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Olagues v. Icahn

United States Court of Appeals, Second Circuit

August 3, 2017

JOHN OLAGUES, Plaintiff-Appellant,
v.
CARL C. ICAHN, HIGH RIVER LIMITED PARTNERSHIP, ICAHN PARTNERS LP, ICAHN PARTNERS MASTER FUND LP, ICAHN PARTNERS MASTER FUND II LP, ICAHN PARTNERS MASTER FUND III LP, Defendants-Appellees

          Argued: December 14, 2016

          Jack G. Fruchter (Mitchell M.Z. Twersky, Cassandra Porsch, on the brief), Abraham Fruchter & Twersky, LLP, New York, NY, for Plaintiff-Appellant.

          Herbert Beigel (Robert R. Viducich, Law Office of Robert R. Viducich, New York, NY, on the brief), Law Offices of Herbert Beigel, Tucson, AZ, for Defendants-Appellees.

          Before: CALABRESI, CABRANES, and LOHIER, Circuit Judges.

          LOHIER, CIRCUIT JUDGE

         John Olagues appeals from a judgment of the United States District Court for the Southern District of New York (Gregory H. Woods, J.) dismissing his actions on behalf of three public companies. Olagues seeks disgorgement of "short-swing" profits under Section 16(b) of the Securities Exchange Act of 1934 from investment entities controlled by Carl C. Icahn. In contracts with various third parties, Icahn sold put options and collected cash premiums as consideration. Because the put options were cancelled unexercised within six months, Section 16(b)'s implementing regulations required Icahn to disgorge the amount of the premiums. Olagues contends that Icahn also should have disgorged the "value" from alleged discounts that Icahn received on purchases of related call options. We AFFIRM.

         John Olagues, a shareholder in three public companies-Herbalife, Ltd., Hologic Inc., and Nuance Communications, Inc. (together, the "Companies")- seeks disgorgement of "short-swing" profits under Section 16(b) of the Securities Exchange Act of 1934 from investment entities controlled by Carl C. Icahn (together, "Icahn" or the "Icahn Entities"). In contracts with various third parties, Icahn sold put options based on the stock price of the Companies and collected cash premiums as consideration. Because the put options were cancelled unexercised within six months of their sale, Section 16(b)'s implementing regulations required Icahn to disgorge the amount of the premiums to the Companies, which he did. In addition to the cash consideration already disgorged, Olagues contends that Icahn also should have disgorged the "value" of alleged discounts that Icahn received on purchases of related call options. The United States District Court for the Southern District of New York (Woods, J.) dismissed Olagues's actions on behalf of the Companies under Rule 12(b)(6) of the Federal Rules of Civil Procedure. On appeal, we AFFIRM the District Court's dismissal because Olagues has not plausibly alleged that Icahn failed to disgorge all of the premiums received for writing (that is, selling) the put options.

         Background

         Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), 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. See Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). "We have explained that liability under Section 16(b) does not attach unless the plaintiff proves that there was (1) a purchase and (2) a sale of securities (3) by an [insider] (4) within a six-month period." Chechele v. Sperling, 758 F.3d 463, 467 (2d Cir. 2014) (quotation marks omitted). The parties do not dispute that the Icahn Entities were, during the relevant time period, statutory insiders subject to Section 16(b) because they owned ten percent or more of the outstanding common stock of the Companies. See 15 U.S.C. § 78p(a)(1). Section 16(b) imposes a form of strict liability and requires disgorgement even if the insider does not use or intend to profit from inside information. See Roth v. Goldman Sachs Grp., Inc., 740 F.3d 865, 869 (2d Cir. 2014).

         Olagues's allegations focus on Icahn's writing of put options and purchases of related call options[1] that derived their value from the underlying stock prices of the Companies. The Securities and Exchange Commission (SEC) has promulgated regulations applying Section 16(b) to derivative securities such as put and call options. See 17 C.F.R. § 240.16b-6. Rule 16b-6(d) applies where the insider receives a premium for writing an option that is cancelled or expires unexercised within six months. The rule provides in relevant part:

Upon cancellation or expiration of an option within six months of the 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.

17 C.F.R. § 240.16b-6(d). Rule 16b-6(d) "is designed to prevent a scheme whereby an insider with inside information favorable to the issuer writes a put option, and receives a premium for doing so, knowing, by virtue of his inside information, that the option will not be exercised within six months." Gwozdzinsky, 156 F.3d at 309. "Thus, under Rule 16b-6(d), any insider who writes a put option on securities of the issuer is liable under Section 16(b) to the extent of any premium received for writing the option if the option is either canceled or expires unexercised within six months of its writing . . . ." Id.

         Olagues seeks disgorgement of premiums that the Icahn Entities received for writing put options that were cancelled within six months. Each put option gave Icahn's counterparty the option to force Icahn to buy shares in the Companies at a fixed price on a certain date. Olagues alleges that each put option also had a "corresponding" call option. App'x 18.[2] Icahn's counterparty was the same for each "corresponding" option pair: for example, Icahn would sell a put option for x shares in Herbalife to a counterparty and buy a call option for x shares in Herbalife from the same counterparty.[3] Icahn wrote only "European style" put options, which permitted the counterparty to exercise the put option only on a specific expiration date. By contrast, Icahn bought only "American style" call options, which permitted Icahn to exercise the call option at any time through an expiration date.[4] For each option pair, the expiration date of the put option matched the expiration date of the call option, and the options shared the same "exercise price"-that is, the price paid per share upon exercise of the option. According to the governing option contracts, the exercise of a call option automatically cancelled the corresponding put option. If Icahn exercised call options for 500 shares, for example, the corresponding put options for 500 shares would immediately be cancelled.

         Taking the Herbalife transactions as an example, Olagues alleges that over the course of three days in February 2013, Icahn sold put options in 3, 230, 606 shares of Herbalife common stock, charging a premium of $0.01 per share to the counterparties. The expiration date of the put options was May 10, 2013, and the exercise price was $23.50. On those same three days in February, Icahn paid premiums to the same counterparties for corresponding call options in 3, 230, 606 shares of Herbalife. The expiration date of the ...


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