Roth v. The Goldman Sachs Group, Inc., et al., No. 12-2509 (2d Cir. 2014)

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Justia Opinion Summary

Plaintiff, on behalf of Leap, filed suit against Goldman, seeking to hold Goldman liable under Section 16(b) of the Securities Exchange Act, 15 U.S.C. 78p(b), and Rule 16b-6(d), 17 C.F.R. 240.16b-6(d), for Goldman's failure to disgorge "short-swing profits" derived from writing call options on Leap stock. The court concluded that for the purposes of Section 16(b), the expiration of a call option within six months of its writing was to be deemed a "purchase" by the option writer to be matched against the "sale" deemed to occur when that option was written. The court also concluded that Section 16(b) required statutory insider status at the time of both purchase and sale, and so Goldman was not required to disgorge profits where it was a statutory insider only when the options were written, but not when they expired. Accordingly, the court affirmed the district court's dismissal of the action for failure to state a claim.

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12-2509-cv Roth v. The Goldman Sachs Group, Inc., et al. 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2012 4 5 (Argued: May 8, 2013 6 7 Decided: January 29, 2014) Docket No. 12-2509-cv - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ANDREW E. ROTH, DERIVATIVELY ON BEHALF OF LEAP WIRELESS INTERNATIONAL, INC., 26 for the Southern District of New York (J. Paul Oetken, Judge), 27 dismissing appellant s derivative action for failure to state a 28 claim. 29 disgorge short-swing profits as required by Section 16(b) of 30 the Securities Exchange Act and Securities and Exchange 31 Commission Rule 16b-6(d). 32 they wrote call options but not when the same options expired 33 less than six months later. Plaintiff-Appellant, v. THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO., LEAP WIRELESS INTERNATIONAL, INC., Defendants-Appellees. - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - B e f o r e: WINTER, CABRANES, and LIVINGSTON, Circuit Judges. Appeal from a judgment of the United States District Court Appellant sought to hold appellees liable for failing to Appellees were statutory insiders when We affirm. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 GLENN OSTRAGER (Paul D. Wexler, Kornstein Veisz Wexler & Pollard LLP, on the brief), Ostrager Chong Flaherty & Broitman P.C., New York, NY, for Plaintiff-Appellant. LAWRENCE T. GRESSER (Daniel H. Tabak & Alexis G. Stone, on the brief), Cohen & Gresser LLP, New York, NY, for Defendants-Appellees. Geoffrey F. Aronow, Michael A. Conley, Jacob H. Stillman, John W. Avery, Benjamin M. Vetter, Securities and Exchange Commission, Washington, D.C., for Amicus Curiae Securities and Exchange Commission. WINTER, Circuit Judge: Andrew Roth appeals from Judge Oetken s dismissal under Fed. 23 R. Civ. P. 12(b)(6) of his derivative action on behalf of Leap 24 Wireless International, Inc. ( Leap ). 25 Goldman Sachs Group and its wholly owned subsidiary Goldman, 26 Sachs & Co. (collectively, Goldman ) liable under Section 16(b) 27 of the Securities Exchange Act ( Exchange Act )1 and Rule 1 He seeks to hold the Section 16(b) provides: (b) Profits from purchase and sale of security within six months For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security or security-based swap agreement purchased or of not repurchasing the security or security-based swap agreement sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years 1 16b-6(d)2 for their failure to disgorge short-swing profits 2 derived from writing call options on Leap stock. 3 Although Section 16(b) is long in the tooth - older even 4 than the author of this opinion - and the subject of countless 5 judicial interpretations, it seems to be an ever-growing fount of 6 close questions as to its meaning. 7 the fact that Goldman owned over ten percent of Leap s equity 8 shares - a statutory insider under Section 16(b) -- when it 9 wrote certain call options, but owned under ten percent when the The issue here arises from 10 unexercised options expired less than six months later. The 11 principal issues are whether: 12 within six months of its writing constitutes a purchase for 13 Section 16(b) purposes that can be matched to the sale that is 14 deemed under Rule 16b-6(a) to occur at the option s writing; and 15 (ii) if so, whether the loss of statutory insider status before 16 the expiration eliminates the need for disgorgement under Section 17 16(b). (i) a call option s expiration Concluding the expiration was a purchase but that the after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security or security-based swap agreement or a security-based swap involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection. 