Petitioner, a stockholder in a corporation with stock registered on a national securities exchange, sued under 16 (b) of the Securities Exchange Act of 1934 to recover on behalf of the corporation from one of its directors and a partnership of which he was a member "short-swing" profits realized by them on the purchase and sale by the partnership of stock of the corporation within a period of less than six months. Petitioner alleged that the partnership had "deputed" the director to represent its interests on the corporation's board of directors and that, by reason of his inside information, he had caused the partnership to purchase the stock of the corporation. The District Court found that these allegations were not supported by the evidence and that the partnership had bought the stock solely on the basis of the corporation's public announcements and without consulting the director. Accordingly, it denied a judgment against the partnership and the director for the full amount of the resulting profits and awarded a judgment against the director for only his proportionate share of the partnership's profits on these transactions, without interest. The Court of Appeals affirmed in all respects. Held: The judgment is affirmed. Pp. 404-414.
Morris J. Levy argued the cause and filed briefs for petitioner.
Whitney North Seymour argued the cause for respondents other than Tide Water Associated Oil Company. With him on the briefs were Benjamin C. Milner and Robert S. Carlson.
Allan F. Conwill, by special leave of Court, argued the cause for the Securities and Exchange Commission, as amicus curiae, urging reversal. With him on the briefs were Solicitor General Cox, John F. Davis, Walter P. North, Ellwood L. Englander and David Ferber.
Bruce Bromley filed a brief for the American Society of Corporate Secretaries, Inc., as amicus curiae, urging affirmance.
MR. JUSTICE BLACK delivered the opinion of the Court.
The petitioner Blau, a stockholder in Tide Water Associated Oil Company, brought this action in a United States District Court on behalf of the company under 16 (b) 1 of the Securities Exchange Act of 1934 to [368 U.S. 403, 405] recover with interest "short swing" profits, that is, profits earned within a six months' period by the purchase and sale of securities, alleged to have been "realized" by respondents in Tide Water securities dealings. Respondents are Lehman Brothers, a partnership engaged in investment banking, securities brokerage and in securities trading for its own account, and Joseph A. Thomas, a member of Lehman Brothers and a director of Tide Water. The complaint alleged that Lehman Brothers "deputed . . . Thomas, to represent its interests as a director on the Tide Water Board of Directors," and that within a period of six months in 1954 and 1955 Thomas, while representing the interests of Lehman Brothers as a director of Tide Water and "by reason of his special and inside knowledge of the affairs of Tide Water, advised and caused the defendants, Lehman Brothers, to purchase and sell 50,000 shares of . . . stock of Tide Water, realizing profits thereon which did not inure to and [were] not recovered by Tide Water."
The case was tried before a district judge without a jury. The evidence showed that Lehman Brothers had in [368 U.S. 403, 406] fact earned profits out of short-swing transactions in Tide Water securities while Thomas was a director of that company. But as to the charges of deputization and wrongful use of "inside" information by Lehman Brothers, the evidence was in conflict.
First, there was testimony that respondent Thomas had succeeded Hertz, another Lehman partner, on the board of Tide Water; that Hertz had "joined Tidewater Company thinking it was going to be in the interests of Lehman Brothers"; and that he had suggested Thomas as his successor partly because it was in the interest of Lehman. There was also testimony, however, that Thomas, aside from having mentioned from time to time to some of his partners and other people that he thought Tide Water was "an attractive investment" and under "good" management, had never discussed the operating details of Tide Water affairs with any member of Lehman Brothers; 2 that Lehman had bought the Tide Water securities without consulting Thomas and wholly on the basis of public announcements by Tide Water that common shareholders could thereafter convert their shares to a new cumulative preferred issue; that Thomas did not know of Lehman's intent to buy Tide Water stock until after the initial purchases had been made; that upon learning about the purchases he immediately notified Lehman that he must be excluded from "any risk of the purchase or any profit or loss from the subsequent sale"; and that this disclaimer was accepted by the firm. 3 [368 U.S. 403, 407]
From the foregoing and other testimony the District Court found that "there was no evidence that the firm of Lehman Brothers deputed Thomas to represent its interests as director on the board of Tide Water" and that there had been no actual use of inside information, Lehman Brothers having bought its Tide Water stock "solely on the basis of Tide Water's public announcements and without consulting Thomas."
