Example of an 60 day letter enforcing Section 16 (b) of the 1934 Act

John Olagues
413 Sauve Rd
River Ridge LA 701213

November 30 , 2017

Re: 60 Day letter requesting recovery of profits earned in violation of Section 16 b of the 1934 Securities Act

Gentlemen:

This letter is a 60 day notice to ABC Corp seeking recovery of profits earned by the officers , Miles White Chainamed in the list of transactions below in violation of Section 16 b of the 1934 Securities Act.

Below are the requirements for a recovery of profits from a violation of Section 16 (b)

Six Required Elements to be shown by Plaintiff for Section 16 b enforcement

1. A non exempt purchase and a non exempt sale of equity securities of the issuer within less than 6 months by a statutory insider.
2. The insider must be an officer, director or greater than a 10% beneficial owner when the non exempt purchase and non exempt sale are made
3. There must be a profit made between the two transactions (i.e a purchase and a sale).
4. The Plaintiff/shareholder must be an owner of issuer securities, when the suit is initiated by Plaintiff.
5. The suit must be filed within less than two years from the last non exempt matched transaction.
6. The issuer must be notified by the shareholder of the Section 16 b violation and then given 60 day within which to seek recovery from the insider.


 
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Below is an explanation of why the discretionary dispositions for taxes are not exempt and are matchable with market purchases:

The SEC can only exempt transactions that are "not comprehended within the purpose of Section 16 (b)."

Below is a verbatim copy of section 16 b of the Securities Exchange Act of 1934.
The parts relating to the purpose are highlighted in yellow. The part dealing with the SEC's ability to exempt transactions are in blue

"(b) 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 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."
---------------------------------------------- End of section 16 (b)


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So the SEC can exempt by rules and regulations transactions that are "not comprehended within the purpose of this subsection".

The first step in understanding what transactions the SEC can exempt requires an analysis of the purpose of this subsection 16 (b) which is below:

"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",

So the purpose is to prevent insiders such as officers, directors and greater than 10 % owners from unfairly using inside information that they may have obtained by being insiders.

I will focus only on officers and directors in this analysis.

Below is a quote from Congress in 1934.

"The expressed purpose of this provision is to prevent the unfair use of inside information. The Commission may exempt transactions not falling within this purpose." S.Rep. No. 792, 73d Cong., 2d Sess., 21 (1934).

So what is the unfair use of information obtained by officers and directors?

In the :
SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 228, 229 and 240 [RELEASE NOS. 33-8600; 34-52202; 35-28013; IC-27025; File No. S7-27-04] RIN 3235-AJ27

OWNERSHIP REPORTS AND TRADING BY OFFICERS, DIRECTORS AND PRINCIPAL SECURITY HOLDERS ;

The SEC quoted the American Bar Association and adopted the sentence below:

"the key consideration of the statute is the absence of the ability to take advantage of the other party on the basis of inside information."

So there must be the absence of the ability to take advantage of the other party.


 
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And the SEC also quoted the New York State Bar Association and adopted their statement as below:

"Rule 16b-3 is entirely consistent with the intent of Congress in enacting Section 16(b), since it exempts only transactions involving parties on an equal footing from the standpoint of knowledge of inside information."

Using just these two sentences that the SEC has adopted in the 2005 Release, we find that any exemptions from 16(b) of dispositions to the issuer (or any other person) from the officer or director must have "the absence of the ability to take advantage of the other party on the basis of inside information". The possible exemption also requires both parties to be "on equal footing from the standpoint of knowledge of inside information".

This certainly prohibits exemptions where the officer or director and the issuer have the same inside negative information but the issuer must accept the decision by the officer or director to sell (i.e. to dispose of shares) to the issuer.

When an officer or director has a choice of delivering cash or shares as payment for the exercise price or for payment of a tax liability and is in possession of negative inside information with the issuer having no choice but to accept shares, the executive's footing is far superior to the footing of the issuer and that transaction is certainly "comprehended within the purpose of this subsection( i.e. section 16 (b))" .
The transaction therefore is not and can not be exempt regardless of how some attorneys interpret SEC Rules.

Sometimes officers or directors are given a choice of electing to deliver cash or shares as payment for the exercise price or for payment of a tax liability and are in possession of negative inside information but the issuer has a choice to accept the disposition of shares or not. Such dispositions here may be exempted if the Committee of 2 or more non employee directors or the Board of Directors make the decision to accept the disposition from the officer or director at the time of the disposition. However, if the transaction is "comprehended within the purpose of section 16 (b)", there can not be an exemption regardless of any prior approval.-------------------------------------------------------

The staff of the SEC in their 2007 Q and A #123.16, in order to clarify the Rules under SEC Rule 16 b-(3) expressed their opinion below in the Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, :

4

Q and A and from Staff of the SEC and analysis by Romeo and Dye follows:

Question: Would approval of a grant that by its terms provides for automatic reloads satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants?

Answer: Yes. Approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis.

The same result applies under Rule 16b-3(e) where the automatic feature is a tax- or exercise-withholding right. [May 23, 2007]
------------------------------------------------------------------- End of the Q and A


Below is from Romeo and Dye expressing their views about the above Q and A :

"(6) Issuer Discretion To Disallow Stock Withholding, Surrender, Or Delivery May Call Into Question Availability Of Rule 16b-3(e). The staff (of the SEC) has taken the position that a net exercise or tax withholding transaction that is subject to issuer discretion would require specific approval of individual transaction in order for the Rule 16b-3(e) exemption to be available.

See Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, Q. 123.16 (May 23, 2007). Apparently the staff is concerned that the issuer's discretion means the board or committee delegated to management the decision whether to approve withholding, rather than making the decision itself."
----------------------------------------------------
My comments are below

Surely the Q and A to and from the staff of the SEC demonstrates that "the specificity of approval requirements under Rule 16b-3(d)and Rule 16 b-3(e) must be satisfied" and discretion by the issuer does not satisfy the specificity of approval requirements under Rule 16b-3(d)and Rule 16 b-3(e) .


 
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The logical implication, in my view, is that if issuer discretion does not satisfy the specificity of approval requirements, discretion by officers or directors also does not satisfy the specificity of approval requirements under SEC Rule 16 b-3(e).

In addition, discretion by the officer or director, when the issuer must accept the discretionary disposition, is "comprehended within the purpose of Section 16 (b)" and can not be exempted.

In summary, discretionary dispositions by the officers or directors to the issuer are not exempt from section 16 (b), whether the issuer has discretion to accept the disposition or not.


  Below is a summary of violations of Section 16 (b)by officers and directors of a real company, with the profits recoverable by the issuer. This analysis below is a real case where the last names were omitted from a real 60 day letter..

Chairman and CEO

Shares                                         Shares
Purchased    Date          Price        Disposed     Date             Price      Profit

59,089   10/11/2016    $40.38       59,089   2/28/2017      $45.46   $300,172

-------------------------------------------------------------------------


 
Brian  EVP


Shares                                         Shares
Purchased   Date           Price        Disposed     Date           Price        Profit

13,271   12/20/2016    $38.46       13,271   2/28/2017     $45.46      $92,900

-------------------------------------------------------------------------

Robert  EVP


Shares                                         Shares
Purchased    Date         Price         Disposed     Date          Price         Profit
9023        12/14/2016  $39.08       9023      2/28/217     $45.46      $58,021

 

Total combined profits...........$451,093

---------------------------------------------------------------------------

 
All of the purchases were market purchases which are not exempt from Section 16 (b). This will be conceded by defendants.

In addition , there was no income calculated and no tax liability on the days that these executives disposed of shares to the issuer allegedly for taxes. IRC 83 c-3 defers the tax liability for up to 6 months after the purchase of shares indicated above. Below is a quote from the Ninth Circuit Court of Appeals on the topic.

BERZON, Circuit Judge:


Ordinarily, when an employee is compensated with nonstatutory stock options that do not have a readily ascertainable fair market value at the time of the grant, the employee realizes income for tax purposes upon exercising the options.1 See 26 U.S.C. §§ 83(a) & (e)(3)-(e)(4); 26 C.F.R. § 1.83-7(a). The taxpayer is taxed on an amount equal to the fair market value of the stock on the date of exercise minus the option price paid for the stock. See 26 C.F.R. §1.83-1(a)(1); id. §1.83- 7(a)

Internal Revenue Code § 83(c)(3), however, allows taxpayers to defer recognition and valuation of income so long as a profitable sale of the stock acquired through the exercise of the options "could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934." 26 U.S.C. § 83(c)(3).

Section 16(b), in turn, forbids a corporate insider from profiting on a purchase made within six months of a sale (or a sale made within six months of a purchase) of the corporation's stock. See 15 U.S.C. § 78p(b). If a taxpayer is permitted to defer tax consequences under IRC § 83(c)(3), the taxpayer will be later taxed on an amount equal to the fair market value of the stock on the date that § 83(c)(3) no longer applies minus the option price paid for the stock. See 26 U.S.C. § 83(a); 26 C.F.R. § 1.83-1(a)(1)

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We are happy to explain to you further why all of the transactions are non exempt and are matchable and the indicated profits are recoverable by Abbott Laboratories.

Regards;

John Olagues and Yingping Huang Phd.
413 Sauve Rd 413 Sauve Rd
River Ridge LA 70123 River Ridge LA 70123
olagues@gmail.com yingping@gmail.com
504-305-4071 7


Below is a paragraph regarding the method of tax payments that the company, Abbott Labs allows in their equity plan document.

(d) Taxes. The Company shall be entitled to withhold, or require a participant to remit to the Company, the amount of any tax attributable to any amount payable or shares deliverable under the Program. The Company may defer making payment or delivery if any such tax may be pending unless and until indemnified to its satisfaction, and the Company shall have no liability to any participant for exercising the foregoing right. The Committee may, in its sole discretion and subject to such rules as it may adopt, permit or require a Grantee to pay all or a portion of the federal, state and local taxes (in U.S. or non-U.S. jurisdictions), including social security and Medicare withholding tax, arising in connection with the receipt or exercise of any Benefit by, without limitation: (i) having the Company withhold Shares, (ii) tendering Shares received in connection with such Benefit back to the Company, (iii) delivering other previously acquired Shares having a Fair Market Value approximately equal to the amount to be withheld, (iv) selling Shares issued pursuant to such Benefit and having the Company withhold from proceeds of the sale of such Shares, (v) having the Company or a Subsidiary, as applicable, withhold from any cash compensation payable to the Grantee, or (vi) requiring the Grantee to repay the Company or Subsidiary, in cash or in Shares, for taxes paid on the Grantee's behalf.

 

Edited Mon, Apr 2, 2018 4:40 AM

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