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 ...