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12-2509-cv
IN THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
ANDREW E. ROTH, DERIVATIVELY ON BEHALF OF
LEAP WIRELESS INTERNATIONAL, INC.,
Plaintiff-Appellant,
v.
THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO.,
LEAP WIRELESS INTERNATIONAL, INC.,
Defendants-Appellees.
On Appeal From The United States District Court
For The Southern District Of New York
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE
GEOFFREY F. ARONOW
General Counsel
MICHAEL A. CONLEY
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
JOHN W. AVERY
Deputy Solicitor
BENJAMIN M. VETTER
Attorney
Securities and Exchange Commission
100 F. Street N.E.
Washington, D.C. 20549-9040
(202) 551-7945 (Vetter)
TABLE OF CONTENTS
TABLE OF AUTHORITIES .................................................................................... ii
INTEREST OF THE COMMISSION .......................................................................1
ISSUE ADDRESSED ................................................................................................2
STATEMENT OF THE CASE..................................................................................2
A.
Statutory and Regulatory Scheme .........................................................3
B.
Facts .......................................................................................................7
C.
The District Court Proceedings ............................................................8
DISSCUSSION ........................................................................................................11
I.
Under Rule 16b-6(d), the expiration of a call option contract within six
months of its writing is treated as a purchase by the writer of the call option
contract for Section 16(b) purposes. ..............................................................11
II.
Rule 16b-6(d) requires that a ten percent beneficial owner pay the options
premium to the issuer only if the ten percent beneficial owner was such both
at the time the options contract was written and when it expires. .................18
CONCLUSION ........................................................................................................20
CERTIFICATE OF COMPLIANCE WITH RULE 32(a) ......................................21
i
TABLE OF AUTHORITIES
CASES
Allaire Corp. v. Okumus, 433 F.3d 248 (2d Cir. 2006) ...................... 8, 11-12, 14-15
Colema Realty Corp. v. Bibow, 555 F. Supp. 1030 (D. Conn. 1983)................12, 17
Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976) .................. 18
Gollust v. Mendell, 501 U.S. 115 (1991) ................................................................... 4
Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305 (2d Cir. 1998) .......... 13, 14
Kern County Land Co. v. Occidental Petroleum Corp.,
411 U.S. 582 (1973)......................................................................................... 4
Magma Power Co. v. Dow Chemical Co.,
136 F.3d 316 (2d Cir. 1998) .................................................. 10, 11, 13-14, 15
Matas v. Siess, 467 F. Supp. 217 (S.D.N.Y. 1979)............................................12, 17
Reece Corp. v. Walco Nat’l Corp., 565 F. Supp. 158 (S.D.N.Y. 1981) ............ 12, 18
Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418 (1972) .....4, 15, 18, 19
Roth ex rel. Leap Wireless Int’l, Inc.v. The Goldman Sachs Group, Inc.,
873 F. Supp. 2d 524 (S.D.N.Y. 2012) ............................ 2-3, 7-8, 9-10, 13, 19
STATUTES
Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq.