15 U.S.C. § 78p(b). 2 Rule 16b-6(d) provides: (d) Upon cancellation or expiration of an option within six months of the writing of the option, any profit derived from writing the option shall be recoverable under section 16(b) of the Act. The profit shall not exceed the premium received for writing the option. The disposition or closing of a long derivative security position, as a result of cancellation or expiration, shall be exempt from section 16(b) of the Act where no value is received from the cancellation or expiration. 17 C.F.R. § 240.16b-6(d). 3 1 Goldman defendants were not statutory insiders at the time of the 2 purchase, the district court held that Goldman was not required 3 to disgorge any profits. 4 5 We affirm. BACKGROUND Appellant s complaint alleges the following. Goldman owned 6 common stock in Leap. On September 30, 2009, Goldman s ownership 7 stake in the company surpassed ten percent, rendering it a 8 statutory insider subject to the reporting and disgorgement 9 requirements of Section 16.3 On the same date, Goldman wrote 10 32,000 call options that covered 3.2 million shares of Leap and 11 were exercisable at $39/share. 12 $0.33/share for a total of $1,056,000 and bore an expiration date 13 of January 16, 2010. 14 Leap shares dropped its ownership stake below ten percent. The options were sold at On October 2, 2009, Goldman s disposal of 15 In an October 6, 2009, e-mail message to Leap, Goldman 16 disclosed that it had generated profits from purchases and sales 17 of Leap securities unrelated to the options described above 18 during the period when Goldman was a statutory insider. 19 to Section 16(b), Goldman (voluntarily) disgorged to Leap the 3 Pursuant Section 16 applies to [e]very person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security of the issuer. 15 U.S.C. § 78p(a). Under Rule 16a-1(a), the definition of beneficial owner is found in Section 13(d) of the Exchange Act and accompanying rules. Under Section 13(d)(3), see id. § 78m(d)(3), [w]hen two or more persons act as a . . . group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a person for the purposes of this subsection. Appellant s complaint alleges that the Goldman appellees-defendants constitute such a group. Because we are reviewing a dismissal under Fed. R. Civ. P. 12(b)(6), we must, therefore, assume that Goldman is a group subject to the statute s requirements. 4 1 profits -- totaling about $203,000 -- derived from these 2 transactions. 3 4 5 On January 16, 2010, the call options at issue here expired unexercised. On June 14, 2011, appellant, a Leap shareholder, made a 6 demand on Leap to sue Goldman under Section 16(b) and Rule 7 16b-6(d) for Goldman s alleged failure to disgorge profits earned 8 by writing the short call options that expired unexercised within 9 six months. In response, Leap referenced the profits already 10 voluntarily disgorged by Goldman and communicated that it 11 consider[ed] the matter closed. 12 Appellant filed the present action on July 13, 2011. 13 Goldman and Leap (the latter as a nominal defendant) moved to 14 dismiss the action for failure to state a claim. 15 court granted the motions, holding: 16 sale must exist to trigger liability under the statute. 17 Section 16(b), the expiration of a short call option constitutes 18 a purchase to be matched with the sale that is deemed to occur 19 when the option is written. 20 only when the options were written, not when they expired. 21 Goldman was, therefore, not required to disgorge profits earned 22 from writing the options because the statute requires statutory 23 insider status at the time of both purchase and sale. 24 Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 423-25 (1972). 25 Appellant timely appealed. The district (i) Both a purchase and a Under (ii) Goldman was a statutory insider 5 (iii) Reliance 1 After the close of briefing but before oral argument, we 2 invited the SEC to submit an amicus curiae brief regarding the 3 merits of the appeal. 4 district court. That brief, when filed, agreed with the 5 DISCUSSION 6 We review a district court s dismissal of a complaint 7 pursuant to Rule 12(b)(6) de novo. 8 Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d 9 Cir. 2010). 