Roth v. The Goldman Sachs Group, Inc., et al.

12-2509-cv
Roth v. The Goldman Sachs Group, Inc., et al.
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2012 3
4
(Argued: May 8, 2013 Decided: January 29, 2014) 5
Docket No. 12-2509-cv 6
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ANDREW E. ROTH, DERIVATIVELY ON BEHALF OF LEAP WIRELESS 8 INTERNATIONAL, INC., 9
10 Plaintiff-Appellant, 11
12 v. 13
14 THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO., LEAP 15 WIRELESS INTERNATIONAL, INC., 16
17 Defendants-Appellees. 18
19
20 - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - 21
22 B e f o r e: WINTER, CABRANES, and LIVINGSTON, Circuit Judges. 23
24 Appeal from a judgment of the United States District Court 25
for the Southern District of New York (J. Paul Oetken, Judge), 26
dismissing appellant’s derivative action for failure to state a 27
claim. Appellant sought to hold appellees liable for failing to 28
disgorge “short-swing profits” as required by Section 16(b) of 29
the Securities Exchange Act and Securities and Exchange 30
Commission Rule 16b-6(d). Appellees were statutory insiders when 31
they wrote call options but not when the same options expired 32
less than six months later. We affirm. 33
1

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GLENN OSTRAGER (Paul D. Wexler, 1 Kornstein Veisz Wexler & Pollard LLP, on 2 the brief), Ostrager Chong Flaherty & 3 Broitman P.C., New York, NY, for 4 Plaintiff-Appellant. 5
6
LAWRENCE T. GRESSER (Daniel H. Tabak & 7 Alexis G. Stone, on the brief), Cohen & 8 Gresser LLP, New York, NY, for 9 Defendants-Appellees. 10
11 Geoffrey F. Aronow, Michael A. Conley, 12 Jacob H. Stillman, John W. Avery, 13 Benjamin M. Vetter, Securities and 14 Exchange Commission, Washington, D.C., 15 for Amicus Curiae Securities and 16 Exchange Commission. 17
18
19 WINTER, Circuit Judge: 20
21 Andrew Roth appeals from Judge Oetken’s dismissal under Fed. 22
R. Civ. P. 12(b)(6) of his derivative action on behalf of Leap 23
Wireless International, Inc. (“Leap”). He seeks to hold the 24
Goldman Sachs Group and its wholly owned subsidiary Goldman, 25
Sachs & Co. (collectively, “Goldman”) liable under Section 16(b) 26
of the Securities Exchange Act (“Exchange Act”) 1 and Rule 27
1 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” 1
derived from writing call options on Leap stock. 2
Although Section 16(b) is long in the tooth –- older even 3
than the author of this opinion –- and the subject of countless 4
judicial interpretations, it seems to be an ever-growing fount of 5
close questions as to its meaning. The issue here arises from 6
the fact that Goldman owned over ten percent of Leap’s equity 7
shares –- a statutory insider under Section 16(b) -- when it 8
wrote certain call options, but owned under ten percent when the 9
unexercised options expired less than six months later. The 10
principal issues are whether: (i) a call option’s expiration 11
within six months of its writing constitutes a “purchase” for 12
Section 16(b) purposes that can be matched to the “sale” that is 13
deemed under Rule 16b-6(a) to occur at the option’s writing; and 14
(ii) if so, whether the loss of statutory insider status before 15
the expiration eliminates the need for disgorgement under Section 16
16(b). Concluding the expiration was a “purchase” but that the 17
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 1
“purchase,” the district court held that Goldman was not required 2
to disgorge any profits. We affirm. 3
BACKGROUND 4
Appellant’s complaint alleges the following. Goldman owned 5
common stock in Leap. On September 30, 2009, Goldman’s ownership 6
stake in the company surpassed ten percent, rendering it a 7
statutory insider subject to the reporting and disgorgement 8
requirements of Section 16. 3 On the same date, Goldman wrote 9
32,000 call options that covered 3.2 million shares of Leap and 10
were exercisable at $39/share. The options were sold at 11
$0.33/share for a total of $1,056,000 and bore an expiration date 12
of January 16, 2010. On October 2, 2009, Goldman’s disposal of 13
Leap shares dropped its ownership stake below ten percent. 14
In an October 6, 2009, e-mail message to Leap, Goldman 15
disclosed that it had generated profits from purchases and sales 16
of Leap securities unrelated to the options described above 17
during the period when Goldman was a statutory insider. Pursuant 18
to Section 16(b), Goldman (voluntarily) disgorged to Leap the 19
3 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 1
