WASHINGTON -- The Supreme Court agreed yesterday to clarify the right of stockholders to sue corporate insiders to force them to give up profits made by buying or selling company stock.
Under federal law, profits that an insider made by dealing in company stock within a span of six months -- "short-swing profits" -- can be recovered for the company's benefit through a stockholder lawsuit.
The law is unclear, however, about a stock that was traded but has ceased to exist because it has been converted as part of a merger deal, meaning that the stockholder challenging short-swing profits no longer owns the original stock.
The Securities and Exchange Commission has urged lower courts to rule that the mere fact that a stock has been converted should not take away the right of an investor who owned that stock to sue over short-swing profits.
In yesterday's order, the Supreme Court said it would review the 2nd Circuit Court's decision allowing New York investor Ira L. Mendell to go ahead with his challenge to about $11 million in profits he said insiders received in 1986 dealings in the stock of Viacom International, Inc.
While Mr. Mendell's lawsuit was pending, Viacom International was merged out of existence, becoming a part of a newly formed company, Viacom Inc.
Insiders challenged by Mr. Mendel argued that since his Viacom International stock no longer existed, his lawsuit had to be dismissed. A federal judge did just that, but the 2nd Circuit Court reinstated his case. A final ruling by the Supreme Court in Gollust vs. Mendell (No. 90-659) is due later this year.