Blau v. Lehman

LOCATION: U.S. District Court for the District of Massachusetts

DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 368 US 403 (1962)
ARGUED: Dec 12, 1961 / Dec 13, 1961
DECIDED: Jan 22, 1962

Facts of the case


Media for Blau v. Lehman

Audio Transcription for Oral Argument - December 13, 1961 in Blau v. Lehman

Audio Transcription for Oral Argument - December 12, 1961 in Blau v. Lehman

Earl Warren:

Number 66, Isadore Blau, etc., Petitioner, versus Robert Lehman et al.

Mr. Levy.

Morris J. Levy:

Mr. Chief Justice and may it please the Court.

This matter is presently before this Court pursuant to its order which granted petitioner's application for writ of certiorari to review the judgment of the Circuit Court of Appeals for the Second Circuit which affirmed, by divided Court, the trial court judgment, dismissing the complaint as to the respondents, Lehman Brothers, and affirming the judgment as against the respondents Thomas.

The action was originally commenced by the petitioner, a stockholder of Tide Water Associated Oil Company, on its behalf, to recover short-swing profits realized by Lehman Brothers from its transactions in the stock of Tide Water.

This action was brought pursuant to Section 16 (b) of the Securities Exchange Act of 1934 which, in substance, provides that, for the purpose of preventing the unfair use of information which may have been obtained by a director, an officer, or a 10% stockholder, any profit realized by such person shall be recoverable by the issuer or if the issuer fails to sue by a stockholder who brings such action on its behalf.

Pursuant to the man upon Tide Water and its failure to commence such suit, the petitioner as a stockholder did commence such suit.

Now, the issue involved here is the interpretation to be given to Section 16 (b), whether or not the Congressional purpose expressly stated by Congress should be carried out or whether the literal language of the statute should be followed.

Another issue involved here is whether or not the Securities and Exchange Commission has the power to formulate and make rules which Congress specifically allowed it to make and what effect the Court should give to such rules in interpreting the purpose of Section 16 (b).

Now, before going into the facts of the case, I think it would be advisable to go into the history of the Securities Exchange Act of 1934.

Your Honors will recall that, in 1929, there was a stock market crash and which vividly brought to the attention of Congress the fact that there was looseness in National Stock Exchanges, there were manipulations by insiders, and there were gen -- the general makeup of the market and the sale and purchase of securities were such as to put the investors generally in a very bad position as compared to the persons who are in the inside of the corporation.

Extended hearings were held before the Congressional committees and, pursuant to such hearings, Congress decided to enact the Securities Exchange Act of 1934 and its general purpose was to protect the investors to prohibit market manipulation and to maintain fair and free markets so that investors throughout the country might go into the market and purchase or sell securities knowing that there are no inside manipulations which cause the prices to go up or down.

Now, closely alike to this general purpose for the enactment of Section 6 -- the enactment of the Securities Exchange Act of 1934 was the furnishing of reports by insiders.

Congress found that insiders had used their confidential knowledge of the corporation to manipulate stock, to purchase stock, to sell stock based upon such knowledge and that the investors were at a great disadvantage because of that.

So, Congress decided to require these insiders such as officers, directors, and principal stockholders who could have use of such inside information and who are in such a position to get it to furnish reports of their purchases or sales of stock.

And, in order to deter them from making use of confidential information, they inaugurated a plan whereby if the director or officer or principal stockholder purchased and sold a security of an issuer which was listed upon the National Security Exchange, if such transaction occurred within a period of less than six months, this -- the profit realized by such insider was recoverable from him regardless of his intention -- as stated in the Section, regardless of his intention of rep -- of not repurchasing the securities sold or of not selling the securities purchased within a period of six months.

Potter Stewart:

Mr. Levy.

Morris J. Levy:

Yes, sir?

Potter Stewart:

This legislation did not apply to insiders such as directors, officers, and majority stockholders, did it?

It applied specifically and expressly and exclusively to directors, officers, and stockholders who held 10% or more of the equities -- securities, isn't that correct?

Morris J. Levy:

The statute, as finally enacted, did state that it applied only to directors.

It didn't state the word “only.”

It actually stated, for the purpose of preventing the use of unfair information, any purchase or sale by a director, an officer, or 10% stockholder.

It should be --

Potter Stewart:

So it didn't say insider such as these people?

Morris J. Levy:

No, it did not.

Potter Stewart:

That's -- I just -- you told us that's the--

Morris J. Levy:

That's right, but I went to the purpose of the statute, and the purpose of the statute was to prevent the use of inside information which might be obtained by an officer, director, or principal stockholder.

Potter Stewart:

As defined?

Morris J. Levy:

Not as defined.