Olagues v. Icahn
2017 U.S. App. LEXIS 14236
| 2d Cir. | 2017Background
- Plaintiff John Olagues brought three consolidated Section 16(b) actions on behalf of public companies (Herbalife, Hologic, Nuance) alleging Icahn Entities made short-swing profits from paired option transactions.
- Icahn wrote European-style put options (cancelable only on expiration) and bought corresponding American-style call options from the same counterparties, with matching exercise prices and expiration dates; exercising a call automatically cancelled the put.
- Icahn reported and disgorged $0.01 per share for written puts that were cancelled within six months; put cancellations occurred shortly after he exercised the calls.
- Olagues alleged the Icahn Entities received additional, unreported consideration in the form of discounts on call premiums (compared to open-market option prices) and sought disgorgement of that difference.
- The district court dismissed under Rule 12(b)(6) for failure to plausibly allege disgorgement shortfall; the Second Circuit reviewed de novo and affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Rule 16b-6(d) require disgorgement of unreported “discounts” on related call premiums as additional consideration for writing puts? | Olagues: discounts on call premiums were effectively additional consideration for writing the puts and must be disgorged. | Icahn: only the actual premium received for the written puts is recoverable; no additional consideration was received for writing the puts. | Held: No plausible allegation that Icahn failed to disgorge the full premium received for writing the puts; claim dismissed. |
| Are open-market option prices meaningfully comparable to the paired, bespoke option contracts Icahn used? | Olagues: open-market option prices show the Icahn transactions underpriced puts and underpaid calls. | Icahn: open-market contracts are standalone American options and not comparable to paired contracts that effectively bound share exchange. | Held: Open-market contracts are not meaningfully comparable; complaint fails to plausibly allege a discount was received. |
| Does exercise of the call (which cancels the put) defeat the Rule 16b-6(d) concern and convert the transaction into a purchase for 16(b) analysis? | Olagues: cancellation triggered disgorgement under Rule 16b-6(d) and additional disgorgement may be warranted. | Icahn: exercising calls caused the underlying shares to change hands (purchase), so the SEC’s concern about retaining premium for an option known to be unexercised is not present. | Held: Because the calls were exercised and shares changed hands, no additional short-swing profit (beyond the reported premium) is plausibly alleged; the SEC’s core concern was not implicated. |
| At the pleading stage, did Olagues allege sufficient facts about market availability/volume to support his open-market comparison theory? | Olagues: alleged open-market prices support the inference of discounts. | Icahn: complaint lacks allegations about market volume/availability at those prices for the large blocks involved. | Held: Complaint fails to allege volume/availability; comparisons insufficient to state a plausible claim. |
Key Cases Cited
- Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305 (2d Cir. 1998) (purpose of Rule 16b-6(d) to prevent insiders from keeping premiums when options will not be exercised)
- Chechele v. Sperling, 758 F.3d 463 (2d Cir. 2014) (Section 16(b) requires purchase and sale within six months; exercise of fixed-price option is a "non-event" for 16(b) treatment)
- Roth v. Goldman Sachs Grp., Inc., 740 F.3d 865 (2d Cir. 2014) (Section 16(b) is strict liability; insider need not have used inside information)
- Allaire Corp. v. Okumus, 433 F.3d 248 (2d Cir. 2006) (recoverable amount is what purchaser paid the insider for the option)
- Herrmann ex rel. Walt Disney Prods. v. Steinberg, 812 F.2d 63 (2d Cir. 1987) (court remanded where compensation characterization appeared artificial)
- Mendell ex rel. Viacom, Inc. v. Gollust, 909 F.2d 724 (2d Cir. 1990) (broad, pragmatic approach to Section 16(b))
- Magma Power Co. v. Dow Chem. Co., 136 F.3d 316 (2d Cir. 1998) (exercise of fixed-price option treated as non-event for 16(b); insider already bound)
- Newmark v. RKO Gen., Inc., 425 F.2d 348 (2d Cir. 1970) (disgorgement required for all consideration received, cash or property)
Affirmed.