from February 19, 1960, and on $ 12,810.77 from February 23, 1960. Counsel will submit an appropriate form of order.
On Motion for Modification.
Defendant has filed a motion for modification. He seeks to eliminate the item of interest in our award of summary judgment in favor of the plaintiff for 'short swing' profits which defendant realized while he was an officer and director of the corporation. Defendant points to the decision of the Supreme Court in Blau v. Lehman, 368 U.S. 403, 82 S. Ct. 451, 7 L. Ed. 2d 403 (1962), handed down one day before our original opinion was filed, as announcing the standard that in cases such as this interest should not be awarded if it would be unfair or inequitable to do so. He argues that the present case falls short of that standard and interest therefore should not be required because: (1) the award made is the equivalent of a 'penalty' on which interest is not granted; (2) interest should be allowed only to compensate a plaintiff for the loss of use of money, where as here plaintiff suffered no actual money damage; (3) there is no evidence of the unfair use by the defendant of inside information; and (4) the governing rule of law was in doubt and it would be harsh to require interest in addition to the principal in the very case in which the doubtful legal question was determined for the first time.
1. An award for profits made by an 'insider' in a 'short swing' transaction is not the imposition of a penalty analogous to a criminal fine. It is compensation to the corporation for the breach of a statutory duty fastened on the 'insider'. The statute is remedial and not penal. Adler v. Klawans, 267 F.2d 840, 846 (2d Cir. 1959). The present case therefore is the very opposite of Rodgers v. U.S., 332 U.S. 371, 68 S. Ct. 5, 92 L. Ed. 3 (1947). There interest was refused on an award which the Agricultural Adjustment Act of 1938, 7 U.S.C.A. § 1348, specifically designated as a penalty. The Court found, moreover, that the purpose of Congress in requiring the penalty was not to raise revenue for the Government's financial advantage, but to deter farmers from exceeding their quotas.
2 & 3. The fact that the plaintiff suffered no money damage and the absence of proof that defendant actually made any unfair use of inside information, are not decisive. This is because of the nature of the remedy created by § 16(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78p(b)). Congress evidently believed that there was widespread violation by corporate insiders of their fiduciary obligation. To prevent such violations and to remove the temptation, Congress fashioned a preventive remedy. It limited the remedy to 'short swing' transactions, but it made it available to the corporation in absolute terms without regard to the individual circumstances. It thus raised to the level of absolute liability the realization by an insider of a 'short swing' profit. The statutory proscription is absolute, and liability is fastened on the officer or director without any showing of actual use of inside information. In thus creating absolute liability on the part of 'insiders' for 'short swing' profits and abolishing the need for proof of actual abuse of trust, Congress surely did not intend that the corporation should be required to enter upon such proof on the subordinate question of interest. Without pressing the analogy, we may roughly describe the remedy under § 16(b) as a remedy for a breach of trust which the statute presumes to have occurred when a 'short swing' profit is realized by an insider. Since interest normally is awarded in cases involving a breach of fiduciary obligation (2 Scott on Trusts § 207 (2d Ed. 1956); Restatement of the Law, Trusts 2d, § 207), the burden of showing that its allowance would be unfair or inequitable is on the defendant. The defendant has not met his burden.
4. We see no reason to deny interest because defendant was able to make a bona fide argument on the question of liability. See Adler v. Klawans, 172 F.Supp. 502, 506 (S.D.N.Y.1958), affirmed 267 F.2d 840 (2d Cir. 1959). The statute, as we have seen, establishes a duty of a fiduciary nature. This duty was breached by defendant and the accounting which he should make to the plaintiff should be a full one. A full award requires the payment of interest as well as principal.
Finding as we do that defendant has not met the burden of showing some overriding inequity in the award of interest, we conclude that the award should follow the normal course and bear interest, as we indicated without discussion of the subject in our original opinion.
AND NOW, June 20, 1962, defendant's Motion for Modification is denied and it is ordered that judgment be entered in favor of plaintiff and against defendant in the amount of $ 16,012.43, with interest at the rate of 6% Per annum on $ 3,201.66 from February 19, 1960, and on $ 12,810.77 from February 23, 1960.