On the basis of these findings the District Court refused to render a judgment, either against the partnership or against Thomas individually, for the $98,686.77 profits which it determined that Lehman Brothers had realized, 4 holding:
Petitioner apparently seeks to have us decide the questions presented as though he had proven the allegations of his complaint that Lehman Brothers actually deputized Thomas to represent its interests as a director of Tide Water, and that it was his advice and counsel based on his special and inside knowledge of Tide Water's affairs that caused Lehman Brothers to buy and sell Tide Water's stock. But the trial court found otherwise and the Court of Appeals affirmed these findings. Inferences could perhaps [368 U.S. 403, 409] have been drawn from the evidence to support petitioner's charges, but examination of the record makes it clear to us that the findings of the two courts below were not clearly erroneous. Moreover, we cannot agree with the Commission that the courts' determinations of the disputed factual issues were conclusions of law rather than findings of fact. We must therefore decide whether Lehman Brothers, Thomas or both have an absolute liability under 16 (b) to pay over all profits made on Lehman's Tide Water stock dealings even though Thomas was not sitting on Tide Water's board to represent Lehman and even though the profits made by the partnership were on its own initiative, independently of any advice or "inside" knowledge given it by director Thomas.
First. The language of 16 does not purport to impose its extraordinary liability on any "person," "fiduciary" or not, unless he or it is a "director," "officer" or "beneficial owner of more than 10 percentum of any class of any equity security . . . which is registered on a national securities exchange." 6 Lehman Brothers was neither an officer nor a 10% stockholder of Tide Water, but petitioner and the Commission contend that the Lehman partnership is or should be treated as a director under 16 (b).
(a) Although admittedly not "literally designated" as one, it is contended that Lehman is a director. No doubt Lehman Brothers, though a partnership, could for purposes of 16 be a "director" of Tide Water and function through a deputy, since 3 (a) (9) of the Act 7 provides that " `person' means . . . partnership" and 3 (a) (7) 8 that " `director' means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated." [368 U.S. 403, 410] Consequently, Lehman Brothers would be a "director" of Tide Water, if as petitioner's complaint charged Lehman actually functioned as a director through Thomas, who had been deputized by Lehman to perform a director's duties not for himself but for Lehman. But the findings of the two courts below, which we have accepted, preclude such a holding. It was Thomas, not Lehman Brothers as an entity, that was the director of Tide Water.
(b) It is next argued that the intent of 3 (a) (9) in defining "person" as including a partnership is to treat a partnership as an inseparable entity. 9 Because Thomas, one member of this inseparable entity, is an "insider," 10 it is contended that the whole partnership should be considered the "insider." But the obvious intent of 3 (a) (9), as the Commission apparently realizes, is merely to make it clear that a partnership can be treated as an entity under the statute, not that it must be. This affords no reason at all for construing the word "director" in 16 (b) as though it read "partnership of which the director is a member." And the fact that Congress provided in 3 (a) (9) for a partnership to be treated as an entity in its own right likewise offers no support for the argument that Congress wanted a partnership to be subject to all the responsibilities and financial burdens of its members in carrying on their other individual business activities.
