1. Insider Trading When must insiders “disgorge”? When are “purchases” and “sales” matchable?

2. Section 16(a) Every person who is … the beneficial owner of more than 10 percent of … equity security of [public company] or who is a director or an officer of the issuer of such security, shall file the statements required by this subsection with the Commission …. Fraud (tort of deceit) Material misrepresentation Intentional (defendant aware of truth) Reliance (plaintiff relies reasonably) Misrepresentation is cause of loss Damages

3. Section 16(b) … any profit realized by [such beneficial owner, director, or officer] from any purchase and sale, or any sale and purchase, of any equity security of [public company] within any period of less than six months, shall inure to and be recoverable by the issuer, irrespective of any intention … Fraud (tort of deceit) Material misrepresentation Intentional (defendant aware of truth) Reliance (plaintiff relies reasonably) Misrepresentation is cause of loss Damages

4. Section 16(c) It shall be unlawful for any such beneficial owner, director, or officer … to sell any equity security of such issuer…, if the person selling the security … (1) does not own the security sold, or (2) if owning the security, does not deliver it against such sale within twenty days thereafter … Fraud (tort of deceit) Material misrepresentation Intentional (defendant aware of truth) Reliance (plaintiff relies reasonably) Misrepresentation is cause of loss Damages

5. Section 16(b) … any profit realized by [such beneficial owner, director, or officer] from any purchase and sale, or any sale and purchase, of any equity security of [public company] within any period of less than six months, shall inure to and be recoverable by the issuer, irrespective of any intention … Fraud (tort of deceit) Material misrepresentation Intentional (defendant aware of truth) Reliance (plaintiff relies reasonably) Misrepresentation is cause of loss Damages § 16(b) disgorgement Transactional nexus Plaintiff Defendant Elements Procedure

6. You are director of Mega Corp (listed on the NYSE). You buy and sell stock in the company as follows: Hypothetical #1 DatePurchaseSell 1/11000 @ $10 2/11000 @ $8 3/11000 @ $12 4/11000 @ $13 5/11000 @ $14 5/151000 @ $14.50

7. You are director of Mega Corp (listed on the NYSE). You buy and sell stock in the company as follows: Hypothetical DatePurchaseSell 1/11000 @ $10 2/11000 @ $8 3/11000 @ $12 4/11000 @ $13 5/11000 @ $14 5/151000 @ $14.50 Actual profit/loss: Purchased 3000 share = $36,000 Sold 3000 shares = $35,500 Net loss = $500

8. You are director of Mega Corp (listed on the NYSE). You buy and sell stock in the company as follows: Hypothetical DatePurchaseSell 1/11000 @ $10 2/11000 @ $8 3/11000 @ $12 4/11000 @ $13 5/11000 @ $14 5/151000 @ $14.50 Section 16(b) calculation: Match 1/1 purchase and 5/15 sale = $4,500 Match 3/1 purchase and 4/1 sale = $1,000 Net gain = $5,500

9. You are director of Mega Corp (listed on the NYSE). You buy and sell stock in the company as follows: Hypothetical DatePurchaseSell 1/11000 @ $10 2/11000 @ $8 3/11000 @ $12 4/11000 @ $13 5/11000 @ $14 5/151000 @ $14.50 Section 16(b) calculation: Match 1/1 purchase and 5/15 sale = $4,500 Match 3/1 purchase and 4/1 sale = $1,000 Net gain = $5,500

10. You are director of Mega Corp (listed on the NYSE). You buy and sell stock in the company as follows: Hypothetical DatePurchaseSell 1/11000 @ $10 2/11000 @ $8 3/11000 @ $12 4/11000 @ $13 5/11000 @ $14 5/151000 @ $14.50 Section 16(b) calculation: Match 1/1 purchase and 5/15 sale = $4,500 Match 3/1 purchase and 4/1 sale = $1,000 Net gain = $5,500

11. Some more hypos …

12. You became director of Mega Corp in 2005 and resigned last month. You then resign and sell your Mega stock: Hypothetical #2 DatePurchaseSell 1/1/05Become director 2/1/0510,000 @ $20 12/1/0510,000 @ $25 1/1/06Resign as director 4/1/0620,000 @ $33

13. You became director of Mega Corp in 2005 and resigned last month. You then resign and sell your Mega stock: Hypothetical #2 DatePurchaseSell 1/1/05Become director 2/1/0510,000 @ $20 12/1/0510,000 @ $25 1/1/06Resign as director 4/1/0620,000 @ $33

