The Second Circuit affirmed a decision which found that an investment partnership violated the short-swing profit provisions of Section 16(b) of the Securities Exchange Act of 1934 by engaging in a promissory note exchange transaction.
The investment partnership initially invested in a convertible promissory note. This convertible promissory note was exchanged for another convertible promissory note of the same issuer having the same face value, but containing different terms. The investment partnership subsequently converted the exchanged promissory note and sold the shares received upon conversion within a week. In holding the investment partnership liable under Section 16(b), the exchanged promissory note was found to be sufficiently different from the original promissory note so as to be considered a new promissory note, rather than an amended one. As a result, the acquisition of the exchanged promissory note, as well as its conversion, constituted a purchase for Section 16(b) purposes.
Section 16(b) applies to beneficial owners of more than 10% of any class of security of domestic issuers registered under the Securities Exchange Act of 1934 and directors and officers of those issuers. Generally, Section 16(b) requires that any short-swing profits, that is, profits from purchases and sales of an issuer's equity securities taking place within six months of each other, be disgorged to the issuer. No showing of actual misuse of inside information or of unlawful intent is necessary to compel disgorgement.
Analytical Surveys Inc. v. Tonga Partners LP, No. 09-2622-cv (U.S. Ct. of App., 2nd Cir., June 4, 2012)