Rule X-16D-1, which provides, in pertinent part, as follows:
'It shall be unlawful for any director, or officer of an issuer of an equity security which is registered on a national securities exchange to effect any foreign or domestic arbitrage transaction in any equity security of such issuer, whether registered or not, unless he * * * shall account to such issuer for the profits arising from such transaction, as provided in section 16(b). * * *'
This Rule clearly makes arbitrage transactions by a director of an issuer subject to the provisions of section 16(b).
The case of Falco v. Donner Foundation, 208 F.2d 600, 40 A.L.R.2d 1340 (2 Cir., 1953), cited by defendant, is distinguishable since that case concerns a suit against a 10% Beneficial owner rather than a director or officer (see note 1 at page 603 of 208 F.2d). In any event, arbitrage is not involved in a conversion situation where 'a substantial interval and market movement separated the acquisition and disposal' of the various securities. Falco v. Donner Foundation, supra, 208 F.2d at page 604 (note 4).
Having determined that defendant is liable for 'any profit realized by him' from the 'purchase and sale' of the debentures and from the 'purchase and sale' of the common stock, the Court now turns to the question of computation of that profit under section 16(b).
The cases decided under section 16(b) establish the rule that in determining profit, the highest sale prices are to be matched with the lowest purchase prices within the periods involved. Smolowe v. Delendo Corp., supra; Park & Tilford v. Schulte, supra; Gratz v. Claughton, 187 F.2d 46 (2 Cir. 1951), cert. den. 341 U.s, 920, 71 S. Ct. 741, 95 L. Ed. 1353; Loss, supra, at pages 1062-1066. This rule is in accordance with the statutory intent 'to squeeze all possible profits out of stock transactions'. Smolowe v. Delendo Corp., supra, 136 F.2d at page 239. It is a rejection of the first-in-first-out rule, and a rule that would permit the matching of purchases and sales of the same stock certificates. It makes irrelevant the fact that defendant delivered the 200 shares of the August 26, 1959 sale out of a lot of 500 shares purchased by him on November 20, 1958, more than six months before such sale.
Applying the above principles with respect to profit on the sale of the debentures on March 18, 1959, the evidence discloses that on that date when defendant received 3,600 shares of common stock for his debentures, the highest sale price of the stock on the American Stock Exchange was 36 1/2. The debentures may thus be valued at $ 131,400.00, representing the value of the 3,600 shares of common stock as 36 1/2 that defendant received for them. Since the original cost of the debentures had been $ 60,000.00, defendant's profit on this transaction would be $ 71,400.00.
As to the profit on the sales of the 1,300 shares of common stock on July 16, August 26 and September 1, 1959, the evidence shows that on March 17, 1959, the day prior to the conversion, a bona fide sale of a $ 1,000.00 debenture was made in the over-the-counter market at a price of $ 2,110.00 plus accrued interest. Thus, a sale of $ 60,000.00 of the debentures on March 18, 1959 would have brought $ 126,600.00. The 1,300 shares actually sold are 36.1111% Of the total of 3,600 shares obtained by defendant as a result of his conversion of the debentures. The common stock may then be valued at the time of purchase at $ 45,716.65, which represents 36.1111% Of the $ 126,000.00 that defendant's debentures could have brought at conversion. See Park & Tilford v. Schulte, supra, 160 F.2d at page 988. Since defendant had received a total of $ 90,861.01 from these transactions, his profit would amount of $ 45,144.36.
Judgment will be entered in favor of plaintiff against the defendant for the sum of $ 116,544.36. Plaintiff's claim for interest will be denied. See Blau v. Lehman, 368 U.S. 403, 414, 82 S. Ct. 451, 7 L. Ed. 2d 403 (1962).
This opinion shall constitute the findings of fact and conclusions of law required by Rule 52(a) of the Federal Rules of Civil Procedure. Counsel for plaintiff is directed to submit an appropriate order on notice to counsel for defendant.