10 Operating Local 649 Annuity The question before us is whether, to fall under the 11 disgorgement requirements of Section 16(b) and Rule 16b-6(d), an 12 expiration of a call option is a purchase and the writer of a 13 call option must be a ten percent owner both at the time it 14 writes the option and at the time the option expires. 15 with the pertinent statutory and regulatory framework. 16 a) 17 We begin Section 16(b) Stated simply, liability under Section 16(b), quoted in Note 18 1, supra, attaches when there was (1) a purchase and (2) a sale 19 of securities (3) by . . . a shareholder who owns more than 10 20 percent of any one class of the issuer's securities (4) within a 21 six-month period. 22 F.3d 305, 308 (2d Cir. 1998). 23 unfair use of information which may have been obtained by 24 company insiders by requiring that any profit realized by [the 25 insider] from any purchase and sale, or any sale and purchase, of 26 any equity security of such issuer (other than an exempted Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 It is intended to prevent[] the 6 1 security) . . . within any period of less than six months . . . 2 shall inure to and be recoverable by the issuer, irrespective of 3 any intention on the part of such [insider]. 4 78p(b). 5 or indirectly the beneficial owner of more than 10 percent of any 6 class of any equity security of the issuer, id. § 78p(a), and 7 states that it shall not be construed to cover any transaction 8 where [a statutory insider] was not such both at the time of the 9 purchase and sale, or the sale and purchase, of the security 10 11 15 U.S.C. § Section 16(b) applies to [e]very person who is directly . . . involved, id. § 78p(b). Section 16(b) is generally subject to mechanical 12 application. It imposes a form of strict liability and 13 requires insiders to disgorge . . . short-swing profits even 14 if they did not trade on inside information or intend to profit 15 on the basis of such information. 16 v. Simmonds, 132 S. Ct. 1414, 1417 (2012), quoting Gollust v. 17 Mendell, 501 U.S. 115, 122 (1991); accord Magma Power Co. v. Dow 18 Chem. Co., 136 F.3d 316, 320-21 (2d Cir. 1998) ( No showing of 19 actual misuse of inside information or of unlawful intent is 20 necessary to compel disgorgement. ). 21 noted, the only method Congress deemed effective to curb the 22 evils of insider trading was a flat rule taking the profits out 23 of a class of transactions in which the possibility of abuse was 24 believed to be intolerably great. 25 at 422. 7 Credit Suisse Sec. (USA) LLC As the Supreme Court has Reliance Elec. Co., 404 U.S. 1 In the past, the customary mechanical application of Section 2 16(b) was largely saved from arbitrariness because the underlying 3 rules were discernible and provided predictability. 4 growing complexities of financial transactions have generated 5 numerous issues of statutory interpretation that admit of no 6 clear resolution. 7 developments in two ways. 8 9 However, the The courts and the SEC have responded to these First, the Supreme Court has permitted a departure from flat rule[s] in a very limited number of situations. For 10 example, it has noted that [t]he statutory definitions of 11 purchase and sale are broad and have the potential to reach 12 many transactions not ordinarily deemed a sale or purchase. 13 Kern Cnty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 14 593-94 (1973). 15 whether the particular type of transaction involved is one that 16 gives rise to speculative abuse, where the instrument or 17 transaction is unorthodox or borderline. 4 18 quoting Reliance Elec. Co., 404 U.S. at 424 n.4. 19 Given that breadth, courts have properly asked Id. at 594-95, Second, the SEC has promulgated a substantial number of 20 rules addressing the increasing use of instruments and 21 transactions that do not fit comfortably into Section 16(b) s 22 simplistic scenario of purchases and sales of common shares. 23 explained below, the SEC has promulgated rules governing options 24 of the kind that give rise to the present appeal. 4 As This approach has been viewed as very limited by some courts. See Texas Int l Airlines v. Nat l Airlines, Inc. 714 F.2d 533, 539-40 (5th Cir. 1983)(limiting Kern County to forced sales). 8 1 2 b) SEC Section 16 Rules A call option is a type of instrument commonly described as 3 a derivative.5 4 covered by Section 16(b), the SEC adopted Rule 16b-6 in 1991 to 5 effect the purposes of section 16 and to address the 6 proliferation of derivative securities and the popularity of 7 exchange-traded options. 