Gibbons v. Malone
2013 U.S. App. LEXIS 398
2d Cir.2013Background
- Insider Malone sold Discovery Series C stock and simultaneously purchased Series A stock in late 2008.
- Series A has voting rights; Series C does not; they are separately registered and traded on NASDAQ (DISCA vs DISCK).
- The two securities are nonconvertible and not economically equivalent; prices fluctuated with Series A generally higher but not always.
- Gibbons sued seeking disgorgement of profits under §16(b) for the alleged short-swing profits from these paired transactions.
- District Court dismissed the complaint under Rule 12(b)(6) for lack of a viable §16(b) claim, citing singular “equity security” language and nonconvertibility.
- The instant appeal asks whether §16(b) applies when an insider trades different stock types in the same issuer, which are separately traded and nonconvertible.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §16(b) apply to short-swing profits from sale and purchase of different stock types by the same insider? | Gibbons argues stocks are economically equivalent; thus pairable. | Malone/Discovery argue §16(b) requires the same security; here securities are distinct. | No §16(b) liability for nonpairable, nonconvertible, separately traded stock types. |
| Are Series A and Series C the same security for §16(b) purposes because economically equivalent? | Securities are economically equivalent; could be paired. | Distinct voting rights and nonconvertibility treat them as different securities. | Not the same security; voting rights and nonconvertibility prevent pairing. |
| Should the court adopt a broader “similarity” rule to permit pairing under §16(b)? | сер argues similarity should suffice. | Text and purpose favor a strict, mechanical rule; similarity not enough. | Rejects similarity approach; §16(b) applies only to the same security. |
Key Cases Cited
- Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976) (short-swing applies to a pair of transactions)
- Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943) (pairing of transactions within six months)
- Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012) (applies to pairing and economic equivalence considerations)
- Lamb v. E.F. Hutton & Co., 363 F.2d 507 (2d Cir. 1966) (economic equivalence concept in convertibles; price relation concerns)
- At Home Corp. v. Cox Communications, Inc., 446 F.3d 403 (2d Cir. 2006) (ambiguous §16(b) terms interpreted to serve congressional purpose)
- Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418 (1972) (statutory purpose to curb short-swing speculation; mechanical rule)
- Gund v. First Florida Banks, Inc., 726 F.2d 682 (11th Cir. 1984) (convertibility as a factor in §16(b) liability (inapplicable here))