## Facts

- A shareholder of Missouri-Kansas-Texas Railroad Company (M-K-T) brought a derivative action under § 16(b) of the Securities Exchange Act of 1934.
- The defendant was an M-K-T director and a more-than-10% beneficial owner who executed multiple purchases and sales of M-K-T shares within six-month periods.
- The suit sought disgorgement to the issuer of all profits from any purchase and sale (or sale and purchase) within six months, as required by § 16(b).
- The district court granted summary judgment on liability and referred calculation of profits to a special master.
- The special master matched purchases and sales within the statutory window in a way that maximized recoverable profits, and judgment was entered for the corporation/shareholder.
- The defendant appealed, contesting venue in the Southern District of New York, the profit-calculation method, and the constitutionality of § 16(b) and the Exchange Act’s venue provision.

## Issues

1. Whether venue was proper under Exchange Act § 27 in the Southern District of New York for a § 16(b) disgorgement action.
2. Whether § 16(b) profits may be computed by matching purchases and sales within six months in a manner that maximizes the issuer’s recovery.
3. Whether § 16(b) (imposing liability without proof of actual misuse of inside information) and § 27’s venue provisions are constitutional.

## Decision

- The Second Circuit affirmed the judgment against the insider.
- Venue in the Southern District of New York was proper under § 27 because relevant acts or transactions constituting the basis for § 16(b) liability occurred there.
- The special master’s method of pairing trades to yield the highest recoverable profit was upheld as consistent with § 16(b).
- The court rejected constitutional challenges to § 16(b)’s strict, prophylactic liability scheme, the 10% threshold classification, and § 27’s venue provisions.

## Legal Principles

- Section 16(b) requires corporate insiders (directors, officers, and 10% beneficial owners) to disgorge to the issuer profits from any purchase and sale (or sale and purchase) of the issuer’s equity securities within six months, without inquiry into intent, motive, or actual use of inside information.
- In calculating § 16(b) “any profit,” courts may match purchases and sales within the six-month period to maximize the issuer’s recovery, rather than selecting pairings that minimize the insider’s liability, so long as the matched transactions satisfy the statute’s timing and ownership requirements.
- Exchange Act § 27 permits suit in a district where acts or transactions constituting the basis for the statutory liability occurred; § 16(b) trading activity can supply the necessary nexus even though § 16(b) is framed in terms of “liability” rather than expressly labeling the conduct a “violation.”
- Congress may constitutionally employ strict, prophylactic rules to address abuses that are difficult to prove directly; classifications targeting directors, officers, and 10% beneficial owners are rational to the goal of limiting insider advantages, and broad venue provisions to facilitate enforcement are permissible.

## Conclusion

The court upheld § 16(b)’s strict disgorgement regime, approved a profit-calculation approach that pairs transactions to maximize recovery to the issuer, found venue proper where relevant trading-related acts occurred under § 27, and sustained both provisions against constitutional attack.


Gratz v. Claughton, 187 F.2d 46 (2d Cir. 1951)