transactions. 2
On January 16, 2010, the call options at issue here expired 3
unexercised. 4
On June 14, 2011, appellant, a Leap shareholder, made a 5
demand on Leap to sue Goldman under Section 16(b) and Rule 6
16b-6(d) for Goldman’s alleged failure to disgorge profits earned 7
by writing the short call options that expired unexercised within 8
six months. In response, Leap referenced the profits already 9
voluntarily disgorged by Goldman and communicated that it 10
“consider[ed] the matter closed.” 11
Appellant filed the present action on July 13, 2011. 12
Goldman and Leap (the latter as a nominal defendant) moved to 13
dismiss the action for failure to state a claim. The district 14
court granted the motions, holding: (i) Both a purchase and a 15
sale must exist to trigger liability under the statute. Under 16
Section 16(b), the expiration of a short call option constitutes 17
a purchase to be matched with the sale that is deemed to occur 18
when the option is written. (ii) Goldman was a statutory insider 19
only when the options were written, not when they expired. (iii) 20
Goldman was, therefore, not required to disgorge profits earned 21
from writing the options because the statute requires statutory 22
insider status at the time of both purchase and sale. Reliance 23
Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 423-25 (1972). 24
Appellant timely appealed. 25
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After the close of briefing but before oral argument, we 1
invited the SEC to submit an amicus curiae brief regarding the 2
merits of the appeal. That brief, when filed, agreed with the 3
district court. 4
DISCUSSION 5
“We review a district court’s dismissal of a complaint 6
pursuant to Rule 12(b)(6) de novo.” Operating Local 649 Annuity 7
Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d 8
Cir. 2010). 9
The question before us is whether, to fall under the 10
disgorgement requirements of Section 16(b) and Rule 16b-6(d), an 11
expiration of a call option is a “purchase” and the writer of a 12
call option must be a ten percent owner both at the time it 13
writes the option and at the time the option expires. We begin 14
with the pertinent statutory and regulatory framework. 15
a) Section 16(b) 16
Stated simply, liability under Section 16(b), quoted in Note 17
1, supra, attaches when “there was (1) a purchase and (2) a sale 18
of securities (3) by . . . a shareholder who owns more than 10 19
percent of any one class of the issuer's securities (4) within a 20
six-month period.” Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 21
F.3d 305, 308 (2d Cir. 1998). It is intended to “prevent[] the 22
unfair use of information which may have been obtained” by 23
company insiders by requiring that “any profit realized by [the 24
insider] from any purchase and sale, or any sale and purchase, of 25
any equity security of such issuer (other than an exempted 26
6

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security) . . . within any period of less than six months . . . 1
shall inure to and be recoverable by the issuer, irrespective of 2
any intention on the part of such [insider].” 15 U.S.C. § 3
78p(b). Section 16(b) applies to “[e]very person who is directly 4
or indirectly the beneficial owner of more than 10 percent of any 5
class of any equity security” of the issuer, id. § 78p(a), and 6
states that it “shall not be construed to cover any transaction 7
where [a statutory insider] was not such both at the time of the 8
purchase and sale, or the sale and purchase, of the security 9
. . . involved,” id. § 78p(b). 10
Section 16(b) is generally subject to mechanical 11
application. It “‘imposes a form of strict liability’ and 12
requires insiders to disgorge . . . ‘short-swing’ profits ‘even 13
if they did not trade on inside information or intend to profit 14
on the basis of such information.’” Credit Suisse Sec. (USA) LLC 15
v. Simmonds, 132 S. Ct. 1414, 1417 (2012), quoting Gollust v. 16
Mendell, 501 U.S. 115, 122 (1991); accord Magma Power Co. v. Dow 17
Chem. Co., 136 F.3d 316, 320-21 (2d Cir. 1998) (“No showing of 18
actual misuse of inside information or of unlawful intent is 19
necessary to compel disgorgement.”). As the Supreme Court has 20
noted, “the only method Congress deemed effective to curb the 21
evils of insider trading was a flat rule taking the profits out 22
of a class of transactions in which the possibility of abuse was 23
believed to be intolerably great.” Reliance Elec. Co., 404 U.S. 24
at 422. 25
7