Section 16(a)(1), 15 U.S.C. 78p(a)(1) ............................................................. 3
Section 16(b), 15 U.S.C. 78p(b) .............................................................passim
LEGISLATIVE HISTORY
S. Rep. No. 73-1455 (1934) ....................................................................................... 3
ii
RULES
Exchange Act Rule 16a-1(b), 17 C.F.R. 240.16a-1(b) .............................................. 6
Exchange Act Rule 16a-1(h), 17 C.F.R. 240.16a-1(h) ........................................6, 11
Exchange Act Rule 16a-2, 17 C.F.R. 240.16a-2........................................................ 8
Exchange Act Rule 16a-10, 17 C.F.R. 240.16a-10 ................................................... 8
Exchange Act Rule 16b-6, 17 C.F.R. 240.16b-6 ....................................................... 1
Exchange Act Rule 16b-6(a), 17 C.F.R. 240.16b-6(a) .......................................... 6, 8
Exchange Act Rule 16b-6(b), 17 C.F.R. 240.16b-6(b) .......................................... 6-7
Exchange Act Rule 16b-6(d), 17 C.F.R. 240.16b-6(d) .....................................passim
RELEASES
Ownership Reports and Trading by Officers, Directors and Principal Stockholders,
53 Fed. Reg. 49997 (Dec. 13, 1988)..................................................12, 13, 14
Ownership Reports and Trading by Officers, Directors and Principal Security
Holders, 56 Fed. Reg. 7242 (Feb. 21, 1991) ..................................... 5, 6-7, 16
OTHER AUTHORITIES
5A Arnold S. Jacobs, Disclosure & Remedies
under the Securities Laws § 4:166 (2012) ..................................................... 16
iii
12-2509-cv
IN THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
ANDREW E. ROTH, DERIVATIVELY ON BEHALF OF
LEAP WIRELESS INTERNATIONAL, INC.,
Plaintiff-Appellant,
v.
THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO.,
LEAP WIRELESS INTERNATIONAL, INC.,
Defendants-Appellees.
On Appeal From The United States District Court
For The Southern District Of New York
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE
INTEREST OF THE COMMISSION
The Securities and Exchange Commission submits this brief as amicus
curiae in response to the invitation of the Court. The Commission has a strong
interest in ensuring that Exchange Act Rule 16b-6, 17 C.F.R. 240.16b-6, which
implements Section 16 of the Securities Exchange Act of 1934, 15 U.S.C. 78p, as
it relates to derivative transactions by corporate insiders, is properly interpreted
and its objectives are carried out. The parties assert conflicting interpretations of
Section 16(b), 15 U.S.C. 78p(b), and Rule 16b-6(d), 17 C.F.R. 240.16b-6(d), and
the Commission submits this brief setting forth its interpretation.
1
ISSUE ADDRESSED
Whether, under Section 16(b) and Rule 16b-6(d), which allow recovery of
short-swing profits gained from the sale and subsequent expiration within six
months of short call options written by a ten percent beneficial owner, the ten
percent beneficial owner must be such both at the time the option is written and at
the time the option expires.
STATEMENT OF THE CASE
This action was brought by Andrew E. Roth, a Leap Wireless International,
Inc. shareholder. Roth brought the action on behalf of Leap under Section 16(b)
and Rule 16b-6(d) to recover alleged short-swing profits obtained by The Goldman
Sachs Group, Inc. while it was a statutory insider of Leap due to its beneficial
ownership of more than ten percent of Leap’s equity securities. Roth alleged that
when Goldman was a statutory insider, it wrote short call options on Leap shares.
Because the call options expired unexercised within six months of writing, Roth
argues that the premiums Goldman received for writing them are recoverable under
Rule 16b-6(d). The district court dismissed Roth’s action because, although
Goldman was a beneficial owner of more than ten percent of Leap’s stock at the
time it wrote the options, it had ceased to be so at the time the options expired.
Roth ex rel. Leap Wireless Int’l, Inc. v. The Goldman Sachs Group, Inc., 873
2
F.Supp.2d 524, 536 (S.D.N.Y. 2012). The Commission agrees with the district
court’s conclusion that Goldman is not liable under Section 16(b) on the facts
alleged in the complaint.
A.
Statutory and Regulatory Scheme
Section 16(b) provides for the recovery by the issuer, in an action brought by
the issuer or by a security holder of the issuer, of profits realized by a statutory
insider (an officer, director, or ten percent beneficial owner) from the sale and
purchase, or the purchase and sale, of the securities of the issuer when both the
purchase and sale, or the sale and purchase, take place within a six-month period.
As related to ten percent beneficial owners,1 Section 16(b) does not “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 . . . involved.”
