 203 F.2d at page 466; Magida on Behalf of Vulcan Detinning Co. v. Continental Can Co., supra, 12 F.R.D. at page 78; Benisch v. Cameron, D.C.S.D.N.Y.1948, 81 F.Supp. 882, at page 885; Grossman v. Young, D.C.S.D.N.Y.1947, 72 F.Supp 375, at page 380.
Once defendant purchased the stock and realized a profit, a cause of action arose;
a right of action by the corporation
existed and the limitation period began to run.
Since plaintiff's action was commenced more than two years thereafter,
ordinarily defendant's motion to dismiss should be granted.
Plaintiff and the Commission
contend that here too an objective standard should determine the timeliness of the action. Since defendant violated a statutory policy against insider trading and a statutory duty of filing, the limitation period should not begin to run until the § 16(a) report was filed, regardless of whether the delay was caused by inadvertence or wilful misconduct. See Fistel v. Christman, D.C.W.D.Pa., 13 F.R.D. 245, at page 248; contra, where the report was filed within the ten day period.
Pointing to the purpose of the Act, § 2 (see 59 Yale L.Jnl. 511); the high standard of fiduciary conduct required;
the legislative history;
the complementary nature of (a) and (b);
the specific purpose of § 16; the short limitation period, understandable only in context with a duty to make prompt disclosure,
they argue that the limitation is not an integral part of the right of action; that such construction provides an effective sanction against tardy § 16(a) reports, and that a contrary holding would frustrate the will of Congress and defeat a worthy statutory purpose.
Second, that defendant's conduct amounted to fraud and concealment which tolled the statute; even though an insider tells the officers and directors about his stock transactions, delay in reporting, whether wilful or inadvertent, should prevent such knowledge from being imputed to the corporation.
Third, estoppel against pleading such a defense; since defendant could have started the period running, plaintiff and the shareholders should not be prejudiced by his failure to do so. A defendant should not profit from his own wrong. Bigelow v. R. K. O. Radio Pictures, Inc., 1946, 327 U.S. 251, at pages 264, 265, 66 S. Ct. 574, 90 L. Ed. 652.
If plaintiff's theory as to statutory construction were adopted and an objective standard applied, regardless of the cause of defendant's delay or plaintiff's knowledge, plaintiff's motion should be granted. But § 16(b) created a new cause of action
and contains within itself a statute of limitations.
'* * * the limitation imposed becomes an integral part of the right of action created by the statute and so limits it that an aggrieved person cannot maintain his suit after the time fixed by the statute has expired.' Pennsylvania Company for Insurance, etc., v. Deckert, 3 Cir., 1941, 123 F.2d 979, at page 985.
'* * * such statutes cannot be tolled, after the manner of statutes of limitation, even for fraud or concealment by the defendant which prevent the plaintiff from bringing the action within time.' Damiano v. Pennsylvania R. Co., 3 Cir., 1947, 161 F.2d 534, at page 535, certiorari denied 332 U.S. 762, 68 S. Ct. 65, 92 L. Ed. 348; Carpenter v. Erie R. Co., 3 Cir., 1942, 132 F.2d 362; and see United States v. Borin, 5 Cir., 1954, 209 F.2d 145, at pages 147, 148.
Although there is ...