C.R.A. Realty Corp. v. Joseph R. Crotty and United Artists Communications, Inc.

MESKILL, Circuit Judge,

dissenting:

I respectfully dissent.

*568The plain language of both section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1982), and the applicable Securities and Exchange Commission (SEC) regulation, 17 C.F.R. § 240.3b-2 (1988), contains no exception that exempts appel-lee Crotty from liability in this case. Section 16(b) unambiguously provides, in pertinent part, that:

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, ... shall inure to and be recoverable by the issuer.

The definition of “officer” for purposes of this section, as determined by the SEC, is “a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions with respect to any organization whether incorporated or unincorporated.” 17 C.F.R. § 240.3b-2.

While these provisions clearly leave room to construe as officers those who do not possess the titles of officers, see Colby v. Klune, 178 F.2d 872, 873 (2d Cir.1949), see also Securities and Exchange Comm’n v. Aaron, 605 F.2d 612, 616-17 (2d Cir.1979), vacated on other grounds, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), they do not permit the reverse inference.

Where the language of a statute is clear, as it is in this case, any extraneous considerations, such as the statute’s legislative history, are irrelevant to an analysis of the statute’s meaning. Davis v. Michigan Dep’t of Treasury, — U.S. -, - n. 3, 109 S.Ct. 1500, 1504 n. 3, 103 L.Ed.2d 891, 901 n. 3 (1989); United States v. Ron Pair Enterprises, Inc., — U.S. —, —, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989); New York State Pesticide Coalition, Inc. v. Jorling, 874 F.2d 115, 118 (2d Cir.1989). Crotty’s title, vice president, is explicitly included within the list of titles that the SEC has determined constitute officers per se under section 16(b). He is, therefore, liable under that section. There is nothing within the terms of either section 16 or 17 C.F.R. § 240.3b-2 that makes either provision ambiguous. While a pragmatic approach may be proper when interpreting the outer reaches of section 16, which is a strict liability statute, it is not called for in this situation.1 There is no reason to ignore the unambiguous language of the statute. Therefore, under the plain terms of the statute and regulation, Crotty is liable to United Artists (UA) for the profits on his transactions.

Simply put, the majority’s interpretation of section 16(b) writes the word “officer” out of the statute. At the very least, the statute should create a presumption that an officer has access to inside information. The majority opinion, however, gives only lip service to the words of the statute and the SEC’s own regulation interpreting those words. Crotty is a vice president of UA, and as such he should be liable for the profit he made in the short-swing transactions at issue here.

It makes no difference that since the time of his purchases and sales, the SEC has proposed amendments that, Crotty argues, would explicitly exempt him from the coverage of section 16(b). See 53 Fed.Reg. 49,997 (proposed Dec. 13, 1988). Not only were those provisions not in effect at the time in question, they are not in effect today. As the Supreme Court has said, “[i]t goes without saying that a proposed *569regulation does not represent an agency’s considered interpretation of its statute and that an agency is entitled to consider alternative interpretations before settling on the view it considers most sound.” Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 845, 106 S.Ct. 3245, 3254, 92 L.Ed.2d 675 (1986); but cf. Liegl v. Webb, 802 F.2d 623, 626-27 (2d Cir.1986) (proposed rule change, which did not require notice and comment rulemaking and which was intended to clarify existing rule, relevant to interpretation of that rule).

Because of the plain language of the statute alone, I believe that Crotty is bound by the provisions of section 16(b) as a matter of law, and I therefore would reverse the judgment of the district court.

There is, however, a second reason why I believe the district court’s decision should be reversed. Even under the majority’s reading of the statute and regulation, Crotty is an insider. The majority opinion itself reveals the great responsibility and control that Crotty had over the financial affairs of UA:

As head film buyer, [Crotty] obtained movies to be shown at the 351 movie screens in the western division [of UA] theaters. He supervised their distribution. This included negotiating and signing agreements pursuant to which United Artists obtained movies for exhibition, supervising the distribution of the movies to the company’s theaters, and settling contracts after the movies had been shown in the theaters. Crotty also had some supervisory responsibility for advertising in his division.
Crotty supervised a staff of 30 people. He had virtually complete and autonomous control of film buying in the western division. He was required to consult with higher authority only if he wanted to exceed a certain limit on the amount of the cash advance paid to a distributor for the exhibition of a particular movie. This occurred no more than two or three times a year. The gross revenue from Crotty’s division routinely was about 35-36% of United Artists’ gross revenue from movie exhibition, or around 15-18% of the company’s total gross revenue.