Section 16(b)’s stated purpose is to “prevent[] the unfair use of information
which may have been obtained by [a corporate insider] by reason of his
relationship to the issuer.” As the Supreme Court has noted, “the only method
Congress deemed effective to curb the evils of insider trading was a flat rule taking
1
By including “beneficial owners” in Section 16(b), Congress intended to prevent
“the unscrupulous employment of inside information by large stockholders who,
while not directors and officers, exercised sufficient control over the destinies of
their companies to enable them to acquire and profit by information not available
to others.” S. Rep. No. 73-1455, at 55 (1934). Congress set beneficial ownership
of more than ten percent of a company’s equity securities as the “large
stockholders” threshold. Id. at 68; Section 16(a)(1), 15 U.S.C. 78p(a)(1) (applying
Section 16 to ten percent beneficial owners).
3
the profits out of a class of transactions in which the possibility of abuse was
believed to be intolerably great.” Reliance Electric Co. v. Emerson Electric Co.,
404 U.S. 418, 422 (1972). To prevent profit-taking based on inside information,
Section 16(b) “imposes a form of strict liability on ‘beneficial owners,’ . . .
rendering them liable to suits requiring them to disgorge their profits even if they
did not trade on inside information or intend to profit on the basis of such
information.” Gollust v. Mendell, 501 U.S. 115, 122 (1991).
Although Section 16(b)’s imposition of “liability without fault” creates a
“reluctan[ce] to exceed a literal, ‘mechanical’ application of the statutory text in
determining who may be subject to liability,” Gollust, 501 U.S. at 122, the
Supreme Court nonetheless has instructed that “where alternative constructions of
the terms of §16(b) are possible, those terms are to be given the construction that
best serves the congressional purpose of curbing short-swing speculation by
corporate insiders.” Reliance, 404 U.S. at 424. Recognizing that “[t]he statutory
definitions of ‘purchase’ and ‘sale’ are broad and, at least arguably, reach many
transactions not ordinarily deemed a sale or purchase,” courts, when interpreting
those terms in Section 16(b), “have properly asked whether the particular type of
transaction involved is one that gives rise to speculative abuse.” Kern County
Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 593-95 (1973) (citations
and quotation marks omitted).
4
As part of a comprehensive revision of its Section 16 rules in 1991, the
Commission considered whether derivative transactions could give rise to
speculative abuse of inside information. The Commission concluded that since the
value of a derivative security is tied to the value of the underlying equity security,
“holding derivative securities is functionally equivalent to holding the underlying
equity securities for purposes of section 16.” Ownership Reports and Trading by
Officers, Directors and Principal Security Holders, 56 Fed. Reg. 7242, 7248 (Feb.
21, 1991) (“Adopting Release”). This functional equivalence means that “both
types of securities can be used to engage in the kind of short-swing profit taking
that Congress sought to prevent. . . .” Id. The Commission therefore adopted Rule
16b-6 “to effect the purposes of section 16 and to address the proliferation of
derivative securities and the popularity of exchange-traded options.” Id.
To prevent the use of inside information to take short-swing profits in
derivative transactions, Rule 16b-6 defines when derivative transactions are
deemed sales or purchases for Section 16(b) purposes. The Commission began
with the fact that “[j]ust as an insider’s opportunity to profit commences when he
purchases or sells the issuer’s common stock, so too the opportunity to profit
commences when the insider engages in transactions in options or other derivative
securities that provide an opportunity to obtain or dispose of the stock at a fixed
price.” 56 Fed. Reg. at 7248. Because the insider’s “opportunity to profit” on
5
inside information arises at the commencement of a derivative transaction, the
Commission, in its Adopting Release, determined that the “significant event” for
Section 16(b) purposes is “acquisition of the derivative security . . . not the
exercise.” 56 Fed. Reg. at 7248. Thus, Rule 16b-6(a), 17 C.F.R. 240.16b-6(a), as
adopted in 1991, states that, for Section 16(b) purposes, “[t]he establishment of or
increase in a call equivalent position or liquidation of or decrease in a put
equivalent position shall be deemed a purchase of the underlying security . . . and
the establishment of or increase in a put equivalent position or liquidation of or
decrease in a call equivalent position shall be deemed a sale of the underlying
securities.”2 Because acquiring fixed-price derivative securities is treated as a sale
or purchase of the underlying equity security under Section 16, the acquisition can
be matched to other sales or purchases of the same underlying equity security, or
derivative securities, by the insider, and the insider must disgorge any resulting
profit. 56 Fed. Reg. at 7249, 7252-53.
