By Amy Leisinger, J.D.
A Second Circuit panel has affirmed the Southern District of New York’s dismissal of a stockholder’s attempt to recover short-swing insider trading profits obtained on cancellation of put options within six months of writing them by several entities in which Carl Icahn held an ownership interest. According to the panel, the complaint failed to allege that the transactions resulted in short‐swing profits beyond the $0.01 per share premium for writing the put options and relies on comparisons to options traded on the open market with no “meaningful similarities” to the options at issue. Under Exchange Act Section 16(b) and Rule 16b-6, the entities were required to disgorge profits only up to the amount of the premium received by the writer of the put, the panel stated (Olagues v. Icahn, August 3, 2017, Lohier, R.).
Icahn transactions. The defendants entered into agreements in which they acquired puts and corresponding calls for certain stock, and the premium paid to Icahn for writing the puts was $0.01 per share. The put and call options were structured so that the put options would expire immediately if the corresponding call options were exercised. Approximately two weeks after entering into the agreements, Icahn exercised the call options and all of the put options were cancelled or expired. Because the put options were cancelled within six months, Icahn reimbursed the company the amount of the premium received—$0.01 per share.
A shareholder filed a complaint alleging that Icahn and related entities understated the short-swing profits they received upon the cancellation of the put options. Under Exchange Act Section 16(b) and Rule 16b-6 any profit realized by an insider from any purchase or sale of any equity security (including derivatives) within a period of less than six months shall be recoverable by the issuer. According to the shareholder, the correct measure of profits was not the $0.01 premium received, but instead included the value from alleged discounts received on purchases of the call options. The Southern District of New York rejected this theory, noting that the shareholder’s “chain of counterfactual hypotheses, assumptions, and inferences” was “a bridge too far” and that the rule requires reimbursement of “premium received,” not “premium consideration obtained.” Finding no amount was paid to Icahn other than the $0.01 per share, the court granted dismissal with prejudice.
No additional premium. While agreeing with the shareholder that Icahn and his entities must disclose all premiums actually received and not just those reported, the panel found that the complaint failed to plausibly allege that the defendants disgorged less than the total amount of premiums received. The complaint describes an unreported “discount,” but the open‐market option contracts cited are not “meaningfully comparable” to the option contracts bought and sold by the defendants because the parties were effectively bound to an exchange of shares at a fixed price on or before the expiration date, the panel stated. As such, according to the panel, the transactions do not raise the concerns underlying Rule 16b‐6(d), which include stopping insiders from receiving and retaining a premium for an option while knowing that the option will not be exercised within six months.
The complaint does not allege facts demonstrating that the transactions resulted in short‐swing profits beyond the $0.01 per share premium, and the district court properly dismissed the complaint for failure to state a plausible claim for additional disgorgement, the panel concluded.
The case is No. 16‐1255‐cv.