On March 14, 2025, Judge John P. Cronan of the United States
District Court for the Southern District of New York granted
summary judgment in favor of defendants in an action brought under
Section 16(b) of the Securities Exchange Act against a
broker-dealer and its CEO. Clarus Corp. v. HAP Trading,
LLC, —F. Supp. 3d—, 2025 WL 833453 (S.D.N.Y.
2025). Plaintiff Clarus Corporation ("Clarus") alleged
that defendants' so-called "packaged trades" for
Clarus securities generated insider short‑swing profits in
violation of Section 16(b) of the Exchange Act. Addressing a
question of first impression, the Court held that the transactions
at issue fell within the exception in Section 16(d) for purchases
and sales of securities incident to a dealer's involvement in
over-the-counter ("OTC") market making.
The allegations concerned that aspect of defendants'
market-making business in which the broker-dealer entered into
packaged trades with brokers, with each such trade including
interrelated component transactions in multiple individual
securities, referred to as "legs"—e.g., a
buy or sell trade in calls, puts, and/or common stock. Id.
at *5. While the individual legs used national exchanges for
certain processes (including order submission, execution, clearing,
and confirmation), the packaged trades themselves were not traded
on any exchange. Id. Defendants also traded in
plaintiff's stock directly but maintained that they did so to
hedge their exposure created by their market-making packaged
trades.
The parties agreed that, during a particular two-month period, the
broker-dealer beneficially owned more than ten percent of
plaintiff's common stock, making it a statutory insider, and
thus requiring it to disgorge any short-swing profits under Section
16(b), unless its trades were subject to a statutory exception. The
statutory exception at issue here was Section 16(d), which in
pertinent part excepts from short-swing liability transactions
"by a dealer in the ordinary course of his business and
incident to the establishment or maintenance by him of a primary or
secondary market (otherwise than on a national securities exchange
...) for such security." Id. at *7.
The Court began its analysis by explaining that Section 16(b) is a
prophylactic measure designed to deter insiders from taking unfair
advantage of confidential company information to realize
short-swing profits on trades in company stock. The statute
therefore imposes strict liability without the need to show any
actual misuse of inside information. The Court further explained
that, as a corollary to its strict liability nature, Section 16(b)
must be narrowly applied and carefully confined to its limited
areas of clear and unambiguous liability. And although the Court
noted there was limited caselaw discussing Section 16(d), it
stressed that in C.R.A. Realty Corporation v. Tri-South
Investors, 738 F.2d 73 (2d Cir. 1984), the Second Circuit had
explained that Section 16(d)'s exemption was intended to
prevent the risk of Section 16(b) liability from causing a
reduction in market-making activities. Further, the Court read
C.R.A. Realty as establishing that a market maker which
uses the facilities of a national exchange to execute trades can
still qualify for the protections of Section 16(d) if (1) the
market maker is engaging in OTC market-making and (2) the trades
utilizing the facilities of the national exchange are
"incident to" those OTC market-making activities. 2025 WL
833453 at *12.
Against this backdrop, the Court first rejected plaintiff's
argument that defendant broker-dealer did not qualify as a market
maker under Section 3(a)(38) of the Exchange Act. Id. at
*17. The Court determined that defendant broker‑dealer met
the statutory definition because it held itself out as willing to
continuously buy and sell plaintiff's securities for its own
account. Id. at *18. The Court also observed that it is
unclear whether, in any case, Section 3(a)(38) could limit the
applicability of Section 16(d), given that it was adopted after
Section 16(d). Id. at *17.
The Court then assessed whether defendants' packaged trades
were "incident to the establishment or maintenance ... of a
primary or secondary market" for plaintiff's
stock—as required for the exemption in Section 16(d) to
apply—or whether Section 16(d) did not apply because the
individual legs of the packaged trades were executed "on a
national securities exchange." Id. at *18. The Court
held that the fact that the individual components of the packaged
trades were completed on an exchange was not determinative, and
what mattered was whether the packaged transactions as a whole were
negotiated over-the-counter.
In reaching this conclusion, the Court held that Section
16(d)'s applicability only to transactions occurring
"otherwise than on a national securities exchange"
referred to the location of the market-making activity,
not to the location of the trading activity. Id.
at *18–19. Here, the Court found that the market for the
securities at issue was not the market for the individual legs of
the packaged trade, but rather the market for the combined package.
Id. at *21. In reaching that conclusion, the Court pointed
to the evidence demonstrating that defendant broker-dealer was
approached specifically to enter into packaged transactions, that
prices were provided for the package as a whole, that the
individual components of the package were negotiated only after the
executable package was communicated, and that the final package in
its entirety would need to be approved by a customer prior to trade
execution. Id. Accordingly, the Court concluded that
"relevant market participants all understood that what was
being negotiated was an aggregated trade composed of
[plaintiff's] securities, set with a specific executable price,
with the legs of the transaction contingent on their execution
together." Id. The Court emphasized that the
components of the packages were not traded on the same exchange and
that the packages could not be entered into on any single national
exchange, so these packages reflected securities that were executed
outside of a national securities exchange. Id. at *22. The
Court also explained that the counterparties defendant
dealer-broker dealt with had "no other obvious counterparty
for the interrelated trades they wanted to execute" and found
these packages "provided a separate benefit to the market by
linking together the exchanges for stock and options."
Id. at *23. The Court further held that to the extent it
was unclear whether this conduct fell within the ambit of Section
16(b) liability, it would err on the side of facilitating
market-making activity and not imposing liability.
Id.
With respect to defendants' transactions in plaintiff's
stock outside of packaged trades, the Court noted that, while the
parties disagreed about the type of hedging defendants were
engaging in, plaintiff conceded these trades were done for risk
mitigation purposes. Id. at *24. The Court held that
because these trades were intended to mitigate the risk of
defendants' market-making activity and were not
disproportionate to the related packaged trades, they qualified for
Section 16(d) protection as "incident to" defendants'
market-making activity. Id. at *24–25.
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