The petitioner Blau, a stockholder in Tide Water Associated Oil Company, brought this action in a United States District Court on behalf of the company under § 16(b) of the Securities Exchange Act of 1934 to recover with interest 'short swing' profits, that is, profits earned within a six months' period by the purchase and sale of securities, alleged to have been 'realized' by respondents in Tide Water securities dealings. Respondents are Lehman Brothers, a partnership engaged in investment banking, the securities brokerage and in securities trading for its own account, and Joseph A. Thomas, a member of Lehman Brothers and a director of Tide Water. The complaint alleged that Lehman Brothers 'deputed * * * Thomas, to represent its interests as a director on the Tide Water Board of Directors,' and that within a period of six months in 1954 and 1955 Thomas, while representing the interests of Lehman Brothers as a director of Tide Water and 'by reason of his special and inside knowledge of the affairs of Tide Water, advised and caused the defendants, Lehman Brothers, to purchase and sell 50,000 shares of * * * stock of Tide Water, realizing profits thereon which did not inure to and (were) not recovered by Tide Water.'
The case was tried before a district judge without a jury. The evidence showed that Lehman Brothers had in fact earned profits out of short-swing transactions in Tide Water securities while Thomas was a director of that company. But as to the charges of deputization and wrongful use of 'inside' information by Lehman Brothers, the evidence was in conflict.
First, there was testimony that respondent Thomas had succeeded Hertz, another Lehman partner, on the board of Tide Water; that Hertz had 'joined Tidewater Company thinking it was going to be in the interests of Lehman Brothers'; and that he had suggested Thomas as his successor partly because it was in the interest of Lehman. There was also testimony, however, that Thomas, aside from having mentioned from time to time to some of his partners and other people that he thought Tide Water was 'an attractive investment' and under 'good' management, had never discussed the operating details of Tide Water affairs with any member of Lehman Brothers; that Lehman had bought the Tide Water securities without consulting Thomas and wholly on the basis of public announcements by Tide Water that common shareholders could thereafter convert their shares to a new cumulative preferred issue; that Thomas did not know of Lehman's intent to buy Tide Water stock until after the initial purchases had been made; that upon learning about the purchases he immediately notified Lehman that he must be excluded from 'any risk of the purchase or any profit or loss from the subsequent sale'; and that this disclaimer was accepted by the firm.
From the foregoing and other testimony the District Court found that 'there was no evidence that the firm of Lehman Brothers deputed Thomas to represent its interests as director on the board of Tide Water' and that there had been no actual use of inside information, Lehman Brothers having bought its Tide Water stock 'solely on the basis of Tide Water's public announcements and without consulting Thomas.'
On the basis of these findings the District Court refused to render a judgment, either against the partnership or against Thomas individually, for the $98,686.77 profits which it determined that Lehman Brothers had realized, holding:
'The law is now well settled that the mere fact that a partner in Lehman Brothers was a director of Tide Water, at the time that Lehman Brothers had this short swing transaction in the stock of Tide Water, is not sufficient to make the partnership liable for the profits thereon, and that Thomas could not be held liable for the profits realized by the other partners from the firm's short swing transactions. Rattner v. Lehman, 2 Cir., 1952, 193 F.2d 564, 565, 567. This precise question was passed upon in the Rattner decision.' 173 F.Supp. 590, 593.