Smolowe v. Delendo Corporation

United States Court of Appeals for the Second Circuit · 1943 · Corporations

136 F.2d 231 (1943)

Updated August 22, 2026

CorporationsSecurities RegulationInsider TradingSection 16(b)Securities Exchange Act of 1934§ 16(b)short-swing profitsobjective liability

Facts

Defendants Seskis and Kaplan were directors and the president and vice-president of Delendo Corporation, each owning about 12 percent of its stock. During a six-month period from December 1, 1939, to May 30, 1940, each purchased and sold substantial amounts of Delendo stock, with some transactions private and some on the New York Curb Exchange; the facts were stipulated and the transactions were conceded to have been made in good faith and without unfair use of inside information. The district court matched purchases and sales to produce the highest profits, holding Seskis liable for $9,733.80 and Kaplan for $9,161.05. One transfer of stock from Seskis to Kaplan was in satisfaction of a preexisting debt, and the district court treated Kaplan's acquisition of that stock as exempt under the statute's debt exception.

Issue

Does § 16(b) require proof that the insider actually made unfair use of inside information, or does it impose liability objectively for any profit from a purchase and sale, or sale and purchase, within less than six months? If liability is objective, how should the recoverable profit be computed, and are the statute and its application constitutional?

Rule

Under § 16(b), any profit realized by a director, officer, or qualifying stockholder from any purchase and sale, or sale and purchase, of the issuer's equity security within less than six months is recoverable by the issuer irrespective of actual intent or proof of actual unfair use of inside information. The statute is remedial and requires recovery of all possible profits; therefore, profit is computed by matching the insider's lowest purchase price with highest sale price within the six-month period, without limiting matches by certificate identity or first-in-first-out accounting. The exemption for securities acquired in good faith in connection with a previously contracted debt applies to the stock acquired by the creditor in satisfaction of the debt, not to stock acquired by the debtor in order to repay the debt.

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

Nina Patel, the chief financial officer of Lakefront Robotics, Inc., bought 4,000 shares of the company’s common stock in Chicago in January and sold 4,000 shares in April for a gain. The board later confirms that Nina acted in good faith and that no material nonpublic information was shown to have influenced her trades.

If a shareholder brings a derivative action on behalf of the issuer to recover the gain, which is the strongest argument for recovery?

Explanation. The majority construed § 16(b) to impose an objective rule. Any profit realized by an officer, director, or covered owner from a purchase and sale, or sale and purchase, within less than six months is recoverable by the issuer without proof of actual unfair use of inside information and irrespective of intent. Good faith does not defeat liability.