While Rule 16b-6(a) defines acquiring a derivative security position as a
purchase or sale for Section 16 purposes, Rule 16b-6(b), 17 C.F.R. 240.16b-6(b),
exempts the exercise of a derivative security from being a purchase or sale under
Section 16. Because exercise of a derivative security “essentially changes the form
2
A “call equivalent position” increases in value when the underlying security
increases in value and includes short put options; a “put equivalent position”
increases in value when the underlying security decreases in value and includes
short call options. Rule 16a-1(b) & (h), 17 C.F.R. 240.16a-1(b) & (h).
6
of beneficial ownership from indirect to direct” and “represents neither the
acquisition nor the disposition of a right affording the opportunity to profit,” the
Commission determined that it is not a Section 16 sale or purchase. 56 Fed. Reg.
at 7249.
The expiration or cancellation of a derivative security, however, represents
the reacquisition of a right affording the opportunity to profit in that it returns full
beneficial ownership of the underlying security to the writer and, in fact,
guarantees the writer a profit in the form of the option premium. Thus, as
explained in greater detail below, infra at 16, Rule 16b-6(d) separately addresses
expiration and requires that “[u]pon 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).” The profit is the premium collected by
the insider for writing the option. Id.
B.
Facts
Goldman Sachs became a ten percent beneficial owner of Leap on
September 30, 2009. Roth, 873 F. Supp. 2d at 527. Also on September 30, 2009,
while it was a ten percent beneficial owner, Goldman Sachs wrote 32,000 short call
options covering 3.2 million shares, exercisable at the fixed price of $39 per share,
and sold them for 33 cents per share, receiving premiums totaling $1,056,000. Id.
On October 2, 2009, Goldman Sachs ceased being a ten percent beneficial owner
7
after it sold enough Leap shares to bring its ownership stake below ten percent. Id.
The September 30 call options expired unexercised on January 16, 2010, less than
four months after issuance. Id. Goldman Sachs was not a ten percent beneficial
owner of Leap when the call options expired.
C.
Proceedings in the District Court
Goldman moved to dismiss Roth’s action, relying primarily on two
independent arguments. First, pointing out that Section 16(b) requires a matched
sale and purchase, Goldman claimed it was not liable on the ground that, accepting
that writing the call options was a “sale” under Section 16(b) and Rule 16b-6(a),
there was no matching purchase because, according to Allaire Corp. v. Okumus,
433 F.3d 248, 252 (2d Cir. 2006), the expiration of the call options was not a
“purchase” under Section 16(b). Second, Goldman argued it was not liable
because even if the expiration of the call options was a “purchase,” it was not a ten
percent beneficial owner at the time of expiration, and Section 16(b) applies only
when a ten percent beneficial owner is such at the time of both the sale and the
purchase.3
3
Goldman also argued that because it was not a ten percent beneficial owner when
the call options expired, Rule 16a-2, 17 C.F.R. 240.16a-2, exempted it from
Section 16(a)’s reporting requirement, and that Rule 16a-10, 17 C.F.R. 240.16a-10,
in turn, exempted it from Section 16(b). The district court did not address the
argument, deciding the case on other grounds. Goldman raises the argument again
on appeal. Goldman Br. at 25-27. The Commission does not believe it is
8
Opposing dismissal, Roth argued that Goldman’s lack of ten percent
beneficial owner status at expiration was immaterial because the expiration of the
options was a “non-event”—neither a purchase nor a sale for Section 16(b)
purposes. Roth argued that Rule 16b-6(d) satisfies the statutory requirement that a
ten percent beneficial owner be such at the time of both a sale and a purchase
because writing the option was itself both a sale and a purchase for Section 16(b)
purposes. This was so, according to Roth, because writing the call option
presented Goldman with the opportunity to profit from inside information, the
concern that Section 16(b) was intended to address.
