Chechele v. Sperling
2014 U.S. App. LEXIS 13178
| 2d Cir. | 2014Background
- Plaintiff Donna Chechele, an Apollo shareholder, sued Apollo executives John and Peter Sperling under §16(b) seeking disgorgement of alleged short-swing profits after the Sperlings entered prepaid variable forward contracts (PVFCs) in 2006–2007 and later sold shares within six months of PVFC settlement.
- The Sperlings executed PVFCs that gave them upfront cash (Payment Date) in exchange for pledging up to a fixed number of Apollo shares to banks; settlement (Settlement Date) required delivery of a formula-determined number of shares or cash equivalent based on the stock price three days before settlement.
- While pledged as collateral on the Payment Date, the Sperlings retained ownership, voting rights, and dividends until any delivery at settlement.
- Some PVFCs settled when the stock price exceeded the ceiling, causing the banks to receive delivered shares; in all five transactions the contracts were settled by delivery (not cash).
- Chechele’s theory: the Sperlings effectively “sold” pledged shares at the Payment Date and then “repurchased” the undelivered shares at settlement, so subsequent open-market sales within six months should be matched to those repurchases under §16(b).
- The district court dismissed, holding the Sperlings’ retained shares did not constitute a §16(b) “purchase” when the PVFCs settled; the Second Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether retention/receipt of undelivered shares at PVFC settlement constitutes a §16(b) “purchase” | Chechele: settlement that leaves Sperlings with undelivered (retained) shares is a purchase that can be matched to later sales within six months | Sperlings: PVFCs are traditional derivatives (sale of call / purchase of put equivalents) so the relevant transactions are the contract writing and, if at all, expiration — settlement (exercise) is a non-event and does not create a new purchase | Court: PVFCs are derivatives treated as sales of option-equivalent positions at contract signing; settlement by exercise is a non-event and retention at settlement is not a §16(b) purchase, so no matchable purchase occurred |
| Whether PVFCs should be analyzed as hybrid derivatives (price fixation at settlement) | Chechele: PVFCs resemble hybrid derivatives without fixed exercise price, so the “purchase” occurs when price/extent is fixed (near settlement) | Sperlings: PVFCs use a predetermined formula and settlement dates fixed at contracting, so they are traditional derivatives whose terms (and risk) are fixed at signing | Court: PVFCs are traditional (not hybrid) derivatives because the formula/dates fix terms at signing; applying hybrid logic would create anomalous §16(b) liability and unfairness |
| Whether option expiration at settlement can be matched to unrelated open-market sales | Chechele: expiration/settlement can be matched to open-market sales to create liability | Sperlings: expiration is matched only to the option writing itself; exercise is a non-event; matching to unrelated sales is improper | Court: expiration can only be matched to its own writing (Roth/Allaire); matching to unrelated sales is not permitted |
| Whether treating PVFCs as loans (not derivatives) avoids §16(b) concerns | Chechele: (implicit) if PVFCs are loans then no derivative purchase/sale occurred | Sperlings: characterizing as loans would enable circumvention of §16(b) through economically equivalent devices | Court: PVFCs are derivatives (SEC and precedent so treat them); treating them as loans would allow manipulation, so derivative analysis governs |
Key Cases Cited
- Roth v. Goldman Sachs Grp., Inc., 740 F.3d 865 (2d. Cir. 2014) (expiration of a call option is deemed a purchase by the writer for §16 matching)
- Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d. Cir. 2012) (hybrid derivative rule: purchase occurs when price becomes fixed because that is last opportunity to use inside information)
- Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305 (2d. Cir. 1998) (§16(b) requires a purchase and a sale within six months by an insider)
- Magma Power Co. v. Dow Chem. Co., 136 F.3d 316 (2d. Cir. 1998) (exercise of a traditional derivative is a non-event for §16(b) purposes)
- Allaire Corp. v. Okumus, 433 F.3d 248 (2d. Cir. 2006) (expiration of an option cannot be matched against a transaction other than its own writing)
- At Home Corp. v. Cox Commc’ns Inc., 446 F.3d 403 (2d. Cir. 2006) (hybrid derivative contexts implicate insider timing risk)