FACT PATTERN 6: FEDERAL SECURITIES LAW: SECTION 16B:

Question 1

What is SECTION 16B law provide recovery for?

Answer 1

This federal law provides for recovery by the corporation of “profits” gained by certain insiders from buying and selling the company’s stock.

Question 2

Can a 16B claim come up in a derivative lawsuit?

Answer 2

Yes

Question 3

When does 16b apply?

Answer 3

1. there is a reporting corporation
2. There is one of many types of defendants (Director, Officer, SH who owns more than 10%
3. A short swing trade

Question 4

What is a reporting corporation?

Answer 4

(1) listed on a national exchange or

(2) at least 2,000 shareholders (or 500 non-accredited shareholders) and $10,000,000 in assets.

Question 5

What is an accredited investor?

Answer 5

in general, an investor who can handle risk, such as an institutional investor or a wealthy individual.

Question 6

Name each type of D in a 16b suit and when they can violate 16b

Answer 6

• • Director (either when she bought or sold) or
• • Officer (either when she bought or sold) or
• • Shareholder who owns more than 10 percent (both when she bought and sold)

Question 7

What is a short swing trade?

Answer 7

Buying and selling stock within a single six-month

period

Question 8

Is fraud or insider trading needed for 16b?

Answer 8

No

Question 9

What happens when 16b applies?

Answer 9

All “profits” from such “short-swing trading” are recoverable by the corporation. If, within six months before or after any sale, there was a purchase at a lower price, there is a profit.

Question 10

sell at 10 today, buy at 1 later does this count as a profit?

Answer 10

Yes, The order of buy and sell does not matter.

Question 11

D is a director of Acme, Inc., which is a reporting company. In 2007, D bought 700 shares of Acme stock for $10 a share. In January 2012, D sold 700 shares for $6 a share. In March 2012, D bought 200 Acme shares for $1 a share. What result?

Answer 11

Doesn’t look like a profit in real-world terms. BUT D owes the corporation $1,000.

Question 12

D is a director of Acme, Inc., which is a reporting company. In 2007, D bought 700 shares of Acme stock for $10 a share. In January 2012, D sold 700 shares for $6 a share. In March 2012, D bought 200 Acme shares for $1 a share. Do the analysis.

Answer 12

Did she buy at less than $6 within 6 months before the sale in January 2012?
-No
Did she buy at less than $6 within 6 months after the sale in January 2012?
-Yes, she bought at $1 in March and sold at 6 that is a $5 per share profit.
Multiply $5 profit times 200 shares. Why 200?
-That is the largest number of shares she both bought and sold in 6 months.