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In the past, the customary mechanical application of Section 1
16(b) was largely saved from arbitrariness because the underlying 2
rules were discernible and provided predictability. However, the 3
growing complexities of financial transactions have generated 4
numerous issues of statutory interpretation that admit of no 5
clear resolution. The courts and the SEC have responded to these 6
developments in two ways. 7
First, the Supreme Court has permitted a departure from 8
“flat rule[s]” in a very limited number of situations. For 9
example, it has noted that “[t]he statutory definitions of 10
‘purchase’ and ‘sale’ are broad” and have the potential to “reach 11
many transactions not ordinarily deemed a sale or purchase.” 12
Kern Cnty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 13
593-94 (1973). Given that breadth, “‘courts have properly asked 14
whether the particular type of transaction involved is one that 15
gives rise to speculative abuse,’” where the instrument or 16
transaction is “unorthodox” or “borderline.” 4 Id. at 594-95, 17
quoting Reliance Elec. Co., 404 U.S. at 424 n.4. 18
Second, the SEC has promulgated a substantial number of 19
rules addressing the increasing use of instruments and 20
transactions that do not fit comfortably into Section 16(b)’s 21
simplistic scenario of purchases and sales of common shares. As 22
explained below, the SEC has promulgated rules governing options 23
of the kind that give rise to the present appeal. 24
4 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).
8

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b) SEC Section 16 Rules 1
A call option is a type of instrument commonly described as 2
a derivative. 5 Because derivative securities are not explicitly 3
covered by Section 16(b), the SEC adopted Rule 16b-6 in 1991 “to 4
effect the purposes of section 16 and to address the 5
proliferation of derivative securities and the popularity of 6
exchange-traded options.” Ownership Reports and Trading by 7
Officers, Directors and Principal Security Holders, Exchange Act 8
Release No. 34-28869, Investment Company Act Release No. 9
35-25254, 56 Fed. Reg. 7242, 7248 (Feb. 21, 1991). The adoption 10
was based on the SEC’s conclusion that, because the value of a 11
derivative security is tied to the value of the underlying equity 12
security, “holding derivative securities is functionally 13
equivalent to holding the underlying equity securities for 14
purposes of section 16.” Trading in derivatives might, 15
therefore, give rise to speculative abuse. 6 Id. 16
Appellant seeks to hold Goldman liable under Rule 16b-6(d), 17
quoted in Note 2, supra. To reiterate, it provides in relevant 18
part that “if an insider writes an option that expires 19
unexercised within six months and profits from doing so on 20
account of having been paid by the purchaser for a right to buy 21
5 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).
9

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shares that the purchaser did not exercise, the writer will be 1
held liable.” Allaire Corp. v. Okumus, 433 F.3d 248, 252 (2d 2
Cir. 2006). The Rule “is designed to prevent a scheme whereby an 3
insider with inside information favorable to the issuer writes 4
a[n] . . . option, and receives a premium for doing so, knowing, 5
by virtue of his inside information, that the option will not be 6
exercised within six months.” Gwozdzinsky, 156 F.3d at 309. 7
As noted, two transactions -- a sale and a purchase of 8
securities -- are required to trigger liability under Section 9
16(b), and the status as a statutory insider must exist at the 10
time of each transaction. Reliance Elec. Co., 404 U.S. at 423- 11
25. Rule 16b-6 defines, for the most part, derivative 12
transactions as either sales or purchases for the purposes of the 13
statute. These categorizations are premised on the fact that 14
“[j]ust as an insider’s opportunity to profit commences when he 15
purchases or sells the issuer’s common stock, so too the 16
opportunity to profit commences when the insider engages in 17
transactions in options or other derivative securities that 18
provide an opportunity to obtain or dispose of the stock at a 19
fixed price.” 56 Fed. Reg. at 7248. 20
For example, Rule 16b-6(a) provides that “the establishment 21
of or increase in a put equivalent position . . . shall be deemed 22
a sale of the underlying securities for purposes of section 16(b) 23
of the Act.” 17 C.F.R. § 240.16b-6(a). The definitional section 24
of the regulations explains that writing a fixed-priced call 25
option is functionally the same as taking a “put equivalent 26
10