The district court dismissed Roth’s action. The court first noted that “in
order for liability to attach, the requirements of [Section 16(b)] must be met—it is
not enough for a transaction to fall under the broader category of evils that the
statute was meant to curb.” Roth, 873 F. Supp. 2d at 530. One requirement of the
statute is that a ten percent beneficial owner be such at the time of both matchable
transactions—either the sale and the purchase, or the purchase and the sale, of the
security involved. Id.
Turning to the regulations, the court rejected both Goldman Sachs’s and
Roth’s arguments that the expiration of the call options within six months of
writing was not a “purchase.” The court noted that “[i]f the expiration of an option
necessary to address the exemption argument, and, consequently, takes no position
on its correctness.
9
could never be considered a ‘purchase’ or ‘sale,’ then Rule 16b-6(d) could not
impose liability consistently with Section 16(b), which ‘requires both a purchase
and sale within a six-month period’ to impose liability.” Id. at 534. Rule 16b-6(d)
was consistent with Section 16(b) “if the events that the regulation governs (the
writing and expiration of an option) can be considered a ‘purchase’ and a ‘sale.’”
Id. at 535. Thus, the court found that writing the call options was the “sale,” and
“[t]he equivalent of the purchase was the expiration of the options on January 16,
2010.” Id. at 536. Addressing Roth’s argument that the writing of the option was
a simultaneous purchase and sale for Rule 16b-6(d) purposes, the court stated that
“Section 16(b) ‘requires at least two transactions within six months: a purchase
followed by a sale or a sale followed by a purchase.’” Id. at 535 (quoting Magma
Power Co. v. Dow Chem. Co., 136 F.3d 316, 325 (2d Cir. 1998)). The court
concluded that Roth’s single-transaction theory “is simply incompatible with the
plain language of the statute.” Id.
Because it was uncontested that Goldman Sachs was not a ten percent
beneficial owner at the time of the “purchase”—the expiration of the call options—
the court held that Goldman Sachs could not be liable under Section 16(b) and
dismissed the action.
10
DISCUSSION
I.
Under Rule 16b-6(d), the expiration of a call option contract within six
months of its writing is treated as a purchase by the writer of the call option
contract for Section 16(b) purposes.
The parties do not dispute that Goldman’s writing of the short call options
was a sale under Rule 16b-6(a) because it established a “put equivalent position”
that is “deemed a sale of the underlying securities for purposes of section 16(b) of
the Act.” See also Rule 16a-1(h) (defining “put equivalent position” to include “a
short call option position”).
On appeal, Goldman argues that the district court correctly held that it was
not liable under Section 16(b) and Rule 16b-6(d) because it was not a ten percent
beneficial owner when the options expired. Goldman Br. 11-14. As an alternative
ground for affirmance, Goldman further argues that the expiration of a call option
is not a purchase under Section 16(b) because “the SEC’s rationale behind
imposing liability on the expiration (rather than cancellation) of an option cannot
be reconciled with ‘[t]he settled rule . . . that an insider’s inactivity cannot give rise
to Section 16(b) liability.’” Goldman Br. 28 (quoting Magma Power, 136 F.3d at
325). According to Goldman, Magma Power’s conclusion that inactivity by an
insider cannot give rise to Section 16(b) liability underpins Allaire’s statement that
“‘neither the holder’s exercise of the option nor the holder’s allowing the option to
expire constitutes a transaction by the option’s writer.’” Id. (quoting Allaire, 433
11
F.3d at 252). In Goldman’s view, the expiration of an option is neither a purchase
nor a sale by the writer because expiration involves no activity by the writer.
