United States District Court, S.D. New York
March 31, 2004.
ALLAIRE CORPORATION, Plaintiff, -against- AHMET H. OKUMUS, OKUMUS CAPITAL, LLC, OKUMUS OPPORTUNITY FUND, LTD., OKUMUS TECHNOLOGY VALUE FUND, LTD., OKUMUS ADVISORS, LLC, OKUMUS OPPORTUNITY PARTNERS, LP, OKUMUS TECHNOLOGY ADVISORS, LLC, and OKUMUS TECHNOLOGY VALUE PARTNERS, LP, Defendants
The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge
This is an action by plaintiff Allaire Corporation brought against
various shareholders for failure to comply with the forfeiture provision
of Section 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78a et seq. Allaire is a public company whose common stock was
traded on the Nasdaq National Market during all relevant times. Defendant
Ahmet H. Okumus is alleged to have directly or indirectly controlled each
of the other defendant corporations. Okumus is the managing member of
defendants Okumus Capital, LLC ("OC"), Okumus Advisors, LLC ("OA"), and
Okumus Technology Advisors, LLC ("OTA"). Defendant OC in turn is the
investment manager of defendants Okumus Opportunity Fund, Ltd. and Okumus
Technology Value Fund, Ltd. OA is a general partner and investment
advisor of defendant Okumus
Technology Value Partners, LP. OTA is the general partner and
investment advisor of defendant Okumus Technology Value Partners, LP.
In sum, plaintiff alleges that defendants, while owners of sufficient
Allaire stock to be considered statutory "insiders," made, within six
months, a purchase and sale of Allaire stock. Plaintiff alleges that this
purchase and sale resulted in profits that, under Rule 16(b) of the
Exchange Act, must be disgorged to plaintiff.
Defendants move to dismiss the complaint for failure to state a claim.
The motion is granted.
The following facts, taken from the complaint, are undisputed unless
The complaint alleges that on November 17, 2000 defendants sold one or
more call options in Allaire stock at a price of $7.50, set to expire on
December 16, 2000. Call options give the buyer of the option the ability
to purchase the underlying stock at a specified price until the
expiration date. Call options are a type of "derivative security," so
named because the value of the option is derived from the price of the
underlying stock. The buyer of a call option holds a "call equivalent
position," which increases in value as the value of the underlying equity
increases. The seller of a call option holds a corollary "put
equivalent position," which increases in value as the value of the
underlying security falls. As will be explained in greater detail below,
the Exchange Act applies special rules to the purchase and sale of
derivative securities by statutory insiders.
The complaint alleges that on November 30, 2000 defendants filed a
Schedule 13G with the Securities and Exchange Commission ("SEC"). The 13G
stated that as of November 20, 2000 defendants were collectively the
beneficial owners of 16.1% of the 27, 411, 078 shares of Allaire common
stock outstanding on November 20. Thus, as will be explained in greater
detail below, the complaint alleges that as of November 20 defendants
were statutory insiders with respect to their Allaire holdings, pursuant
to Section 16(b) of the Exchange Act.
On December 16, 2000 the call options expired unexercised. The
complaint alleges that this event constituted a purchase of stock by
defendants. Defendants dispute this characterization.
The complaint alleges that on January 16, 2001 defendants again sold
one or more call options exercisable immediately at a strike price of
$7.50, with an expiration date of February 16, 2001. The complaint
alleges that this event constituted a sale of stock that may be paired,
pursuant to the Exchange Act, with the expiration of the prior call
option, in order to constitute a purchase and sale of Allaire stock
within six months. Defendants dispute this characterization.
The call options were exercised on February 16, 2001.
On February 28, 2001 defendants filed with the SEC an amendment to the
Schedule 13G filed in November, stating that defendants beneficially
owned no shares of Allaire Common Stock.
Section 16(b) of the Exchange Act provides:
For the purpose of preventing the unfair use of
information which may have been obtained by [a]
beneficial owner, director, or officer by reason
of his relationship to the issuer, any profit
realized by him from any purchase and sale, or any
sale and purchase, of any equity security of such
issuer (other than an exempted security) within
any period of less than six months . . . shall
inure to and be recoverable by the issuer,
irrespective of any intention on the part of such
beneficial owner, director, or officer in entering
into such transaction of holding the security
purchased or of not repurchasing the security sold
for a period exceeding six months. . . . This
subsection shall not be construed to cover any
transaction where such beneficial owner was not
such both at the time of the purchase and sale, or
the sale and purchase, of the security involved
. . . .
15 U.S.C. § 78p(b). Section 16(a) of the Exchange Act defines
"beneficial owner," as referred to in Section 16(b), as any person "who
is directly or indirectly the beneficial owner of more than 10 per centum
of any class of any equity security (other than an exempted security)
which is registered pursuant to section 781 of this title." Id.
§ 78p(a). Thus, Section 16 creates a class of statutory "insiders"
who are prevented from reaping "short-swing profits based on access to
inside information." Kern County Land Co. v. Occidental
Corp., 411 U.S. 582
, 594 (1973). The statute is a
no-fault, strict liability provision with respect to transactions that
fall "within its narrowly drawn limits." Foremost-McKesson. Inc. v.