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position.” Such “a derivative security position . . . increases 1
in value as the value of the underlying equity decreases,” 2
because, when the market price of the security is above but 3
dropping close to the strike price, the cost to the writer of 4
selling at the strike price decreases. 17 C.F.R. § 240.16a-1(h). 5
If the market price falls below the strike price, the option 6
holder will not exercise it, and the writer will profit on the 7
premium. Following the same logic, the regulations provide that 8
“[t]he closing of a derivative security position as a result of 9
its exercise or conversion shall be exempt from the operation of 10
section 16(b) of the Act.” 17 C.F.R. § 240.16b-6(b). 11
But while Rule 16b-6(a) equates the establishment of a put 12
equivalent position to a sale, Rule 16b-6(d) does not identify 13
the events it lists -- the writing and the expiration of the 14
option -- as either purchases or sales. However, in a release 15
regarding the then-proposed 1991 Amendments to the Section 16 16
Rules, the SEC stated: “[a] grant of an option may be viewed as 17
a sale of the derivative security by the writer of the option, if 18
consideration is received for the option.” Ownership Reports and 19
Trading by Officers, Directors and Principal Stockholders, 20
Exchange Act Release No. 34-26333, 53 Fed. Reg. 49997-02, 50009 21
(Dec. 13, 1988). In the same release, the SEC noted: “in the 22
case of an expiration of a short option position, the expiration 23
would be treated as the purchase of the option because there is 24
short-swing profit potential in such a case.” Id. at 50008. The 25
SEC advances the same view here in its amicus brief. Important 26
11

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to our disposition of this appeal, therefore, is the deference we 1
must give to an agency’s interpretation of its own regulations -- 2
as expressed here in the SEC Release quoted above and in its 3
amicus brief -- unless the proffered interpretation is “plainly 4
erroneous or inconsistent with the regulations.” See Auer v. 5
Robbins, 519 U.S. 452, 461-63 (1997) (internal quotation marks 6
omitted); accord Press v. Quick & Reilly, Inc., 218 F.3d 121, 7
128-29 (2d Cir. 2000). 8
c) Application 9
Although neither party contests that the writing of a call 10
option constitutes a sale under Section 16(b), see, e.g., 11
Gwozdzinsky, 156 F.3d at 309, both challenge the district court’s 12
holding that a short call option’s expiration amounts to a 13
Section 16(b) purchase by the option writer. The parties claim 14
instead that the passive expiration of a short call option is a 15
statutory nonevent in all cases under the statute; this 16
conclusion, they argue, is compelled by our holdings in Magma 17
Power and Allaire. 18
While the parties agree on this premise, each nevertheless 19
argues for a different outcome. Acknowledging that two separate 20
transactions are necessary elements of Section 16(b)’s 21
disgorgement requirement, Goldman invites us to invalidate the 22
portion of Rule 16b-6(d) that pertains to short call option 23
expirations. 7 Appellant, on the other hand, argues that the 24
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.
12

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writing of a short call option constitutes a simultaneous sale 1
and purchase under the statute, based on a theory that the writer 2
commits itself to a subsequent purchase of the underlying stock 3
at the instant it takes a short position on a call option. 4
According to appellant, then, because Goldman was a statutory 5
insider when the options were written -- at the time of the 6
asserted simultaneous sales and purchases -- for Section 16(b) 7
purposes, it is of no consequence that Goldman was not a 8
statutory insider at the time of the option’s expiration. 9
However, both parties misconstrue our precedents, and we 10
adopt the district court’s holding and the SEC’s interpretation: 11
for purposes of Section 16(b), the expiration of a call option 12
within six months of its writing is to be deemed a “purchase” by 13
the option writer to be matched against the “sale” deemed to 14
occur when that option was written. Rule 16b-6(d) was adopted to 15
eliminate the potential that an insider/option-writer could 16
generate profits by “knowing, by virtue of his inside 17
information, that the option will not be exercised within six 18
months.” Gwozdzinsky, 156 F.3d at 309. When an insider sells a 19
call option, and that same option expires unexercised less than 20
six months later, the writer’s opportunity to profit on the 21
underlying stock is realized. It is for this reason that the SEC 22
determined, “in the case of an expiration of a short option 23
position, the expiration would be treated as the purchase of the 24
option.” 53 Fed. Reg. at 50008. We follow that resolution of 25
the issue. 26
13