Roth argues that, contrary to the district court’s conclusion, the expiration of
the call options was not a matching purchase by Goldman for Section 16(b)
purposes. Rather, he argues, the writing of the call options was both a sale and a
purchase by Goldman because “[u]nder the statute the purchase and sale takes
place simultaneously by the terms of the option contract.” Roth Br. 11. Roth cites
three district court cases pre-dating the Commission’s 1991 adoption of
Rule 16b-64 as authority that “[t]he notion that a transaction can be both a purchase
and a sale for 16(b) purposes had been approved by a number of courts where
necessary to vindicate the purposes of the statute.” Id. 18.
Neither Roth’s argument that writing an option is a simultaneous purchase
and sale nor Goldman’s argument that expiration of a short call option is not
treated as a purchase by the writer is correct. Rule 16b-6(d) requires the
disgorgement of the premium received when expiration occurs within six months
of writing “because there is short-swing profit potential in such a case.”
Ownership Reports and Trading by Officers, Directors and Principal Stockholders,
53 Fed. Reg. 49997, 50008 (Dec. 13, 1988). The short-swing profit potential arises
4
Colema Realty Corp. v. Bibow, 555 F. Supp. 1030, 1039 (D. Conn. 1983), Reece
Corp. v. Walco Nat’l Corp., 565 F. Supp. 158 (S.D.N.Y. 1981), and Matas v. Siess,
467 F. Supp. 217, 224 (S.D.N.Y. 1979).
12
from the possibility that an insider might acquire an option position “knowing, by
virtue of his inside information, that the option will not be exercised within six
months.” Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 309 (2d Cir.
1998). In such a case, expiration ends the holder’s right to exercise and awards the
insider a profit from the inside information. To prevent such profit-taking, the
Commission determined that “in the case of an expiration of a short option
position, the expiration would be treated as the purchase of the option.” 53 Fed.
Reg. at 50008. Rule 16b-6(d) treats expiration as a purchase, matched to the
earlier sale (the writing), by requiring that “[u]pon . . . 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.” Thus, the district court
correctly concluded that Goldman’s writing of the call options was a “sale,” and
that “[t]he equivalent of the purchase was the expiration of the options on January
16, 2010.” Roth, 873 F. Supp. 2d at 536.
Goldman’s argument that the expiration of the options is not a purchase
under Section 16(b) because inactivity by an insider cannot give rise to liability
rests on a misreading of Magma Power and Allaire. Magma Power concluded that
an option holder’s decision not to exercise the option was neither a purchase nor a
sale by the option holder. 136 F.3d at 324. There, the “inactivity” was the option
holder’s decision not to exercise an option to purchase equity securities. Id. As
13
the court noted, insiders have the opportunity to purchase equity securities every
day, and the decision not to purchase cannot rationally form the basis of Section
16(b) liability. Id. Goldman is not similarly situated. Goldman was the writer, not
the holder. And when it wrote the call options, Goldman set the strike price, the
amount of the premium, and the expiration date, and it was that activity that
presented Goldman an opportunity to profit from inside information.
Gwozdzinsky, 156 F.3d at 309; 53 Fed. Reg. at 50008. The expiration of the option
within six months resulted from a combination of Goldman’s activity and the
option holder’s inactivity.
Goldman’s reliance on Allaire is equally misplaced. The Allaire plaintiff
argued that, because the expiration of a set of call options liquidated the writer’s
put equivalent position, it was a purchase under Rule 16b-6(a), and that that
purchase could be matched to the writing of a second set of call options (written
within six months), which was a sale under Rule 16b-6(a) because it established a
new put equivalent position. 433 F.3d at 249, 251. The court rejected the
plaintiff’s argument on the ground that Rule 16b-6(a) does not apply to expirations.
