Gratz v. Claughton

United States Court of Appeals for the Second Circuit · 1951 · Corporations

187 F.2d 46 (2d Cir. 1951)

Updated August 22, 2026

CorporationsSecuritiesSection 16(b)Short-swing profitsVenuecorporate fiduciaryconstructive trusteebeneficial owner

Facts

Claughton was a beneficial owner of more than ten percent of the railroad's shares and engaged in purchases and sales of the company's stock within periods of less than six months. The trades were executed on the New York exchanges pursuant to his orders, although he was domiciled in Florida and was served there. He challenged venue, the constitutionality of Section 16(b) and the venue provision, and the master's method of computing profits. The master matched transactions under a rule designed to produce the greatest recoverable profit.

Issue

Whether a Section 16(b) action could be brought in the Southern District of New York based on trades executed on New York exchanges, whether Section 16(b) and its venue provision were constitutional, and how profits should be computed when an insider engaged in multiple purchases and sales within six months. More specifically, the court had to decide whether profits are limited to identified shares or instead are matched in a way that maximizes recovery.

Rule

Under Section 16(b), short-swing purchases and sales by a director, officer, or 10% beneficial owner are violations for which profits must be disgorged to the issuer. Venue under Section 27 is proper in the district where the wrongful purchase and sale transactions occurred. In computing profits, shares are not matched by identifying the same certificates; instead, purchases and sales within six months are matched so as to produce the maximum profit recoverable, and the six-month look runs both backward and forward from a sale, subject to the limit that no transaction may be used in more than one equation.

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nadia Flores, a 12% shareholder of Pine Harbor Transit Corp., lives in Arizona. She places orders through her broker to buy and sell Pine Harbor stock on an exchange floor in New York within four months, and the issuer sues her in federal court in Manhattan after serving her at home in Phoenix.

Is venue proper in the Southern District of New York?

Explanation. Venue is proper where the act or transaction constituting the violation occurred. The majority treated the wrongful acts as the purchases and sales themselves, not a later failure to account. Because the trades were executed in New York, suit may be brought there even though the defendant lives and was served elsewhere.