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Neither Magma Power nor Allaire mandates a different result. 1
In Magma Power, we concluded that an option holder’s decision not 2
to exercise an option to buy stock does not constitute a 3
transaction by the option holder for the purposes of the 4
statute. 8 136 F.3d at 324-25. Goldman is not the option holder, 5
however, but the option writer. While the option holder’s 6
decision not to purchase shares may not constitute a transaction 7
on the part of the option holder, we have never held as much with 8
respect to the option writer. 9
Nor does Allaire, an opinion regarding the application of 10
Rule 16b-6(a), control our decision. In Allaire, the defendants 11
wrote call options on Allaire stock prior to becoming statutory 12
insiders. Thereafter, the defendants acquired enough shares to 13
push their ownership stake above ten percent. The original 14
options then expired unexercised (just one month after they were 15
written). About a month later, while the defendants were still 16
insiders, they wrote a new set of call options on Allaire stock. 17
433 F.3d at 249. 18
Allaire argued that, under Rule 16b-6(a), the expiration of 19
the initial set of options constituted a “purchase” of the stock 20
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).
14

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because “it represents a liquidation of or decrease in a put 1
equivalent position”; the second set of options then, when 2
written, amounted to the establishment of a new put equivalent 3
position -- a sale that, according to Allaire, could be matched 4
to the purported purchase. Id. at 249, 251. We held that the 5
expiration of the first set of options did not constitute a 6
purchase under Section 16b-6(a) matchable to the later sale of a 7
different set of call options. Id. at 252. 8
When read out of that context, there is language in Allaire 9
that would seem in tension with our conclusion that the 10
expiration of a call option under Rule 16b-6(d) constitutes a 11
purchase by the option writer. But we reiterate, to the extent 12
that Allaire did not make it clear, that this language applies 13
only to short call option expirations under Rule 16b-6(a). 14
Indeed, “[t]he principal issue” in Allaire was “whether, under 15
Rule 16b-6(a), the expiration of a short call option is a 16
purchase, thereby exposing its insider/writer to section 16(b) 17
liability if within six months after that expiration he or she 18
also wrote (sold) another such call option.” Id. at 251 19
(emphasis added). 20
Given the facts of Allaire, there are sound reasons to view 21
our holding there as limited to call-option expirations under 22
Rule 16b-6(a). The danger of misuse of non-public information 23
exists at the time the option is written, and the expiration of 24
that option is the moment of profit. Matching writings with 25
expirations of different options does not clearly advance the 26
15

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purposes of the statute. Options written at different times are 1
less likely to give rise to speculative abuse, and matching the 2
expiration of an option only to its own writing recognizes the 3
more evident danger. 4
The Allaire opinion itself makes this clear. For example, 5
we observed that, under Rule 16b-6(a), “when the option is 6
written by the insider (and not canceled), leaving the insider 7
with no control over whether or not it will be exercised, his or 8
her inside information, at least in the usual case, cannot be 9
employed for his or her personal profit.” Id. at 252. We 10
concluded, “neither the holder’s exercise of the option nor the 11
holder’s allowing the option to expire constitutes a transaction 12
by the option’s writer.” Id. Moreover, at several junctures, 13
Allaire was careful to note that its holding applied only to 14
option expirations under Rule 16b-6(a). See id. (“Just as the 15
holder’s exercise of a call option is not a ‘sale’ by the writer 16
under Rule 16b-6(a), neither is the expiration of a call option a 17
‘purchase’ by the writer under that provision.” (emphases 18
added)); id. at 253(“If the expiration of a call option were a 19
purchase under Rule 16b-6(a), what purpose would it serve to 20
provide, as Rule 16b-6(d) does, that the expiration of an option 21
within six months of its writing triggers liability?”); id. at 22
254 (“[T]he writing of an option may be a ‘transaction’ under 23
section 16(b) but . . . the expiration of an option, when matched 24
against any transaction other than its own writing, is not.” 25
(emphasis added)). 26
16

