Fed. Sec. L. Rep. P 93,948 Charles D. Winston v. Federal Express Corporation

Citations: 853 F.2d 455; 1988 U.S. App. LEXIS 10222; 1988 WL 79752Docket: 87-5549

Court: Court of Appeals for the Sixth Circuit; August 3, 1988; Federal Appellate Court

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Charles D. Winston appealed the district court's summary judgment favoring Federal Express Corporation, which determined that he was an "officer" under section 16(b) of the Securities Exchange Act of 1934. Winston, hired as Vice President of Network Systems and later promoted to Senior Vice President of Electronic Products, resigned on August 27, 1985, but remained on the payroll until September 30. He did not perform duties after his resignation but was available for transition discussions until then. On September 30, he exercised stock options to purchase 8,298 shares of Federal Express stock. He sold these shares on March 26, 1986, for over $176,000 in profit, believing, based on incorrect brokerage advice, that the transaction did not fall under the six-month short-swing profit rule. The court ruled that the trade date was determinative, categorizing it as a short-swing transaction, which required him to return the profits to Federal Express. Winston contended he was not an officer at the time of the stock purchase; however, the district court upheld that he was indeed an officer under section 16(b) when the stock was bought. The appellate court affirmed the district court's decision.

Section 16(b) aims to protect investors from insider trading by imposing strict liability on insiders, regardless of whether they received or used confidential information. Courts interpret this statute to ensure easy administration, focusing on the individual's title to determine if they qualify as an officer under the law. An exception exists for individuals with honorary or purely titular titles who do not perform executive functions, thus not having access to confidential information. The inference of access based on title can be rebutted with evidence showing a lack of executive responsibilities. 

In the case at hand, Winston admitted to having significant executive responsibilities and access to confidential information until his resignation on August 27. Although he claimed to have ceased his duties after that date and argued that his stock purchase on September 30 should not fall under the short-swing profit rule, he could not sufficiently overcome the presumption that he continued to have access to confidential information during the interim. His testimony indicated minimal interaction with the company post-resignation and no evidence that he was explicitly denied access to confidential information or that the company implemented measures to prevent such access. Therefore, despite holding a title, Winston did not demonstrate that he was effectively shielded from insider information after his resignation.

Winston's resignation was effective shortly after it was tendered, which was a significant factor in the case. He relied on the precedent set in Gold v. Scurlock, where a court determined that an officer was not considered an officer under section 16(b) due to having transitioned to mere administrative duties over a year prior to a relevant transaction. In contrast, Winston's interim period was only one month, insufficient to disprove the presumption that he retained potential access to confidential information until his resignation date. 

Although the outcome may seem harsh—given that Winston did not misuse confidential information and acted on mistaken expert advice—strict liability rules necessitate such results. These rules place the responsibility for compliance on insiders, who must manage any potential miscalculations. 

The ruling establishes that an officer can avoid section 16(b) liability if they can provide substantial evidence rebutting the presumption of continued access to confidential information during their interim period. In Winston's case, he did not present sufficient evidence to overcome this presumption. Consequently, the district court's judgment in favor of Federal Express was affirmed, with clarification that a longer interim period might not have changed the outcome, as the case at hand did not present such evidence to counter the presumption of access.