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Feder v. Martin Marietta Corp.

Citation. Feder v. Martin Marietta Corp., 406 F.2d 260, Fed. Sec. L. Rep. (CCH) P92,333 (2d Cir. N.Y. Jan. 14, 1969)
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Brief Fact Summary.

Bunker, the president of Martin Marietta Corp. (Defendant) also served as director of Sperry Rand. Marietta (Defendant), and during the span of six months bought and sold shares of Sperry Rand, but resigned before the sales were transacted.

Synopsis of Rule of Law.

Directors of an issuer corporation who bought and sold an issuer security for profit during a six month time frame are held liable as per Section 16(b) of the 1934 Securities ExchangeAct, as is a corporation that is deemed a “director†when it deputizes a person closely identified with the interests to serve as director of the issuer corporation. Even if the “deputy†transitioned into a director during the buying of the issuer shares and resigned prior to the selling of said shares by the deputizing corporation, with the purchases and sales falling under a six month time frame, the corporation will sustain a § 16(b) liability.


As chief executive and president of Martin Marietta Corp, Bunker was responsible for approving all of Marietta’s stock transactions. When Marietta’s directors learned that Marietta had a $10 million investment in Sperry Rand they permitted Bunker to become a director there.
Once Bunker was a director at Sperry Rand, Marietta purchased over one hundred thousand extra shares of Sherry Rand and after the purchase transpired, Bunker resigned. His letter of resignation stated that he became a director at Sperry Rand due to Marietta owned a “substantial number†of Sperry Rand shares. Within six months of purchasing the additional shares, Marietta sold all of them for a profit. A shareholder of Sherry Rand, Feder, brought suit under § 16(b) in order to recover for Sperry Rand the profits from the sold shares on the idea that through its deputy Bunker, Marietta was actually a director of Sperry Rand when the shares were purchased. The action was dismissed by the lower court.


(1) Is a corporation deemed a “director” as defined by § 16(b) where it appoints its chief executive to act as a director of a different corporation when the executive has the duty of personally approving all stock transactions for the corporation and where the taking the of the directorship by the chief executive is approved by the corporation knowing that it owns a considerable amount of that other corporation’s stock?
(2) Is an individual who has the job of director at the time of buying stock but resigns before the stock is sold liable under § 16(b), if the buying and selling purchase and sale take place within a six-month period?


(Waterman, J.) (1) Yes. A corporation can become a “director” as defined by § 16(b) when it “deputizes†a person to serve on the board of an issuer corporation.  “Deputization†is decided on a case-by-case basis and is determined. When viewed objectively, the question is if the director was self-serving or served the interests of the corporation. In this case, Bunker personally approved all of Marietta’s stock trading and was appointed to the Sperry directorship
due to Marietta’s financial interest in Sperry Rand, with Bunker even admitting that. Also, it is of note that Marietta has a track record of putting its officers on boards of other corporations. So, Marietta, with Bunker as its deputy, is a director of Sperry Rand as defined by § 16(b). Finding otherwise, the lower courtis reversed.
(2) Individuals who own 10% of an issuer’s stock and the directors and officers of that issuer are differentiated by Section 16(b). Unlike 10% shareholders, officers and directors are not required to hold those positions during both the purchasing and selling in order to fall with § l6(b).
In Adler v. Klawans, 267 F.2d 840 (2d Cir. 1959) it was held that a director who held that position at the time of sale but not at the time of purchase still sustained a § 16(b) liability when the buying and selling within a six month time period. It is unreasonable to refuse to adhere to Adler when a director holds his position at the time of purchase but not the sale, like in this case.
Using inside information, a director could decide when to buy the shares, resign and then sell the shares and should be held liable. SEC rules that try to limit liability in similar circumstances infringes on the purpose of the Act and so is out of the power of the Agency to promulgate. The selling of stock by a previous director only falls under § 16(b) is the stock was bought during the time he was a director and the sale was transacted within a six month time frame from date of purchase. Reversed.


Section l6(b) is a prophylactic statute and in enacting it, Congress planned for it to be interpreted in a all-encompassing manner in hopes of creating a deterrent for persons who could be swayed to use their position to obtain information to reap profits on the stock market, which is why most courts interpret it very broadly.

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