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The Second Circuit Court of Appeals has issued a limited, but
potentially significant, ruling on disgorging short-swing profits.
In Olagues v. Icahn, et al., the court affirmed the
dismissal of a "short-swing" trading suit brought by a
shareholder in Herbalife, Ltd., Hologic Inc. and Nuance
Communications, Inc., against investment entities controlled by
Carl C. Icahn ("Icahn" and the
"Icahn Entities"). The plaintiffs had
sought disgorgement of certain consideration that the Icahn
Entities allegedly received in violation of Section 16(b) of the
Exchange Act and regulations promulgated thereunder.
Section 16(b) of the Exchange Act aims to prevent corporate
insiders, who are presumed to possess material information about
the corporation, from earning short-swing profits by buying and
selling securities within a six-month period. Exchange Act Rule
16b-6(d) applies where an insider receives a premium for writing
(that is, selling) an option that is cancelled or expires
unexercised within six months.
Here, the plaintiffs first acknowledged that the Icahn Entities
disgorged premiums on certain put options that were cancelled
unexercised within six months of their sale, as required by Section
16(b). They next alleged that the Icahn Entities should have also
disgorged the "value" of alleged discounts that Icahn
received on purchases of related call options. In affirming the
district court's decision, the Second Circuit rejected this new
argument and ruled that the plaintiff failed to state a plausible
claim for additional disgorgement.
The court focused on the plaintiff's exclusive reliance on
comparisons to options traded on the open market. The panel found
that these open-market options had "no meaningful similarities
to the options at issue here" and therefore concluded that the
plaintiff failed to allege that the Icahn Entities disgorged less
than the total amount of premiums they actually received. In
issuing this ruling, the court emphasized the "limited
nature" of its holding, because its conclusion that the
complaint did not state a claim for relief reflected the
plaintiff's exclusive reliance upon open-market options that
were not truly comparable to the options at issue in this case.
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