8 Officers, Directors and Principal Security Holders, Exchange Act 9 Release No. 34-28869, Investment Company Act Release No. Because derivative securities are not explicitly Ownership Reports and Trading by 10 35-25254, 56 Fed. Reg. 7242, 7248 (Feb. 21, 1991). 11 was based on the SEC s conclusion that, because the value of a 12 derivative security is tied to the value of the underlying equity 13 security, holding derivative securities is functionally 14 equivalent to holding the underlying equity securities for 15 purposes of section 16. 16 therefore, give rise to speculative abuse.6 17 The adoption Trading in derivatives might, Id. Appellant seeks to hold Goldman liable under Rule 16b-6(d), 18 quoted in Note 2, supra. To reiterate, it provides in relevant 19 part that if an insider writes an option that expires 20 unexercised within six months and profits from doing so on 21 account of having been paid by the purchaser for a right to buy 5 Derivatives are financial instruments that derive their value (hence the name) from an underlying security or index. Magma Power, 136 F.3d at 321. An option . . . is a purchased right to buy or sell property at a fixed or floating price . . . . A call option gives the option holder the right to buy shares of an underlying security at a particular price. Id. at 321 n.2 (citations omitted). 6 The SEC now defines equity security to mean any equity security or derivative security relating to an issuer, whether or not issued by that issuer. 17 C.F.R. § 240.16a-1(d). 9 1 shares that the purchaser did not exercise, the writer will be 2 held liable. 3 Cir. 2006). 4 insider with inside information favorable to the issuer writes 5 a[n] . . . option, and receives a premium for doing so, knowing, 6 by virtue of his inside information, that the option will not be 7 exercised within six months. 8 Allaire Corp. v. Okumus, 433 F.3d 248, 252 (2d The Rule is designed to prevent a scheme whereby an Gwozdzinsky, 156 F.3d at 309. As noted, two transactions -- a sale and a purchase of 9 securities -- are required to trigger liability under Section 10 16(b), and the status as a statutory insider must exist at the 11 time of each transaction. 12 25. 13 transactions as either sales or purchases for the purposes of the 14 statute. 15 [j]ust as an insider s opportunity to profit commences when he 16 purchases or sells the issuer s common stock, so too the 17 opportunity to profit commences when the insider engages in 18 transactions in options or other derivative securities that 19 provide an opportunity to obtain or dispose of the stock at a 20 fixed price. 21 Reliance Elec. Co., 404 U.S. at 423- Rule 16b-6 defines, for the most part, derivative These categorizations are premised on the fact that 56 Fed. Reg. at 7248. For example, Rule 16b-6(a) provides that the establishment 22 of or increase in a put equivalent position . . . shall be deemed 23 a sale of the underlying securities for purposes of section 16(b) 24 of the Act. 25 of the regulations explains that writing a fixed-priced call 26 option is functionally the same as taking a put equivalent 17 C.F.R. § 240.16b-6(a). 10 The definitional section 1 position. 2 in value as the value of the underlying equity decreases, 3 because, when the market price of the security is above but 4 dropping close to the strike price, the cost to the writer of 5 selling at the strike price decreases. 6 If the market price falls below the strike price, the option 7 holder will not exercise it, and the writer will profit on the 8 premium. 9 [t]he closing of a derivative security position as a result of 10 its exercise or conversion shall be exempt from the operation of 11 section 16(b) of the Act. 12 Such a derivative security position . . . increases 17 C.F.R. § 240.16a-1(h). Following the same logic, the regulations provide that 17 C.F.R. § 240.16b-6(b). But while Rule 16b-6(a) equates the establishment of a put 13 equivalent position to a sale, Rule 16b-6(d) does not identify 14 the events it lists -- the writing and the expiration of the 15 option -- as either purchases or sales. 16 regarding the then-proposed 1991 Amendments to the Section 16 17 Rules, the SEC stated: 18 a sale of the derivative security by the writer of the option, if 19 consideration is received for the option. 20 Trading by Officers, Directors and Principal Stockholders, 21 Exchange Act Release No. 34-26333, 53 Fed. Reg. 49997-02, 50009 22 (Dec. 13, 1988). 