Defendant Goldman Sachs wrote short call options covering shares of Leap Wireless International, Inc. stock, while owning more than 10% of the shares of a certain class of Leap Wireless common stock. Shortly after writing the options, Goldman Sachs reduced its ownership below 10% and the options expired unexercised approximately four months later. Plaintiff, a shareholder of Leap Wireless, brought an action against Goldman Sachs pursuant to Section 16(b) of the Exchange Act to disgorge the profits earned by Goldman Sachs from the creation and expiration of the options. Under the applicable SEC rules, the creation of an option could be considered a purchase or a sale of a security, and therefore could be the basis for liability under Section 16(b). Rule 16b-6(d) provides that 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).
Here, Goldman Sachs argued that it could not be liable under Section 16(b) because it was not an insider at the time the call options expired. Goldman Sachs argued that Section 16(b) imposes liability on a 10% beneficial owner only if it is an insider both at the time of the purchase and sale. The Court agreed and explained that the statute itself expressly provides that "it shall not be construed to cover any transaction where [a 10% owner] was not such both at the time of the purchase and sale." The Court further explained that the fact that Goldman Sachs may have possessed inside knowledge at the time of the writing of the options does not allow the Court to disregard the clear requirements of the statute.
Section 16 applies to beneficial owners of more than 10% of any class of security of domestic issuers registered under the Exchange Act, and directors and officers of those issuers. Generally, Section 16 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. The Court noted that Congress intended to establish this bright line rule that does not depend on an insider's possession of inside information.
Roth vs. Goldman Sachs Group, Inc., 11 Civ. 4820 (JPO) (S.D.N.Y. June 5, 2012)