The Second Circuit Court of Appeals has issued a limited, but potentially significant, ruling on disgorging short-swing profits. In Olagues v. Icahn, et al., the court affirmed the dismissal of a "short-swing" trading suit brought by a shareholder in Herbalife, Ltd., Hologic Inc. and Nuance Communications, Inc., against investment entities controlled by Carl C. Icahn ("Icahn" and the "Icahn Entities"). The plaintiffs had sought disgorgement of certain consideration that the Icahn Entities allegedly received in violation of Section 16(b) of the Exchange Act and regulations promulgated thereunder.

Section 16(b) of the Exchange Act aims to prevent corporate insiders, who are presumed to possess material information about the corporation, from earning short-swing profits by buying and selling securities within a six-month period. Exchange Act Rule 16b-6(d) applies where an insider receives a premium for writing (that is, selling) an option that is cancelled or expires unexercised within six months.

Here, the plaintiffs first acknowledged that the Icahn Entities disgorged premiums on certain put options that were cancelled unexercised within six months of their sale, as required by Section 16(b). They next alleged that the Icahn Entities should have also disgorged the "value" of alleged discounts that Icahn received on purchases of related call options. In affirming the district court's decision, the Second Circuit rejected this new argument and ruled that the plaintiff failed to state a plausible claim for additional disgorgement.

The court focused on the plaintiff's exclusive reliance on comparisons to options traded on the open market. The panel found that these open-market options had "no meaningful similarities to the options at issue here" and therefore concluded that the plaintiff failed to allege that the Icahn Entities disgorged less than the total amount of premiums they actually received. In issuing this ruling, the court emphasized the "limited nature" of its holding, because its conclusion that the complaint did not state a claim for relief reflected the plaintiff's exclusive reliance upon open-market options that were not truly comparable to the options at issue in this case.

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