South-Western Legal Studies in Business

Short-Swing Profits Earned by Insiders Must Be Disgorged
Description Court held that insiders who held more than ten percent of the securities in a company had a duty to disgorge profits earned in short-swing transactions that occurred within six-month time periods by matching highest sale prices to lowest purchase prices.
Topic Consumer Protection
Key Words Section 16; Short-Wing Profits; Insiders; Disgorgement
C A S E   S U M M A R Y
Facts Two distinct groups of defendants were involved in a series of private placements of KFx securities that resulted in each group owning more than ten percent of the shared of KFx. As a result of holding more than ten percent of the stock, defendants were subject to insider restrictions on short-swing sale profits under Section 16 of the Securities Exchange Act. Segen sued in a shareholder derivate action on behalf of KFx shareholders, seeking disgorgement of $9 million in short-swing profits. The insiders moved for summary judgment.
Decision

Motion granted. The defendants had already disgorged profits of $185,000 that they agreed could be found to be short-swing profits in violation of Section 16. The $9 million claimed by plaintiff is incorrect. To determine the maximum possible recovery in short-swing profits from insider’s transactions, it is necessary to define the transactions subject to insider prohibitions, and then a date and time must be established for each purchase or sale to determine the price of the underlying security. Trades must be matched in a manner maximizing disgorgeable amounts, which is accomplished by matching highest sale prices with lowest purchase prices within six-month periods. Defendants have done so. No further disgorgement is due.

Citation Segen v. Westcliff Capital Management, --- F.Supp.2d --- (2004 WL 78648, S.D., NY, 2004)

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