14. You became director of Mega Corp in 2005 and resigned last month. You then resign and sell your Mega stock: Hypothetical #3 DatePurchaseSell 12/31/0450,000 @ $20 1/1/05Become director 2/1/0510,000 @ $20 3/1/0520,000 @ $33 1/1/06Resign as director 4/1/0640,000 @ $33

15. You became director of Mega Corp in 2005 and resigned last month. You then resign and sell your Mega stock: Hypothetical #3 DatePurchaseSell 12/31/0450,000 @ $20 1/1/05Become director 2/1/0510,000 @ $20 3/1/0520,000 @ $33 1/1/06Resign as director 4/1/0640,000 @ $33

16. Another hypo …

17. Probity Funds is a large mutual fund. It manages many portfolios. Probity buys and sells Mini Corp, a small public company with 10,000,000 shares outstanding: Hypothetical #3 DatePurchaseSell 1/10.2 million @ $15 2/11.2 million @ $25 3/10.3 million @ $20 5/11.7 million @ $30

18. Probity Funds is a large mutual fund. It manages many portfolios. Probity buys and sells Mini Corp, a small public company with 10,000,000 shares outstanding: Hypothetical #3 DatePurchaseSell 1/10.2 million @ $15 2/11.2 million @ $25 3/10.3 million @ $20 5/11.7 million @ $30

19. Section 16(b): 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, * * * “The discussion has focused on whether “at the time of purchase” means “before the purchase” or “immediately after the purchase.” “Congress intended to reach only beneficial owners who both bought and sold on the basis of inside information.” Foremost-McKesson v. Provident Securities (US 1972) Justice Lewis Powell

20. Probity Funds is planning to liquidate its holdings in Small-Time Corp (3 million shares outstanding). As of Feb 1, Probity holds 15% of Small-Time. Advise whether the following sequence creates 16(b) liability. Hypothetical #4 DatePurchaseSell 1/1350,000 @ $12 2/1100,000 @ $13 3/1150,000 @ $25 4/2300,000 @ $25

21. Probity Funds is planning to liquidate its holdings in Small-Time Corp (3 million shares outstanding). As of Feb 1, Probity holds 15% of Small-Time. Advise whether the following sequence creates 16(b) liability. Hypothetical #4 DatePurchaseSell 1/1350,000 @ $12 2/1100,000 @ $13 3/1150,000 @ $25 4/2300,000 @ $25 Section 16(b) liability: Only match when 10%+ shareholder Only 100,000 = gain of $1.2 million

22. [When a 10% shareholder reduces its holdings below 10% in two transactions, with the first bringing its holdings to or below the 10% threshold, a second transactions further liquidating its holding is not within the reach of Section 16(b).] Reliance Electric v. Emerson Electric (US 1972) Justice Lewis Powell

23. Last hypo … (sell to “white knight”)

24. Occidental undertakes a hostile takeover of Kern County Land. Occidental acquires more than 10% of Kern County’s common stock. Kern County responds by finding a “white knight” that agrees to acquire Kern County in a merger – for cash and Tenneco’s convertible preferred stock. So Occidental decides to lick its wounds and takes its profits. It negotiates an option with Tenneco to sell its Kern County holdings for a $8.9 million premium. Later when it exercises its option it realizes another $10.6 million profit. Issue: Must it disgorge its profit to the new Tenneco subsidiary (New Kern County)? Hypothetical #5

25. DatePurchaseSell 5/11,900 @ $50 5/10500,000 @ $83.50 5/10Becomes 10%+ shareholder 5/19Kern County announces merger 6/2Option to sell all 6/8385,000 @ $83.50 7/17KC merges with Tenneco 12/9Exercise option

26. Section 16(b) was enacted for the purpose of preventing the unfair use of information which may have been obtained by a statutory insider Issue 1: Was the merger a sale? Nothing in connection with Occidental’s acquisition of Old Kern … indicates either the possibility of insider information being available to Occidental … or the potential for speculative abuse of such inside information. Issue 2: Was the option a sale? Much can be said of the events leading to the [option] Kern County Land v. Occidental Petroleum (US 1973) Justice Byron White

27. Hypothetical #5A DatePurchaseSell 5/11,900 @ $50 5/10500,000 @ $83.50 5/10Becomes 10%+ shareholder 5/19Kern County announces merger 6/8385,000 @ $83.50 7/1KC announces merger with Tenneco 7/2886,900 @ $90