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ALLAIRE CORPORATION v. OKUMUS

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

Opinion

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 Page 2 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 COMPLAINT

  The following facts, taken from the complaint, are undisputed unless otherwise noted.

  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 Page 3 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. Page 4

  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.

  DISCUSSION

  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 ...

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