Investors' right to seek insider profits upheld

June 11, 1991|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- An investor claiming that corporate "insiders" made money illegally by trading in a company's stock may press that claim even after a merger eliminates that issue of stock, the Supreme Court ruled unanimously yesterday.

As long as the investor owned the stock at the time the claim against insiders for their "short-swing" trading profits was filed in court, the claim survives after the stock has been converted into a new issue by an exchange in a merger, the court declared in an opinion written by Justice David H. Souter.

The opinion rules out any chance that insiders, facing a demand that they hand over to the company any profits they made by buying or selling company stock during a six-month span, can remove that threat by arranging a "paper" merger to wipe out that issue of stock.

Federal law outlaws all such short-swing profits by insiders and allows stockholders to sue to recapture those profits for the company.

The court declared that Congress intended to give investors the right to force corporate insiders to disgorge" their short-swing trading gains. That right exists, the court said, as long as the investor retains some financial stake in the outcome of the claim as it proceeds in court. That stake need be only the return to the company of the illegal profits.

The key to a stockholder's right to sue to recapture those profits is the stock the investor owned at the time the suit against insiders was filed. If that stock is exchanged in a later merger for new stock issued by the corporate parent emerging from the merger, the claim against the insiders is not wiped out, the court said.

The court's ruling was a victory for a New York investor, Ira L. Mendell, who sued a group of partners, partnerships and corporations that owned more than 10 percent of the stock of Viacom International Inc. He claimed that insiders who traded in Viacom stock in 1986 cleared profits of about $11 million.

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