Real Life examples of violations of Section 16 b of the 1934 Act

Below is a real example of officer violating section 16 b.

The purpose of section 16 b is 

"(b) 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,

 

 Shares                                        Shares
Purchased      Date         Price     Disposed     Date         Price         Profit 

68,826      8/15/2015    $14.23     68,826    4/7/2015     $24.31      $693,760

Total profit........................$693,760 subject to 16 (b) recovery

1. The disposition of the 68,826 shares was a disposition to the issuer pursuant to the well timed exercise of 90,000 Employee Stock Options initially granted by the issuer.

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Question...Did the officer have discretion as to when the exercise of the ESOs took place?

Answer...Yes the ESOs had 10 years from the day of grant to the expiration, with vesting after one year from the grant day.

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Question... Did the officer have the choice of delivering shares or cash for the exercise price.

Answer... Yes he did. And he chose to deliver shares.

Question ... Did he trade on inside information

Answer... Only the officer knows. 

Question... Did the officer have superior standing relative to the issuer which was required to accept the decision to deliver shares for the exercise price.

Answer... Yes the officer had superior standing because he could make the decision of when to deliver cash or shares and the issuer must accept his disposition, even if we assume that both the officer and the issuer had the same inside information.

 

Another Example of a violation of 16 b is below. This one also shows when IRC 83 c-3 comes into the play


CEO and President

Shares                                           Shares
Purchased      Date        Price         Disposed       Date          Price      Profit 

 30,000     7/24/2015    $14.34        30,000    11/19/2015    $18.10   $112,800
 10,000     8/21/2015     $15.68       10,000    11/19/2015    $18.10    $24,200


 
Total Profits................$137,000

 

These shares that were sold/disposed to the issuer on 11/19/2015 were received as a result of RSUs vestings and the discretionary decision by the issuer to withhold shares for the tax liability.

On 11/19/2015, there was no income calculation or tax liability at the time of vesting since IRC 83-c-3 deferred the income calculation and tax . There was no approval of tax withholding for a tax liability that is premature and therefore the dispositions could not be exempt from Section 16 (b).

Even if 83 c-3 did not defer the tax liability, the violation of 16 b) still occurred as all required elements were present.

 

Another Example of a Section 16 b violation is below: This one involves market purchases of common stock matched with discretionary dispositions to the issuer for the exercise price of warrants that were purchased earlier:

CEO transactions

Shares                                           Shares
Purchased         Date        Price      Disposed         Date       Price     Profit  

900,000       11/07/2014   8.24     900,000      1/31/2015   $11.78  $3.190,000

The CEO had discretion as to when to exercise the warrants and he had discretion as to how to pay the exercise price (i.e. either in cash or common shares). These discretionary decisions preclude the satisfying of the required approval necessary to get an exemption for the disposition, thereby making the market purchase matched with the disposition of shares for the exercise price payment.

John Olagues

Edited Fri, Oct 13, 2017 8:49 PM

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