Id. at 252 (Rule 16b-6(a) applies only to determine whether the “initial transaction
between the writer and the holder” is a Section 16(b) purchase or sale). Pointing
out that Rule 16b-6(d) explicitly deals with expirations, the court stated that “if the
SEC had intended Rule 16b-6(a) to govern expirations, the SEC would presumably
14
have used the word ‘expiration’ to do so.” Id. at 253. The court further noted that
Rule 16b-6(d) did not apply. The plaintiff was attempting to match two different
sets of options, but the writer of an option is liable under Rule 16b-6(d) only when
“that same option [expires] within six months.” Id. Allaire is inapposite to this
case because it dealt with different facts and it interpreted Rule 16b-6(a), not Rule
16b-6(d).
Roth, like Goldman, misreads Allaire to hold that the expiration of a call
option is never a purchase for Section 16(b) purposes, Roth Br. 15, but he
nonetheless contends that Goldman is liable because a simultaneous sale and
purchase took place when Goldman wrote the call options. It therefore is
immaterial, in Roth’s view, that Goldman was not a ten percent beneficial owner at
expiration because it was a ten percent beneficial owner when it wrote the call
options. Roth’s argument conflicts with the plain language of both Section 16(b)
and Rule 16b-6(d).
The imposition of strict liability under Section 16(b) turns on the “objective
standard[s]” set out in the statute. Reliance, 404 U.S. at 422-23. One objective
standard in Section 16(b) is the requirement that the insider engage in “any
purchase and sale, or any sale and purchase” of the issuer’s equity securities. The
requirement of either a purchase and sale, or sale and purchase, means that there
must be two events, one offsetting the other. Magma Power, 136 F.3d at 324-25;
15
see also 56 Fed. Reg. at 7248 (Section 16 applies to “insiders who engage[] in two
transactions in the company’s equity securities within a six-month period of
time”). Roth argues that two events exist because Goldman “irrevocably
committed to both the purchase and sale of Leap Wireless equity securities on
writing the Options—a simultaneous purchase and sale.” Roth Br. 4. Roth’s
simultaneous purchase-and-sale theory presumes that the option holder will not
exercise the option, and that the subsequent expiration of the option within six
months relates back to the writing such that the writer will be deemed at the time
of writing to have made a purchase to match its sale for Section 16(b) purposes.
Roth’s presumption ignores an essential feature of an options contract—the
holder’s right to decide if and when to exercise the option before it expires.
Goldman’s writing of the call options was a sale under Rule 16b-6(a), but it does
not follow that Goldman was immediately and irrevocably committed to a
matching purchase. Because the holder of an option can decide whether or not to
exercise, “the parties are irrevocably committed only when the optionee exercises.”
5A Arnold S. Jacobs, Disclosure & Remedies under the Securities Laws § 4:166, at
4-603 (2012). Recognizing that fact, Rule 16b-6(d) does not treat the writing of
the call options as simultaneous sale-and-purchase; rather, Rule 16b-6(d) requires
disgorgement of short-swing profits obtained from short options positions only
“[u]pon cancellation or expiration of an option . . .” (emphasis added). The actual
16
cancellation or expiration of the option is the triggering event for liability under
Rule 16b-6(d), not the writing of the option. Roth’s contrary assertion, Roth Br.
11, 17, is simply incorrect. Treating of the actual expiration of an option as the
Section 16(b) purchase is consistent with the goal of depriving insider-writers of
short options of their profits because it acknowledges that the profit is not lockedin until expiration. Thus, Rule 16b-6(d) allows recovery of the premium paid for
the call options only after they expire, and treats the actual expiration as the
matching purchase required by Section 16(b).
Roth’s argument is not supported by the cases he cites. For example, key to
the court’s holding in Matas v. Siess, 467 F. Supp. 217 (S.D.N.Y. 1979) was the
fact that under then-governing precedent, “an option is a purchase only when it is
exercised, not when it is granted.” Id. at 224. But as explained above, supra at 6,
the Commission’s 1991 rulemaking clarified that acquisition of an option is the
“significant event,” not the exercise. Colema Realty Corp. v. Bibow, 555 F. Supp.