(c) Both the petitioner and the Commission contend on policy grounds that the Lehman partnership should be held liable even though it is neither a director, officer, nor [368 U.S. 403, 411] a 10% stockholder. Conceding that such an interpretation is not justified by the literal language of 16 (b) which plainly limits liability to directors, officers, and 10% stockholders, it is argued that we should expand 16 (b) to cover partnerships of which a director is a member in order to carry out the congressionally declared 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. . . ." Failure to do so, it is argued, will leave a large and unintended loop-hole in the statute - one "substantially eliminating the great Wall Street trading firms from the statute's operation." 286 F.2d, at 799. These firms it is claimed will be able to evade the Act and take advantage of the "inside" information available to their members as insiders of countless corporations merely by trading "inside" information among the various partners.
The argument of petitioner and the Commission seems to go so far as to suggest that 16 (b)'s forfeiture of profits should be extended to include all persons realizing "short swing" profits who either act on the basis of "inside" information or have the possibility of "inside" information. One may agree that petitioner and the Commission present persuasive policy arguments that the Act should be broadened in this way to prevent "the unfair use of information" more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses. 11 But this very broadening of the categories of persons on whom these liabilities are imposed by the [368 U.S. 403, 412] language of 16 (b) was considered and rejected by Congress when it passed the Act. Drafts of provisions that eventually became 16 (b) not only would have made it unlawful for any director, officer or 10% stockholder to disclose any confidential information regarding registered securities, but also would have made all profits received by anyone, "insider" or not, "to whom such unlawful disclosure" had been made recoverable by the company. 12
Not only did Congress refuse to give 16 (b) the content we are now urged to put into it by interpretation, but with knowledge that in 1952 the Second Circuit Court of Appeals refused, in the Rattner case, to apply 16 (b) to Lehman Brothers in circumstances substantially like [368 U.S. 403, 413] those here, Congress has left the Act as it was. 13 And so far as the record shows this interpretation of 16 (b) was the view of the Commission until it intervened last year in this case. Indeed in the Rattner case the Court of Appeals relied in part on Commission Rule X-16A-3 (b) which required insider-partners to report only the amount of their own holdings and not the amount of holdings by the partnership. While the Commission has since changed this rule to require disclosure of partnership holdings too, its official release explaining the change stated that the new rule was "not intended as a modification of the principles governing liability for short-swing transactions under Section 16 (b) as set forth in the case of Rattner v. Lehman . . . ." 14 Congress can and might amend 16 (b) if the Commission would present to it the policy arguments it has presented to us, but we think that Congress is the proper agency to change an interpretation of the Act unbroken since its passage, if the change is to be made.
Second. The petitioner and the Commission contend that Thomas should be required individually to pay to Tide Water the entire $98,686.77 profit Lehman Brothers realized on the ground that under partnership law he is co-owner of the entire undivided amount and has therefore "realized" it all. "[O]nly by holding the partner-director liable for the entire short-swing profits realized by his firm," it is urged, can "an effective prophylactic to the stated statutory policy . . . be fully enforced." But [368 U.S. 403, 414] liability under 16 (b) is to be determined neither by general partnership law nor by adding to the "prophylactic" effect Congress itself clearly prescribed in 16 (b). That section leaves no room for judicial doubt that a director is to pay to his company only "any profit realized by him" from short-swing transactions. (Emphasis added.) It would be nothing but a fiction to say that Thomas "realized" all the profits earned by the partnership of which he was a member. It was not error to refuse to hold Thomas liable for profits he did not make.
Third. It is contended that both courts below erred in failing to allow interest on the recovery of Thomas' share of the partnership profits. Section 16 (b) says nothing about interest one way or the other. This Court has said in a kindred situation that "interest is not recovered according to a rigid theory of compensation for money withheld, but is given in response to considerations of fairness. It is denied when its exaction would be inequitable." Board of Commissioners v. United States, 308 U.S. 343, 352 . Both courts below denied interest here and we cannot say that the denial was either so unfair or so inequitable as to require us to upset it.
[ Footnote 2 ] In 1956, after the purchase and sale in question, Lehman Brothers participated in the underwriting of some Tide Water bonds. Thomas handled this for Lehman and during the course of the matter discussed Tide Water affairs with the other members of Lehman.