Majority op., § I. The facts clearly show that Crotty was in a position not only to bind UA through the execution of major contracts, but also to obtain information that could be useful in making investment decisions before that information was generally known either within the company, within the industry or to the general public. If an officer chooses to trade in his or her company’s stock, whether that officer actually uses inside information is irrelevant. It is the availability of inside information that is controlling under section 16(b). That this is so is evident from the cases that have reached outside the realm of titles to find that those who do not have the title of an officer can be liable under provisions of the securities laws that nominally apply to officers. Those cases have focused on the function an employee performs and the information to which an employee is exposed, and not the employee’s title. If an employee’s functions provide the employee with access to inside information, that employee falls within the purview of these laws. Thus, the critical issue is access to information, and not the use thereof. See, e.g., Aaron, 605 F.2d at 617 (employee who participated in management decisions and had supervisory responsibilities was potentially liable under 15 U.S.C. § 77t(b) (1976) and 15 U.S.C. § 78u(d) (1976)); Colby, 178 F.2d at 875 (“The question is what this particular employee was called upon to do.”).

The majority concludes that because Crotty received information about a movie’s daily gross revenues only at the same time that this information became generally available, he was not privy to inside information. I disagree. While the discovery of a movie’s daily gross revenue could be inside information if no one else were able to get that information, that is not the only information that may be considered “inside.”

For instance, Crotty knew just how many contracts were being negotiated at any one time, and the price UA was paying for the rental of each movie. He would therefore know of any changes in UA’s fortunes, as *570evidenced by a decrease or increase in the rate UA was forced to pay for distribution rights to a movie. He would also be in a position to know what percentage of the gross on a movie UA could expect to receive. This information could be useful even before actual gross revenues were known. Thus, if UA had distribution rights to a movie that was certain to be a blockbuster, but its distribution contracts were for any reason out of line with industry norms, Crotty would know about it.

More fundamentally, Crotty had the power to negotiate for movies to distribute in the first place. Knowing the level of success that UA was having in acquiring movies to lease would also be invaluable to one who wished to pursue a course of insider trading. In a volatile market such as that of the movies, knowing whether a company had few or many chances with which to make money over the course of a season could be of great help in gauging the future success of that company.

It is naive to assume that because Crotty was not one of UA’s directors and did not attend meetings of the board of directors, he did not have access to inside information. Not only is inside information available from other sources, but nothing prevented him from, for example, making a phone call to other UA officers or the directors themselves and discussing with them the course of meetings that he did not attend. In this respect, the majority ignores the fact that, whether or not Crotty actually received or used inside information, his position gave him access to it.

The majority makes much of the point that Crotty’s duties did not change when he received the title “vice president” from UA’s board of directors. I find this fact non-illuminating, however. There is nothing to indicate that Crotty’s new title was merely honorary; it could very well be that he was actually performing the duties of an officer before he received the title, and thus the title was recognition of a position that he had already de facto attained. Thus, the title of vice president may have merely caught up with his duties and responsibilities.

Especially where one person has “virtually complete and autonomous control” of “15-18% of [a] company’s total gross revenue,” and that person has not only the title, but also the duties, of an officer and insider, he or she should be held liable for any profits made on short-swing transactions such as those engaged in by Crotty here.

For these reasons, I believe that Crotty was an officer subject to the restrictions of section 16(b) as a matter of law. Furthermore, even if he were not subject to section 16(b) as a matter of law, the district court’s finding that Crotty had insufficient access to inside information for him to be deemed an insider was clearly erroneous. I would therefore reverse the judgment of the district court.

. Unlike the situation in Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 599, 93 S.Ct. 1736, 1747, 36 L.Ed.2d 503 (1973), there was nothing "involuntary" in the nature of Grotty's purchase and sale of securities. In Kern, the Supreme Court held that a tender offeror who had failed in a takeover attempt could sell back stock it had obtained in the course of the takeover attempt without violating section 16(b). This was so even though the transaction fell within the literal terms of the statute. The Court made it clear, however, that the involuntary nature of the transaction was of prime importance to the outcome of the case.