Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on insiders whose purchases and sales of securities result in “short-swing profits,” i.e., profits realized from the purchase and sale (or sale and purchase) of a company’s shares within a six-month period. “Insiders” include directors, officers and “beneficial owners” of more than 10 percent of a company’s registered securities—namely, persons who exercise voting or investment control over, and hold a pecuniary interest in, more than 10 percent of a company’s registered securities. Section 16(b) aims to prevent these insiders from engaging in speculative transactions on the basis of information not available to others.
On Jan. 20, 2012, the 2nd Circuit held that a beneficial owner’s acquisition of securities directly from an issuer—at the issuer’s request and with the board’s approval—is covered by Section 16(b), and that limited partnerships are beneficial owners for the purposes of Section 16(b) liability, notwithstanding their delegation of voting and investment control over their securities portfolios to their general partners’ agents. (See Huppe v. WPCS Intern. Inc., --- F.3d ---, 2012 WL 164072 (2d. Cir. 2012).)
The Funds also argued that the limited partners’ delegation of exclusive power to vote and dispose of the Funds’ portfolio securities to their respective general partners, and then to Marxe and Greenhouse, precluded the Funds from being 10-percent holders under the SEC’s rules. They argued that Marxe and Greenhouse—who actually controlled the securities—were the only conceivable insiders with the ability to misuse inside information, and consequently they, but not the Funds, should be subject to the restrictions of Section 16(b).