23 case of an expiration of a short option position, the expiration 24 would be treated as the purchase of the option because there is 25 short-swing profit potential in such a case. 26 SEC advances the same view here in its amicus brief. However, in a release [a] grant of an option may be viewed as Ownership Reports and In the same release, the SEC noted: 11 in the Id. at 50008. The Important 1 to our disposition of this appeal, therefore, is the deference we 2 must give to an agency s interpretation of its own regulations -- 3 as expressed here in the SEC Release quoted above and in its 4 amicus brief -- unless the proffered interpretation is plainly 5 erroneous or inconsistent with the regulations. 6 Robbins, 519 U.S. 452, 461-63 (1997) (internal quotation marks 7 omitted); accord Press v. Quick & Reilly, Inc., 218 F.3d 121, 8 128-29 (2d Cir. 2000). 9 c) 10 See Auer v. Application Although neither party contests that the writing of a call 11 option constitutes a sale under Section 16(b), see, e.g., 12 Gwozdzinsky, 156 F.3d at 309, both challenge the district court s 13 holding that a short call option s expiration amounts to a 14 Section 16(b) purchase by the option writer. 15 instead that the passive expiration of a short call option is a 16 statutory nonevent in all cases under the statute; this 17 conclusion, they argue, is compelled by our holdings in Magma 18 Power and Allaire. 19 The parties claim While the parties agree on this premise, each nevertheless 20 argues for a different outcome. Acknowledging that two separate 21 transactions are necessary elements of Section 16(b) s 22 disgorgement requirement, Goldman invites us to invalidate the 23 portion of Rule 16b-6(d) that pertains to short call option 24 expirations.7 Appellant, on the other hand, argues that the 7 Of course, Goldman also argues that, if we find that the expiration of an option under Rule 16b-6(d) is a Section 16(b) purchase, it cannot be held liable because it was no longer a statutory insider at the time of the options expiration. We agree with that proposition. See infra. 12 1 writing of a short call option constitutes a simultaneous sale 2 and purchase under the statute, based on a theory that the writer 3 commits itself to a subsequent purchase of the underlying stock 4 at the instant it takes a short position on a call option. 5 According to appellant, then, because Goldman was a statutory 6 insider when the options were written -- at the time of the 7 asserted simultaneous sales and purchases -- for Section 16(b) 8 purposes, it is of no consequence that Goldman was not a 9 statutory insider at the time of the option s expiration. 10 However, both parties misconstrue our precedents, and we 11 adopt the district court s holding and the SEC s interpretation: 12 for purposes of Section 16(b), the expiration of a call option 13 within six months of its writing is to be deemed a purchase by 14 the option writer to be matched against the sale deemed to 15 occur when that option was written. 16 eliminate the potential that an insider/option-writer could 17 generate profits by knowing, by virtue of his inside 18 information, that the option will not be exercised within six 19 months. 20 call option, and that same option expires unexercised less than 21 six months later, the writer s opportunity to profit on the 22 underlying stock is realized. 23 determined, in the case of an expiration of a short option 24 position, the expiration would be treated as the purchase of the 25 option. 26 the issue. Rule 16b-6(d) was adopted to Gwozdzinsky, 156 F.3d at 309. When an insider sells a It is for this reason that the SEC 53 Fed. Reg. at 50008. 13 We follow that resolution of 1 Neither Magma Power nor Allaire mandates a different result. 2 In Magma Power, we concluded that an option holder s decision not 3 to exercise an option to buy stock does not constitute a 4 transaction by the option holder for the purposes of the 5 statute.8 6 however, but the option writer. 7 decision not to purchase shares may not constitute a transaction 8 on the part of the option holder, we have never held as much with 9 respect to the option writer. 10 136 F.3d at 324-25. Goldman is not the option holder, While the option holder s Nor does Allaire, an opinion regarding the application of 11 Rule 16b-6(a), control our decision. In Allaire, the defendants 12 wrote call options on Allaire stock prior to becoming statutory 13 insiders. 14 push their ownership stake above ten percent. 15 options then expired unexercised (just one month after they were 16 written). 17 insiders, they wrote a new set of call options on Allaire stock. 