[ Footnote 3 ] In compliance with 16 (a) and the rules and forms thereunder, see note 14, infra, Thomas filed with the SEC reports of the Lehman transactions in Tide Water stock and his disclaimer of those transactions.
[ Footnote 4 ] In both courts below defendants claimed that Lehman's profits should have been found to be much less than they were. Since the determination below has not been complained of here, it is not necessary to pass on those contentions.
[ Footnote 5 ] In the two courts below it was contended both that Thomas, because of his disclaimer of all participation in these partnership transactions, had realized no profits at all, and also that, even if he did realize some profits the amount was less than that found. See the opinion of Judge Swan dissenting in part below. 286 F.2d, at 793. We express no view on these questions since the Thomas judgment is not challenged here.
[ Footnote 6 ] See 16 (a), 48 Stat. 896, 15 U.S.C. 78p (a).
[ Footnote 7 ] 48 Stat. 883, 15 U.S.C. 78c (a) (9).
[ Footnote 8 ] 48 Stat. 883, 15 U.S.C. 78c (a) (7).
[ Footnote 9 ] The Commission's brief says: "Therefore, when a member of a partnership holds a directorship with the knowledge and consent of his firm, it is entirely reasonable to consider the partnership as the `director' for the purposes of Section 16 (b)."
[ Footnote 10 ] An "insider" for purposes of 16 is an officer, director or 10% stockholder. See Cook and Feldman, Insider Trading Under the Securities Exchange Act, 66 Harv. L. Rev. 385, 399-404.
[ Footnote 11 ] Mosser v. Darrow, 341 U.S. 267 , and Lehman v. Civil Aeronautics Board, 93 U.S. App. D.C. 81, 209 F.2d 289, cited by the Commission as comparable situations throw little if any light on the issues in this case. Those cases involved different facts and different statutes, statutes which themselves have different language, purpose and history from the statute here.
[ Footnote 12 ] Thus, 15 (b) of both H. R. 7852, and S. 2693, 73d Cong., 2d Sess. provided:
[ Footnote 13 ] See Seventeenth Annual Report of the Securities and Exchange Commission, p. 62 (1952); Eighteenth Annual Report, p. 79 (1953). These reports were submitted to Congress.
[ Footnote 14 ] Securities and Exchange Commission Release No. 4754 (September 24, 1952). Rule X-16A-3 was again amended, effective March 9, 1961, to delete any requirements that a partner report the amount of the issuer's securities held by the partnership but the substance of the rule is still contained in the Commission's instructions to its Forms 3 and 4 which are used for making the reports required under 16 (a).
MR. JUSTICE DOUGLAS, with whom THE CHIEF JUSTICE concurs, dissenting.
What the Court does today is substantially to eliminate "the great Wall Street trading firms" from the operation of 16 (b), as Judge Clark stated in his dissent in the Court of Appeals. 286 F.2d 786, 799. This result follows because of the wide dispersion of partners of investment banking firms among our major corporations. Lehman Bros. has partners on 100 boards. Under today's [368 U.S. 403, 415] ruling that firm can make a rich harvest on the "inside information" which 16 of the Act covers because each partner need account only for his distributive share of the firm's profits on "inside information," the other partners keeping the balance. This is a mutilation of the Act.