1030 (D. Conn. 1983), likewise was decided before the 1991 rulemaking, and
likewise relied on precedent holding that “option shares are deemed to have been
purchased on the date the option was exercised.” Id. at 1039. And in any event,
Colema clearly involved two distinct transactions: the defendants surrendered
(sold) 100 shares of previously acquired stock at current market value and, using
the value received for those shares, acquired (purchased) new shares at the option
17
price. Id. Reece Corporation v. Walco National Corporation, 565 F.Supp. 158
(S.D.N.Y. 1981), addressed when two sales taking place at different times might
nonetheless be part of a single transaction, and contributes nothing to the question
of when a single transaction might be a simultaneous purchase and sale.
II.
Rule 16b-6(d) requires that a ten percent beneficial owner pay the options
premium to the issuer only if the ten percent beneficial owner was such both
at the time the options contract was written and when it expires.
Section 16(b), as it relates to ten percent beneficial owners, plainly requires
that the ten percent beneficial owner be such “both at the time of the purchase and
sale, or the sale and purchase, of the security . . . involved.” See Reliance, 404
U.S. at 422-23. Neither a purchase of securities by which a person becomes a ten
percent beneficial owner nor a sale of securities made after a person ceases to be a
ten percent beneficial owner is matchable for purposes of liability under Section
16(b). Reliance, 404 U.S. at 424-25 (Section 16(b) does not apply to sales made
after a person ceases to be a ten percent beneficial owner); Foremost-McKesson,
Inc. v. Provident Sec. Co., 423 U.S. 232, 249-50 (1976) (Section 16(b) applies only
to purchases made after a person becomes a ten percent beneficial owner).
Roth correctly notes that treating expiration as the Section 16(b) purchase
means that a ten percent beneficial owner can write options that expire within six
months, but nonetheless avoid liability under Rule 16b-6(d) simply by ceasing to
be a ten percent beneficial owner before the short options expire. Roth Br. 16-17.
18
This, however, is an unavoidable consequence of the statutory requirements set by
Congress. Reliance, 404 U.S. at 423 (the literal language of the statute “clearly
contemplates that a statutory insider might sell enough shares to bring his holdings
below 10%, and later—but still within six months—sell additional shares free from
liability under the statute”).
Here, it is undisputed that Goldman was not a ten percent beneficial owner
when the call options expired which, as explained above, is the relevant purchase
under Rule 16b-6(d) for Section 16(b) purposes. The district court correctly held
that Goldman could not be held liable under Section 16(b). Roth, 873 F. Supp. 2d
at 536.
CONCLUSION
For the foregoing reasons, the district court was correct in holding (1) that
Rule 16b-6(d) treats the expiration of call options within six months of writing as a
purchase for Section 16(b) purposes and (2) that Goldman could not be liable
because it was no longer a ten percent beneficial owner when the call options it
wrote expired.
19
Respectfully submitted,
GEOFFREY F. ARANOW
General Counsel
MICHAEL A. CONLEY
Deputy General Counsel
JACOB H. STILLMAN
Solicitor
JOHN W. AVERY
Deputy Solicitor
/s/ Benjamin Vetter
BENJAMIN VETTER
Attorney
Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
(202) 551-7945 (Vetter)
VetterB@sec.gov
April 2013
20
CERTIFICATE OF COMPLIANCE WITH RULE 32(a)
This brief complies with the type-volume limitation of Fed. R. App. P.
32(a)(7)(B) because this brief contains 4,687 words, excluding the parts of the
brief exempted by Fed. R. App. P. 21(a)(7)(B)(iii).
This brief complies with the typeface requirements of Fed. R. App. P.
21(a)(5) and with the type style requirements of Fed. R. App. P. 32(a)(6) because
this brief has been prepared in a proportionally spaced typeface using Microsoft
Word 2010 in 14 point Times New Roman font.
/s/ Benjamin Vetter
BENJAMIN VETTER
Attorney
Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
(202) 551-7945 (Vetter)
VetterB@sec.gov
April 2013
21
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.