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Allaire’s express and implied references to Rule 16b-6(d), 1
therefore, beg the question we answer: when matched against its 2
own writing, the expiration of an option within six months is a 3
“transaction” -- a purchase by the option writer -- for the 4
purposes of Section 16(b). 5
Appellant’s theory -- that the writing of an option 6
constitutes a simultaneous purchase and sale -- finds support 7
neither in the statutory text, the SEC Rules, nor in our 8
precedents. Section 16(b) plainly requires separate 9
transactions. 10
To the extent appellant argues that the broad, statutory 11
definitions of “purchase” and “sale” encompass the circumstances 12
here -- essentially that both definitions should apply to the 13
transaction that occurs when the option is written to effectuate 14
the purposes of the statute -- that argument is contrary to the 15
statutory text, which is clearly addressed to separate 16
transactions. Moreover, it ignores the real possibility that the 17
holder will exercise the option. Most importantly, the SEC 18
undertook this identical inquiry when it promulgated Rules 19
establishing that there are two relevant transactions at separate 20
points in time: the writing of the option and its expiration. 9
21
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).
17

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While the SEC’s resolution may not be the only reasonable 1
one, it is certainly within the realm of reason, and we defer to 2
it. Press, 218 F.3d at 128-29. Section 16(b) was written to 3
govern a financial world of largely square pegs and square holes. 4
The growing use of oval, rectangular, triangular, star-like, etc. 5
pegs, creates problems without clear solutions. We are not free 6
to reject the SEC’s view as to the most desirable, if not 7
perfect, solution to particular issues. 8
In that regard, appellant warns of the dangers associated 9
with the holding we now adopt, cautioning that a statutory 10
insider can simply write an option and then divest himself of 11
shares enough that he is no longer subject to Section 16(b)’s 12
disgorgement requirements. However, this argument is foreclosed 13
by Reliance Electric, which allowed a statutory insider to 14
purposefully drop its holdings to slightly under ten percent so 15
as to sell the remainder without liability under Section 16(b). 16
When it enacted Section 16(b), “Congress did not reach every 17
transaction in which an investor actually relies on inside 18
information.” Reliance Elec. Co., 404 U.S. at 422. For example, 19
the statute “clearly contemplates that a statutory insider might 20
sell enough shares to bring his holdings below ten percent, and 21
later -- but still within six months -- sell additional shares 22
free from liability under the statute,” id. at 423, creating the 23
very situation of which appellant calls upon us to be 24
apprehensive. As in the case of structured transactions designed 25
to drop below ten percent, we must also follow the instruction 26
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that “[l]iability cannot be imposed simply because the investor 1
structured his transaction with the intent of avoiding liability 2
under [Section] 16(b).” Id. at 422. 3
The prophylactic disgorgement rule of Section 16(b) is not 4
an all-encompassing remedy for every occasion when insiders 5
succeed in writing options and disposing of stock in a way that 6
allows a profit based on inside information. Section 16(b) 7
requires that a statutory insider must have such status at the 8
time of the sale and the purchase of securities in order to be 9
liable. Therefore, to be liable, Goldman had to have been a 10
statutory insider both at the time of the option’s writing and at 11
the time of its expiration. Because Goldman was no longer a 12
statutory insider at the time the options expired in January 13
2010, it is not liable. 14
CONCLUSION 15
To summarize: 16
(1) For purposes of Section 16(b), the expiration of a call 17
option within six months of its writing is to be deemed a 18
“purchase” by the option writer to be matched against the “sale” 19
deemed to occur when that option was written. 20
(2) Section 16(b) requires statutory insider status at the 21
time of both purchase and sale, and so Goldman was not required 22
to disgorge profits where it was a statutory insider only when 23
the options were written, but not when they expired. 24
For the reasons stated above, we affirm the June 8, 2012, 25
judgment of the district court. 26
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