Roth v. The Goldman Sachs Group, Inc.

Filing

OPINION, the district court judgment is affirmed, by RKW, JAC, DAL, FILED.[1144310] [12-2509]

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12-2509-cv
Roth v. The Goldman Sachs Group, Inc., et al.

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UNITED STATES COURT OF APPEALS

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FOR THE SECOND CIRCUIT

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August Term, 2012

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(Argued: May 8, 2013

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Decided: January 29, 2014)
Docket No. 12-2509-cv

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ANDREW E. ROTH, DERIVATIVELY ON BEHALF OF LEAP WIRELESS
INTERNATIONAL, INC.,

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for the Southern District of New York (J. Paul Oetken, Judge),

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dismissing appellant’s derivative action for failure to state a

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claim.

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disgorge “short-swing profits” as required by Section 16(b) of

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the Securities Exchange Act and Securities and Exchange

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Commission Rule 16b-6(d).

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they wrote call options but not when the same options expired

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less than six months later.

Plaintiff-Appellant,
v.
THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO., LEAP
WIRELESS INTERNATIONAL, INC.,
Defendants-Appellees.
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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.
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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.

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R. Civ. P. 12(b)(6) of his derivative action on behalf of Leap

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Wireless International, Inc. (“Leap”).

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Goldman Sachs Group and its wholly owned subsidiary Goldman,

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Sachs & Co. (collectively, “Goldman”) liable under Section 16(b)

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of the Securities Exchange Act (“Exchange Act”)1 and Rule
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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

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16b-6(d)2 for their failure to disgorge “short-swing profits”

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derived from writing call options on Leap stock.

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Although Section 16(b) is long in the tooth –- older even

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than the author of this opinion –- and the subject of countless

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judicial interpretations, it seems to be an ever-growing fount of

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close questions as to its meaning.

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the fact that Goldman owned over ten percent of Leap’s equity

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shares –- a statutory insider under Section 16(b) -- when it

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wrote certain call options, but owned under ten percent when the

The issue here arises from

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unexercised options expired less than six months later.

The

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principal issues are whether:

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within six months of its writing constitutes a “purchase” for

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Section 16(b) purposes that can be matched to the “sale” that is

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deemed under Rule 16b-6(a) to occur at the option’s writing; and

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(ii) if so, whether the loss of statutory insider status before

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the expiration eliminates the need for disgorgement under Section

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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).

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Goldman defendants were not statutory insiders at the time of the

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“purchase,” the district court held that Goldman was not required

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to disgorge any profits.

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We affirm.
BACKGROUND

Appellant’s complaint alleges the following.

Goldman owned

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common stock in Leap.

On September 30, 2009, Goldman’s ownership

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stake in the company surpassed ten percent, rendering it a

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statutory insider subject to the reporting and disgorgement

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requirements of Section 16.3

On the same date, Goldman wrote

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32,000 call options that covered 3.2 million shares of Leap and

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were exercisable at $39/share.

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$0.33/share for a total of $1,056,000 and bore an expiration date

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of January 16, 2010.

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Leap shares dropped its ownership stake below ten percent.

The options were sold at

On October 2, 2009, Goldman’s disposal of

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In an October 6, 2009, e-mail message to Leap, Goldman

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disclosed that it had generated profits from purchases and sales

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of Leap securities unrelated to the options described above

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during the period when Goldman was a statutory insider.

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to Section 16(b), Goldman (voluntarily) disgorged to Leap the

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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.

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profits -- totaling about $203,000 -- derived from these

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transactions.

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On January 16, 2010, the call options at issue here expired
unexercised.
On June 14, 2011, appellant, a Leap shareholder, made a

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demand on Leap to sue Goldman under Section 16(b) and Rule

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16b-6(d) for Goldman’s alleged failure to disgorge profits earned

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by writing the short call options that expired unexercised within

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six months.

In response, Leap referenced the profits already

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voluntarily disgorged by Goldman and communicated that it

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“consider[ed] the matter closed.”

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Appellant filed the present action on July 13, 2011.

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Goldman and Leap (the latter as a nominal defendant) moved to

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dismiss the action for failure to state a claim.

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court granted the motions, holding:

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sale must exist to trigger liability under the statute.

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Section 16(b), the expiration of a short call option constitutes

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a purchase to be matched with the sale that is deemed to occur

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when the option is written.

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only when the options were written, not when they expired.

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Goldman was, therefore, not required to disgorge profits earned

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from writing the options because the statute requires statutory

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insider status at the time of both purchase and sale.

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Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 423-25 (1972).

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Appellant timely appealed.

The district

(i) Both a purchase and a
Under

(ii) Goldman was a statutory insider

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(iii)

Reliance

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After the close of briefing but before oral argument, we

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invited the SEC to submit an amicus curiae brief regarding the

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merits of the appeal.

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district court.

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That brief, when filed, agreed with the

DISCUSSION

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“We review a district court’s dismissal of a complaint

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pursuant to Rule 12(b)(6) de novo.”

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Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d

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Cir. 2010).

