## Facts

- Shareholders Smolowe and Levy brought consolidated derivative actions on behalf of Delendo Corporation under § 16(b) of the Securities Exchange Act of 1934 to recover alleged short-swing trading profits.
- Defendants Seskis (president/director) and Kaplan (vice-president/director) each owned more than 10% of Delendo’s stock and engaged in substantial purchases and sales of Delendo shares.
- Between December 1, 1939 and May 30, 1940, Seskis purchased over 15,000 shares and sold nearly 16,000; Kaplan purchased nearly 23,000 and sold over 21,000.
- Transactions occurred both on an exchange and privately; most purchase certificates differed from those delivered on sales.
- The parties stipulated the trades were made in good faith and without actual misuse of inside information.
- The district court imposed § 16(b) liability, calculated recoverable profits by matching purchases and sales to produce the maximum profit within six months, and entered money judgments against Seskis and Kaplan for the corporation.
- On appeal, defendants challenged the interpretation of § 16(b), the profit-calculation method, and the statute’s constitutionality; the United States intervened to defend the statute.

## Issues

1. Whether § 16(b) requires proof of actual misuse of inside information or other wrongdoing, or instead imposes objective liability for any insider profit on matched purchases and sales within six months.
2. How “profit” must be computed under § 16(b), including whether courts should match transactions to yield the maximum recoverable profit.
3. Whether § 16(b), construed to require disgorgement without proof of intent or unfairness, violates due process or is otherwise unconstitutional.

## Decision

- The Second Circuit affirmed the judgments requiring Seskis and Kaplan to disgorge short-swing profits to Delendo.
- The court held § 16(b) imposes liability without regard to good faith, intent, or proof of actual use of inside information.
- The court approved calculating profits by matching purchases and sales within a six-month period to produce the maximum recoverable profit.
- The court upheld § 16(b) as constitutional under Congress’s power to regulate securities markets and as a rational means to deter insider short-term trading.

## Legal Principles

- Section 16(b) creates objective, prophylactic liability requiring directors, officers, and more-than-10% beneficial owners to disgorge to the issuer any profits from purchases and sales (or sales and purchases) within less than six months.
- Liability under § 16(b) does not depend on proof of scienter, bad faith, or actual unfair use of nonpublic information.
- Recoverable “profit” under § 16(b) is computed by matching purchases and sales within the statutory window in the manner that yields the highest profit to the issuer, rather than by tracing particular certificates or adopting a transaction-linking approach that would reduce recovery.
- A bright-line disgorgement rule that may reach some innocent trades can satisfy due process when chosen as a rational legislative response to practical difficulties in proving insider misuse case by case.
- In successful derivative enforcement of § 16(b), reasonable attorney’s fees may be awarded from the recovery because the action is brought for the corporation’s benefit.

## Conclusion

The court sustained § 16(b) as a strict-liability disgorgement provision and endorsed the maximum-profit matching methodology to compute short-swing profits, affirming judgments requiring corporate insiders to repay the highest provable six-month trading gains to the issuer even absent proof of wrongdoing.


Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943)