The following sentence appears on all SEC Form 4s... Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).

What does the following statement mean?

  Intentional misstatements or omissions of facts constitute Federal Criminal Violations.  See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).

18 USC 1001 is below:  

(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully-

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2) makes any materially false, fictitious, or fraudulent statement or representation; or

(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;
shall be fined under this title, imprisoned not more than 5 years or, if the offense involves international or domestic terrorism (as defined in section 2331), imprisoned not more than 8 years, or both. If the matter relates to an offense under chapter 109A, 109B, 110, or 117, or section 1591, then the term of imprisonment imposed under this section shall be not more than 8 years.


(b) Subsection (a) does not apply to a party to a judicial proceeding, or that party's counsel, for statements, representations, writings or documents submitted by such party or counsel to a judge or magistrate in that proceeding.
(c) With respect to any matter within the jurisdiction of the legislative branch, subsection (a) shall apply only to-
(1) administrative matters, including a claim for payment, a matter related to the procurement of property or services, personnel or employment practices, or support services, or a document required by law, rule, or regulation to be submitted to the Congress or any office or officer within the legislative branch; or
(2) any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress, consistent with applicable rules of the House or Senate. 

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Does it mean that if an insider makes an entry into the SEC Form 4 that is false and it was intentionally entered by the insider, then the entry is a felony?  Or Does the violation require that the executive intentionally meant to defraud by making such a false entry?

Assume that a large insider who owns more that 10 % of the company shares decides to buy calls and sell (write) puts over-the-counter. Both the calls and the puts have the same exercise price and the same time to expiration.

Assume the stock is trading for $20.00 on the NYSE and the exercise price is $15.00 for the calls and the puts. The calls have a theoretical value and exchange traded value of $6.00 and the puts have a theoretical value and an exchange traded value of $1.00

SEC Rule 16 b-6(d) is below:

(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.

So if the calls are written for $1.00 and they are cancelled or expire worthless within 6 months, the $1.00, multiplied by the number of shares the puts cover, profit is recoverable by the issuer. under section 16 (b)

But the insider reported on his form 4 that he sold the puts for $0.01 and the calls were purchased for $5.01. They reported $0.01 as the put price and the call price at $5.01 because the net from paying $5.01 and selling for $0.01 is the same as the net from paying $6.00 and selling for $1.00. There are other reasons for using the false lower prices.

However, the taxes are different, and the recovery under Section 16 b of the Securities  Exchange Act are far different.

When the puts expire out-of-the-money and the calls are exercised as they are in-the-money, the insider will report short term capital gain on the puts that were written allegedly at $0.01 (instead of $1.00) and he will also pay $0.01 as a recovery to the issuer of $0.01 (instead of $1.00).

This was actually done by an advisor to Trumpti, who just quit.

Was the intent to save taxes, to lower the margin requirements and lower the recovery by the issuer by 99%. Answer is yes. 

But Alan Dye thinks the use of $0.01 as the price of the puts, whose real value in 100 times as great is fine if they refer to the buy call and sell puts as a forward (which is nowhere defined).


John Olagues

Edited Tue, Aug 22, 2017 8:27 AM

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