The opinion of the court was delivered by: FREEDMAN
Plaintiff has moved for summary judgment in an action brought under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), for profits realized by defendant on so-called 'short swing' transactions. The Act permits corporate recovery of profits made by an 'insider' from the purchase and sale of the corporation's stock within any period of less than six months.
The statutory standards are that the 'equity security' must be registered on a national securities exchange and that the insider must be one who directly or indirectly is the beneficial owner of more than 10% Of any class of such security or who is a director or an officer of the issuer of such security § (16(b)).
Section 16(b) provides: 'For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This 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, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.'
Defendant was an officer and director of plaintiff corporation on October 8, 1959, when he purchased 1,800 shares of its common stock at a price of $ 14. per share. He remained an officer and director until March 3, 1961, long after the events here involved. On February 19, 1960, well within six months from the date of purchase, defendant sold 100 shares of the stock for a total price of $ 4,601.66, or a profit of $ 3,201.66. A few days later, on February 23, 1960, he sold a block of 300 shares for $ 13,804.96, and a block of 100 shares for $ 4,605.81, or a total of $ 18,410.77, on which his profit was $ 12,810.77. The total profit realized by defendant on the sales of February 19 and February 23 was $ 16,012.43. It is this amount which plaintiff seeks to recover.
The case clearly meets all the statutory provisions except that the stock was not already registered on a national securities exchange when defendant purchased it on October 8, 1959, although it was registered while he was the owner on January 11, 1960, and remained registered when he sold it in February 1960.
The Securities Exchange Act of 1934 is a broadly remedial statute intended to cure widespread abuse by corporate managers of their fiduciary relationship to the corporation and its stockholders. Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943), certiorari denied, 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446; Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959). In harmony with this purpose 1 16(b) affords the classic remedy for abuse of trust: the recovery by the cestuique trust of the profits made by the fiduciary.
It is urged by defendant that the requirements of § 16(b) have not been met because the stock was not registered on a national securities exchange at both ends of the transaction: the time of purchase and the time of sale of the stock. § 16(b) speaks of profit realized by an insider 'from any purchase and sale' or 'any sale and purchase' of an equity security within the six months period. Were it necessary we would readily construe 'and' as meaning 'or', under the familiar canon of statutory construction: United States v. Fisk, 3 Wall. 445, 448, 18 L. Ed. 243 (1866); Peacock v. Lubbock Compress Co., 252 F.2d 892, (5th Cir. 1958).
See also Pennsylvania Labor Relations Board v. Martha Co., 359 Pa. 347, 352, 59 A.2d 166 (1948); Burgis v. Philadelphia County, 169 Pa. Super. 23, 25, 82 A.2d 561 (1951). But the use of the conjunctive was necessary to describe the facts of purchase and sale from which a profit is realized; there could be no profit from a purchase without a sale.
The statutory purpose is emphasized by the last sentence of § 16(b) which specifically directs that beneficial ownership of more than 10% Of any class of stock must exist at both the time of purchase and the time of sale. It was pointed out in Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959), that the doctrine of expressio unius est exclusio alterius leads to the conclusion that the requirement is limited to the single case specified, that of the owner of 10% Of a class of security and therefore does not apply to an officer or director.
Accordingly, since § 16(b) does not expressly require that the stock held by an officer or director of a corporation must be registered on a national securities exchange at the time it was purchased as well as when it was sold, we will not infer such a requirement contrary to the manifest statutory purpose. Congress did specify the both ends requirement on purchase and sale by an insider owning more than 10% Of a class of security. Its silence on registration may not be converted into a command.
Defendant raises two additional defenses. They are based on the allegations in defendant's affidavit that he was induced to enter into his employment with the corporation on the agreement of Karl Hope, plaintiff's president and sole stockholder, to finance his purchase of $ 25,000 of the corporation's stock when it was offered for sale; that Hope did in fact guarantee a bank loan of $ 25,000. to defendant with which he purchased the 1,800 shares, which were pledged as collateral for the demand note which evidenced the loan. Defendant alleges that the loan was to be repaid as soon as possible and that it was to repay the loan that he sold the stock. From these circumstances defendant claims that plaintiff is now estopped from recovering defendant's profits from the purchase and sale of the stock. He also urges that the transaction was 'akin' to a stock option, stock bonus, profit sharing or incentive plan, which are exempt from the operation of § 16(b) by Rule X-16A-3, 17 C.F.R. § 240.16b-3.
The remedial purpose of the statute precludes the application of the doctrine of estoppel in the present case. The statute seeks to protect stockholders from the acts of corporate insiders. To estop the corporation because of the acts of such insiders would defeat its purpose. It is in manifestation of this purpose that § 29(a) of the Act (15 U.S.C.A. § 78cc) explicitly prohibits any attempt to alter or waive the requirements of the Act even by the express agreement of the parties. See Jefferson Lake Sulphur Co. v. Walet, 104 F.Supp. 20, 24 (E.D.La.1952).
In any event the doctrine of estoppel could not be invoked against the corporation in this case, because defendant's affidavit alleges merely a private transaction between him and Hope, in which Hope agreed to pledge his individual credit. There is nothing in the affidavit which affords any basis for fastening on the corporation any part of Hope's undertaking with the defendant.
For the same reason the transaction is not exempt under Rule X-16B-3. There is no shred of evidence of a corporate act in establishing a stock option, stock bonus, profit sharing or incentive plan, and only such corporate plans are ...