18 433 F.3d at 249. Thereafter, the defendants acquired enough shares to The original About a month later, while the defendants were still 19 Allaire argued that, under Rule 16b-6(a), the expiration of 20 the initial set of options constituted a purchase of the stock 8 The particular option in Magma Power referenced by the parties was a floating-price-option component that was part of a more complex instrument (the Note ), and was retained by the insider after it sold the Note. The Note itself included a call option that could be exercised by the Note holder. The component the insider retained allowed it, when the Note holder decided to exercise its option, either to reacquire shares by paying the Note holder the shares market value in cash, or to fulfill the Note holder s call with shares. 136 F.3d at 324-25. The insider fulfilled its obligation on the Note with shares rather than cash -- that is, deciding not to exercise its option to purchase shares. Id. After a thorough analysis, we determined that the insider s decision to not repurchase shares was not the equivalent of a purchase under 16b-6(a). 14 1 because it represents a liquidation of or decrease in a put 2 equivalent position ; the second set of options then, when 3 written, amounted to the establishment of a new put equivalent 4 position -- a sale that, according to Allaire, could be matched 5 to the purported purchase. 6 expiration of the first set of options did not constitute a 7 purchase under Section 16b-6(a) matchable to the later sale of a 8 different set of call options. 9 Id. at 249, 251. We held that the Id. at 252. When read out of that context, there is language in Allaire 10 that would seem in tension with our conclusion that the 11 expiration of a call option under Rule 16b-6(d) constitutes a 12 purchase by the option writer. 13 that Allaire did not make it clear, that this language applies 14 only to short call option expirations under Rule 16b-6(a). 15 Indeed, [t]he principal issue in Allaire was whether, under 16 Rule 16b-6(a), the expiration of a short call option is a 17 purchase, thereby exposing its insider/writer to section 16(b) 18 liability if within six months after that expiration he or she 19 also wrote (sold) another such call option. 20 (emphasis added). 21 But we reiterate, to the extent Id. at 251 Given the facts of Allaire, there are sound reasons to view 22 our holding there as limited to call-option expirations under 23 Rule 16b-6(a). 24 exists at the time the option is written, and the expiration of 25 that option is the moment of profit. 26 expirations of different options does not clearly advance the The danger of misuse of non-public information 15 Matching writings with 1 purposes of the statute. 2 less likely to give rise to speculative abuse, and matching the 3 expiration of an option only to its own writing recognizes the 4 more evident danger. 5 Options written at different times are The Allaire opinion itself makes this clear. For example, 6 we observed that, under Rule 16b-6(a), when the option is 7 written by the insider (and not canceled), leaving the insider 8 with no control over whether or not it will be exercised, his or 9 her inside information, at least in the usual case, cannot be 10 employed for his or her personal profit. 11 concluded, neither the holder s exercise of the option nor the 12 holder s allowing the option to expire constitutes a transaction 13 by the option s writer. 14 Allaire was careful to note that its holding applied only to 15 option expirations under Rule 16b-6(a). 16 holder s exercise of a call option is not a sale by the writer 17 under Rule 16b-6(a), neither is the expiration of a call option a 18 purchase by the writer under that provision. (emphases 19 added)); id. at 253( If the expiration of a call option were a 20 purchase under Rule 16b-6(a), what purpose would it serve to 21 provide, as Rule 16b-6(d) does, that the expiration of an option 22 within six months of its writing triggers liability? ); id. at 23 254 ( [T]he writing of an option may be a transaction under 24 section 16(b) but . . . the expiration of an option, when matched 25 against any transaction other than its own writing, is not. 26 (emphasis added)). Id. Id. at 252. We Moreover, at several junctures, 16 See id. ( Just as the 1 Allaire s express and implied references to Rule 16b-6(d), 2 therefore, beg the question we answer: when matched against its 3 own writing, the expiration of an option within six months is a 4 transaction -- a purchase by the option writer -- for the 5 purposes of Section 16(b). 6 Appellant s theory -- that the writing of an option 7 constitutes a simultaneous purchase and sale -- finds support 8 neither in the statutory text, the SEC Rules, nor in our 9 precedents. 