If a partnership can be a "director" within the meaning of 16 (a), then "any profit realized by him," as those words are used in 16 (b), includes all the profits, not merely a portion of them, which the partnership realized on the "inside information." There is no basis in reason for saying a partnership cannot be a "director" for purposes of the Act. In Rattner v. Lehman, 193 F.2d 564, 567, 1 Judge Learned Hand said he was "not prepared to say" that a partnership could not be considered a "director," adding "for some purposes the common law does treat a firm as a jural person." In his view a partnership might be a "director" within the meaning of 16 if it "deputed a partner" to represent its interests. Yet formal designation is no more significant than informal approval. Everyone knows that the investment banking-corporation alliances are consciously constructed so as to increase the profits of the bankers. In partnership law a debate has long raged over whether a partnership is an [368 U.S. 403, 416] entity or an aggregate. Pursuit of that will-o'-the-wisp is not profitable. For even New York with its aggregate theory recognizes that a partnership is or may be considered an entity for some purposes. 2 It is easier to make this partnership a "director" for purposes of 16 than to hold the opposite. Section 16 (a) speaks of every "person" who is a "director." In 3 (a) (9) "person" is defined to include, inter alia, "a partnership." 3 Thus, the purpose to subject a partnership to the provisions of 16 need not turn on a strained reading of that section.
At the root of the present problem are the scope and degree of liability arising out of fiduciary relations. In modern times that liability has been strictly construed. The New York Court of Appeals, speaking through Chief Judge Cardozo in Meinhard v. Salmon, 249 N. Y. 458, 164 N. E. 545, held a joint adventurer to a higher standard than we insist upon today:
We forget much history when we give 16 a strict and narrow construction. Brandeis in Other People's Money spoke of the office of "director" as "a happy hunting ground" for investment bankers. He said that "The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege." Id., at 12.
The hearings that led to the Securities Exchange Act of 1934 are replete with episodes showing how insiders exploited for their personal gain "inside information" which came to them as fiduciaries and was therefore an asset of the entire body of security holders. The Senate Report labeled those practices as "predatory operations." S. Rep. No. 1455, 73d Cong., 2d Sess., p. 68. It said:
What we do today allows all but one partner to share in the feast which the one places on the partnership table. They in turn can offer feasts to him in the 99 other companies of which they are directors. 5 14 Stan. L. Rev. 192, 198. This result is a dilution of the fiduciary principle that Congress wrote into 16 of the Act. It is, with all respect, a dilution that is possible only by a strained reading of the law. Until now, the courts have given this fiduciary principle a cordial reception. We should not leave to Congress the task of restoring the edifice that it erected and that we tear down. [368 U.S. 403, 421]
[ Footnote 1 ] The Rattner decision was rendered at a time when the Securities and Exchange Commission, pursuant to its regulatory power, provided a reporting requirement for 16 (a) which allowed a partner-director to disclose only that amount of the equity securities of the corporation in question held by his partnership and representing his proportionate interest in the partnership. Rule X-16A-3. After the Rattner decision that Rule was amended to read:
[ Footnote 2 ] Matter of Schwartzman, 262 App. Div. 635, 636-637, 30 N. Y. S. 2d 882, 884, aff'd 288 N. Y. 568, 42 N. E. 2d 22, holding a partnership to be a legal entity for purposes of the Unemployment Insurance Law; Mendelsohn v. Equitable Life Assurance Soc., 178 Misc. 152, 154, 33 N. Y. S. 2d 733, 735, holding "attorneys as partners are but one person" for purposes of the Rules of Civil Practice: Travelers Ind. Co. v. Unger, 4 Misc. 2d 955, 959, 158 N. Y. S. 2d 892, 896, holding a partnership "is to be regarded as a legal entity for the purposes of pleading." And see Bernard v. Ratner, 7 N. Y. S. 2d 717.
[ Footnote 3 ] In United States v. A & P Trucking Co., 358 U.S. 121 - a case far more severe in its impact than the result I urge here, as it held a partnership could be criminally liable under the Motor Carrier Act - the Court said, "Congress has specifically included partnerships within the definition of `person' in a large number of regulatory Acts, thus showing its intent to treat partnerships as entities." Id., p. 124, note 3.
[ Footnote 5 ] The proper approach to the problem of interlocking directorates through the agency of an investment banking house was expressed by Judge Fahy in Lehman v. Civil Aeronautics Board, 93 U.S. App. D.C. 81, 209 F.2d 289, a case involving this same firm. See Appendix to this opinion. [368 U.S. 403, 424]