Provident Securities Co., 423 U.S. 232
, 251 (1976); see
also, Gwozdzinsky v. Zell/Chilmark Fund, L.P.,
156 F.3d 305
, 310 (2d Cir. 1998).
In 1991 the SEC amended its rules to clarify the applicability of
Section 16(b) to derivative securities. Rule 16a-4 specifies that, except
for reporting purposes, "[f]or purposes of section 16 of the Act, both
derivative securities and the underlying securities to which they relate
shall be deemed to be the same class of equity securities."
17 C.F.R. § 240.16a-4. Rule 16b-4 sets forth a fairly complex scheme for how
purchases or sales of derivative securities are to be counted under
Rule 16(b), which is relevant to set forth in some detail:
(a) The establishment of or increase in a call
equivalent position or liquidation of or decrease
in a put equivalent position shall be deemed a
purchase of the underlying security for purposes
of section 16(b) of the Act, and the establishment
of or increase in a put equivalent position or
liquidation of or decrease in a call equivalent
position shall be deemed a sale of the underlying
securities for purposes of section 16(b) of the
Act. . . .
(b) The closing of a derivative security position
as a result of its exercise or conversion shall be
exempt from the operation of section 16(b) of the
Act, and the acquisition of underlying securities
at a fixed exercise price due to the exercise or
conversion of a call equivalent position or the
disposition of underlying securities at a fixed
exercise price due to the exercise of a put
equivalent position shall be exempt from the
operation of section 16(b) of the Act.
. . .
(d) Upon cancellation or expiration of an option
within six months of writing of the option, any
profit derived from writing the option shall be
recoverable under section 16(b) of the Act. The
profit shall not exceed the premium received for
writing the option. The disposition or closing of
a long derivative security position, as a result
of cancellation or expiration, shall be exempt
from section 16(b) of the Act where no value is
received from the cancellation or expiration.
17 C.F.R. § 240.16b-6.
Contemporaneous commentary by the SEC on these amendments clarified
that the Rules require that the acquisition or disposition, rather than
the exercise, of a derivative security be deemed the significant event
under 16(b). See Ownership Reports and Trading by Officers,
Directors and Principal Security Holders, Final Rules and Solicitation of
Comments, 56 Fed. Reg. 7242, 7248-49, 7253 (Feb. 21, 1991). This is
the exercise of a derivative security, much like
the conversion of a convertible security,
essentially changes the form of beneficial
ownership from indirect to direct. Since the
exercise represents neither the acquisition nor
the disposition of a right affording the
opportunity to profit, it should not be an event
that is matched against another transaction in the
equity securities for purposes of section 16(b)
short-swing profit recovery.
Id. at 7249. The Second Circuit reaffirmed this rationale
in Magma Power Co. v. Dow Chemical Co., 136 F.3d 316
1998), explaining that "the acquisition or disposition of the option is
the point at which the inside information may be advantageous, [so] the
SEC's regime regards it as the triggering event under
Section 16(b)." Id. at 322. By contrast, "the exercise
of a fixed-price option is a non-event for 16(b) purposes . . . . because
the insider by then is already bound by the terms of the option, [so] the
potential for abuse of inside information is minimal." Id.
Thus, Rule 16b-6(a)'s reference to the establishment or liquidation of
call or put positions designates acquisition or disposition of an option
as the relevant events under Section 16(b). This is clarified by the
express language of Rule 16b-6(b), which exempts from Section 16(b) the
disposition of a derivative position based on the exercise or conversion
of such position. See id.
It is clear from the above discussion that plaintiff's interpretation
of Rule 16b-6 misconstrues its applicability to the instant transaction.
Plaintiff argues that the December 16 expiration of the call option must
be construed as a "purchase" by defendants, because it was a "liquidation
of . . . a put equivalent position" within the meaning of Rule 16b-6(a).
However, only the November 17 sale of the call option, not its December
16 expiration, can come within Rule 16b-6(a). This is because it was the
November 17 sale that bound defendants to the terms of the option, and
therefore was the point at which any inside information possessed by the
defendants might have been advantageous. Under the reasoning of the
Magma Power case, if those options had been exercised on
December 16 it would have
been a "non-event" because the exercise itself could not be driven
by inside information possessed by the defendants. This logic is equally
applicable to the expiration of the call options in this case.
Of course, as noted above, the defendants were not in fact insiders on
November 17, because they did not acquire sufficient Allaire stock until
November 20. Therefore, the November 17 call option sale was not a sale
covered by Section 16(b). A fortiorari, the expiration of the
call options on December 16 was also irrelevant under Section 16(b).
Therefore, the December 16 expiration cannot be matched with the
writing of the January 16 call option for purposes of recovering
defendants' profits from that transaction. For this reason, plaintiff
fails to state a claim under Section 16(b).
For the reasons set forth, defendants' motion to dismiss for failure to
state a claim is granted.
© 1992-2004 VersusLaw Inc.