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Operating Local 649 Annuity

The question before us is whether, to fall under the

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disgorgement requirements of Section 16(b) and Rule 16b-6(d), an

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expiration of a call option is a “purchase” and the writer of a

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call option must be a ten percent owner both at the time it

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writes the option and at the time the option expires.

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with the pertinent statutory and regulatory framework.

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a)

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We begin

Section 16(b)
Stated simply, liability under Section 16(b), quoted in Note

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1, supra, attaches when “there was (1) a purchase and (2) a sale

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of securities (3) by . . . a shareholder who owns more than 10

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percent of any one class of the issuer's securities (4) within a

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six-month period.”

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F.3d 305, 308 (2d Cir. 1998).

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unfair use of information which may have been obtained” by

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company insiders by requiring that “any profit realized by [the

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insider] from any purchase and sale, or any sale and purchase, of

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any equity security of such issuer (other than an exempted

Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156
It is intended to “prevent[] the

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security) . . . within any period of less than six months . . .

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shall inure to and be recoverable by the issuer, irrespective of

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any intention on the part of such [insider].”

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78p(b).

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or indirectly the beneficial owner of more than 10 percent of any

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class of any equity security” of the issuer, id. § 78p(a), and

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states that it “shall not be construed to cover any transaction

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where [a statutory insider] was not such both at the time of the

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purchase and sale, or the sale and purchase, of the security

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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

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application.

It “‘imposes a form of strict liability’ and

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requires insiders to disgorge . . . ‘short-swing’ profits ‘even

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if they did not trade on inside information or intend to profit

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on the basis of such information.’”

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v. Simmonds, 132 S. Ct. 1414, 1417 (2012), quoting Gollust v.

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Mendell, 501 U.S. 115, 122 (1991); accord Magma Power Co. v. Dow

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Chem. Co., 136 F.3d 316, 320-21 (2d Cir. 1998) (“No showing of

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actual misuse of inside information or of unlawful intent is

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necessary to compel disgorgement.”).

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noted, “the only method Congress deemed effective to curb the

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evils of insider trading was a flat rule taking the profits out

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of a class of transactions in which the possibility of abuse was

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believed to be intolerably great.”

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at 422.

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Credit Suisse Sec. (USA) LLC

As the Supreme Court has

Reliance Elec. Co., 404 U.S.

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In the past, the customary mechanical application of Section

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16(b) was largely saved from arbitrariness because the underlying

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rules were discernible and provided predictability.

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growing complexities of financial transactions have generated

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numerous issues of statutory interpretation that admit of no

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clear resolution.

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developments in two ways.

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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

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example, it has noted that “[t]he statutory definitions of

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‘purchase’ and ‘sale’ are broad” and have the potential to “reach

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many transactions not ordinarily deemed a sale or purchase.”

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Kern Cnty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582,

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593-94 (1973).

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whether the particular type of transaction involved is one that

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gives rise to speculative abuse,’” where the instrument or

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transaction is “unorthodox” or “borderline.”4

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quoting Reliance Elec. Co., 404 U.S. at 424 n.4.

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Given that breadth, “‘courts have properly asked

Id. at 594-95,

Second, the SEC has promulgated a substantial number of

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rules addressing the increasing use of instruments and

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transactions that do not fit comfortably into Section 16(b)’s

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simplistic scenario of purchases and sales of common shares.

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explained below, the SEC has promulgated rules governing options

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of the kind that give rise to the present appeal.

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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).

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b)

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SEC Section 16 Rules
A call option is a type of instrument commonly described as

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a derivative.5

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covered by Section 16(b), the SEC adopted Rule 16b-6 in 1991 “to

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effect the purposes of section 16 and to address the

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proliferation of derivative securities and the popularity of

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exchange-traded options.”

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Officers, Directors and Principal Security Holders, Exchange Act

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Release No. 34-28869, Investment Company Act Release No.

Because derivative securities are not explicitly

Ownership Reports and Trading by

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35-25254, 56 Fed. Reg. 7242, 7248 (Feb. 21, 1991).

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was based on the SEC’s conclusion that, because the value of a

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derivative security is tied to the value of the underlying equity

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security, “holding derivative securities is functionally

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equivalent to holding the underlying equity securities for

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purposes of section 16.”

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therefore, give rise to speculative abuse.6

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The adoption

Trading in derivatives might,
Id.

Appellant seeks to hold Goldman liable under Rule 16b-6(d),

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quoted in Note 2, supra.

To reiterate, it provides in relevant

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part that “if an insider writes an option that expires

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unexercised within six months and profits from doing so on

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account of having been paid by the purchaser for a right to buy

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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).

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shares that the purchaser did not exercise, the writer will be

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held liable.”

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Cir. 2006).

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insider with inside information favorable to the issuer writes

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a[n] . . . option, and receives a premium for doing so, knowing,

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by virtue of his inside information, that the option will not be

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exercised within six months.”

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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
securities -- are required to trigger liability under Section

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16(b), and the status as a statutory insider must exist at the

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time of each transaction.

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25.

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transactions as either sales or purchases for the purposes of the

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statute.