10 11 Section 16(b) plainly requires separate transactions. To the extent appellant argues that the broad, statutory 12 definitions of purchase and sale encompass the circumstances 13 here -- essentially that both definitions should apply to the 14 transaction that occurs when the option is written to effectuate 15 the purposes of the statute -- that argument is contrary to the 16 statutory text, which is clearly addressed to separate 17 transactions. 18 holder will exercise the option. 19 undertook this identical inquiry when it promulgated Rules 20 establishing that there are two relevant transactions at separate 21 points in time: Moreover, it ignores the real possibility that the Most importantly, the SEC the writing of the option and its expiration.9 9 Appellant cites to several district court cases in support of his simultaneous purchase and sale theory, none of which are persuasive. See, e.g., Matas v. Siess, 467 F. Supp. 217 (S.D.N.Y. 1979) (exercise of stock appreciation rights for cash under company plan was an unorthodox transaction that the court treated as both a purchase and sale for purposes of Section 16(b), where defendants timed the exercise to maximize the difference, which they received in cash, between the option price and the market price on the date of exercise). 17 1 While the SEC s resolution may not be the only reasonable 2 one, it is certainly within the realm of reason, and we defer to 3 it. 4 govern a financial world of largely square pegs and square holes. 5 The growing use of oval, rectangular, triangular, star-like, etc. 6 pegs, creates problems without clear solutions. 7 to reject the SEC s view as to the most desirable, if not 8 perfect, solution to particular issues. 9 Press, 218 F.3d at 128-29. Section 16(b) was written to We are not free In that regard, appellant warns of the dangers associated 10 with the holding we now adopt, cautioning that a statutory 11 insider can simply write an option and then divest himself of 12 shares enough that he is no longer subject to Section 16(b) s 13 disgorgement requirements. 14 by Reliance Electric, which allowed a statutory insider to 15 purposefully drop its holdings to slightly under ten percent so 16 as to sell the remainder without liability under Section 16(b). 17 When it enacted Section 16(b), Congress did not reach every 18 transaction in which an investor actually relies on inside 19 information. 20 the statute clearly contemplates that a statutory insider might 21 sell enough shares to bring his holdings below ten percent, and 22 later -- but still within six months -- sell additional shares 23 free from liability under the statute, id. at 423, creating the 24 very situation of which appellant calls upon us to be 25 apprehensive. 26 to drop below ten percent, we must also follow the instruction However, this argument is foreclosed Reliance Elec. Co., 404 U.S. at 422. For example, As in the case of structured transactions designed 18 1 that [l]iability cannot be imposed simply because the investor 2 structured his transaction with the intent of avoiding liability 3 under [Section] 16(b). 4 Id. at 422. The prophylactic disgorgement rule of Section 16(b) is not 5 an all-encompassing remedy for every occasion when insiders 6 succeed in writing options and disposing of stock in a way that 7 allows a profit based on inside information. 8 requires that a statutory insider must have such status at the 9 time of the sale and the purchase of securities in order to be Section 16(b) 10 liable. Therefore, to be liable, Goldman had to have been a 11 statutory insider both at the time of the option s writing and at 12 the time of its expiration. 13 statutory insider at the time the options expired in January 14 2010, it is not liable. 15 16 17 Because Goldman was no longer a CONCLUSION To summarize: (1) For purposes of Section 16(b), the expiration of a call 18 option within six months of its writing is to be deemed a 19 purchase by the option writer to be matched against the sale 20 deemed to occur when that option was written. 21 (2) Section 16(b) requires statutory insider status at the 22 time of both purchase and sale, and so Goldman was not required 23 to disgorge profits where it was a statutory insider only when 24 the options were written, but not when they expired. 25 26 For the reasons stated above, we affirm the June 8, 2012, judgment of the district court. 19


  • Ralph K. Winter, Jr. (Author)

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