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“[j]ust as an insider’s opportunity to profit commences when he

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purchases or sells the issuer’s common stock, so too the

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opportunity to profit commences when the insider engages in

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transactions in options or other derivative securities that

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provide an opportunity to obtain or dispose of the stock at a

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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

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of or increase in a put equivalent position . . . shall be deemed

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a sale of the underlying securities for purposes of section 16(b)

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of the Act.”

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of the regulations explains that writing a fixed-priced call

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option is functionally the same as taking a “put equivalent

17 C.F.R. § 240.16b-6(a).

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The definitional section

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position.”

Such “a derivative security position . . . increases

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in value as the value of the underlying equity decreases,”

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because, when the market price of the security is above but

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dropping close to the strike price, the cost to the writer of

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selling at the strike price decreases.

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If the market price falls below the strike price, the option

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holder will not exercise it, and the writer will profit on the

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premium.

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“[t]he closing of a derivative security position as a result of

17 C.F.R. § 240.16a-1(h).

Following the same logic, the regulations provide that

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its exercise or conversion shall be exempt from the operation of

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section 16(b) of the Act.”

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17 C.F.R. § 240.16b-6(b).

But while Rule 16b-6(a) equates the establishment of a put

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equivalent position to a sale, Rule 16b-6(d) does not identify

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the events it lists -- the writing and the expiration of the

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option -- as either purchases or sales.

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regarding the then-proposed 1991 Amendments to the Section 16

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Rules, the SEC stated:

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a sale of the derivative security by the writer of the option, if

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consideration is received for the option.”

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Trading by Officers, Directors and Principal Stockholders,

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Exchange Act Release No. 34-26333, 53 Fed. Reg. 49997-02, 50009

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(Dec. 13, 1988).

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case of an expiration of a short option position, the expiration

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would be treated as the purchase of the option because there is

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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:

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“in the

Id. at 50008.

The

Important

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to our disposition of this appeal, therefore, is the deference we

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must give to an agency’s interpretation of its own regulations --

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as expressed here in the SEC Release quoted above and in its

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amicus brief -- unless the proffered interpretation is “plainly

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erroneous or inconsistent with the regulations.”

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Robbins, 519 U.S. 452, 461-63 (1997) (internal quotation marks

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omitted); accord Press v. Quick & Reilly, Inc., 218 F.3d 121,

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128-29 (2d Cir. 2000).

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c)

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See Auer v.

Application
Although neither party contests that the writing of a call

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option constitutes a sale under Section 16(b), see, e.g.,

12

Gwozdzinsky, 156 F.3d at 309, both challenge the district court’s

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holding that a short call option’s expiration amounts to a

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Section 16(b) purchase by the option writer.

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instead that the passive expiration of a short call option is a

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statutory nonevent in all cases under the statute; this

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conclusion, they argue, is compelled by our holdings in Magma

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Power and Allaire.

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The parties claim

While the parties agree on this premise, each nevertheless

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argues for a different outcome.

Acknowledging that two separate

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transactions are necessary elements of Section 16(b)’s

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disgorgement requirement, Goldman invites us to invalidate the

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portion of Rule 16b-6(d) that pertains to short call option

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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.

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writing of a short call option constitutes a simultaneous sale

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and purchase under the statute, based on a theory that the writer

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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

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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).

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because “it represents a liquidation of or decrease in a put

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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

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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

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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

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also wrote (sold) another such call option.”

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(emphasis added).

21

But we reiterate, to the extent

Id. at 251

Given the facts of Allaire, there are sound reasons to view

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our holding there as limited to call-option expirations under

23

Rule 16b-6(a).

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exists at the time the option is written, and the expiration of

25

that option is the moment of profit.

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expirations of different options does not clearly advance the

The danger of misuse of non-public information

15

Matching writings with

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purposes of the statute.

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less likely to give rise to speculative abuse, and matching the

3

expiration of an option only to its own writing recognizes the

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more evident danger.

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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

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employed for his or her personal profit.”

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concluded, “neither the holder’s exercise of the option nor the

12

holder’s allowing the option to expire constitutes a transaction

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by the option’s writer.”

14

Allaire was careful to note that its holding applied only to

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option expirations under Rule 16b-6(a).

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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

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‘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

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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

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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

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“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

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transaction that occurs when the option is written to effectuate

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the purposes of the statute -- that argument is contrary to the

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statutory text, which is clearly addressed to separate

17

transactions.

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holder will exercise the option.

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undertook this identical inquiry when it promulgated Rules

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establishing that there are two relevant transactions at separate

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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).
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While the SEC’s resolution may not be the only reasonable

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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.

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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).

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When it enacted Section 16(b), “Congress did not reach every

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transaction in which an investor actually relies on inside

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information.”

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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

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very situation of which appellant calls upon us to be

25

apprehensive.

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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

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that “[l]iability cannot be imposed simply because the investor

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structured his transaction with the intent of avoiding liability

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under [Section] 16(b).”

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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.

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26

For the reasons stated above, we affirm the June 8, 2012,
judgment of the district court.

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