Re:Tesla, Musk must face shareholder lawsuit over going-priv...
by tzs on Wednesday April 15, 2020 @07:43PM
(#22884506)
> Shareholder lawsuits against executives would be a better way of policing fraud, but they are uncommon, likely because they are not as lucrative for lawyers.
There is an interesting case where they were lucrative for lawyers. The government wanted to discourage "short swing" trading by executives and other insiders. That's a series of trades that includes both buying and selling.
The way they did this was the brilliant rule 16(b). That rule says that officers, directors, and people who own more than 10% of the shares in a company must turn over to the company any profits from short swing trading of the company's stock that occurs within a 6 month period.
So if Bob the CEO buys company stock at $100/share and a month later sells it at $120/share, Bob owes the company $20/share.
What makes it brilliant is:
1. If the company doesn't act and ask Bob to cough up that $20/share, and shareholder can sue Bob to make him do so,
2. If Bob loses, Bob will have to pay the attorney fees of that shareholder,
3. The shareholder did not have to be a shareholder at the time of Bob's trades. They only need to be a shareholder when they file the suit.
The people that 16(b) applies to are the same set of people who are required to publicly report their trades. There were law firms that would get those public reports in machine readable form, have a program go through them looking for people who profited from short swing trades, buy one share in those companies, and then sue. They easily would win, and Bob would have to pay his profits to the company, and the lawyers got to collect their fees from Bob.
And that's not even the worst of it for poor Bob. Suppose Bob had bought at $100, then sold at $90. If that's all he did, no problem because he had a loss, not a profit. But suppose that Bob then bought at $80 and sold at $70. Bob has suffered a loss of $20. No profit, so at least no 16(b) problem, right?
Not so fast. Suppose all four of those transactions took place inside of 6 months. The short swing profit calculation doesn't really care about timing. It just looks for the highest sale price and lowest purchase purchase price in the window and matches as many shares up at those prices as it can. Then do the same thing for the remaining shares, and so on, until as many shares as possible have been matched up.
Bob's buy $100/sell $90, buy $80/sell $70, which is a $20 loss according to Bob's bank account, would be seen as a $10 profit--the buy $80 would be matched with the sell $70. Bob ends up coughing up $10 to the company, on top of the $20 he actually lost, and whatever he has to pay the lawyers who sue him if it comes to that.
This turned out to be so effective at stopping officers, directors, and 10% shareholders from making money off of these short swing trades (or even from breaking even) that they largely stopped even trying--and with no enforcement cost to the SEC. Those people, if they want to trade in their own company's stock, have to pick a direction (buy or sell) and stick with that. If they want to change direction, they need to wait more than 6 months.
There is an interesting case where they were lucrative for lawyers. The government wanted to discourage "short swing" trading by executives and other insiders. That's a series of trades that includes both buying and selling.
The way they did this was the brilliant rule 16(b). That rule says that officers, directors, and people who own more than 10% of the shares in a company must turn over to the company any profits from short swing trading of the company's stock that occurs within a 6 month period.
So if Bob the CEO buys company stock at $100/share and a month later sells it at $120/share, Bob owes the company $20/share.
What makes it brilliant is:
1. If the company doesn't act and ask Bob to cough up that $20/share, and shareholder can sue Bob to make him do so,
2. If Bob loses, Bob will have to pay the attorney fees of that shareholder,
3. The shareholder did not have to be a shareholder at the time of Bob's trades. They only need to be a shareholder when they file the suit.
The people that 16(b) applies to are the same set of people who are required to publicly report their trades. There were law firms that would get those public reports in machine readable form, have a program go through them looking for people who profited from short swing trades, buy one share in those companies, and then sue. They easily would win, and Bob would have to pay his profits to the company, and the lawyers got to collect their fees from Bob.
And that's not even the worst of it for poor Bob. Suppose Bob had bought at $100, then sold at $90. If that's all he did, no problem because he had a loss, not a profit. But suppose that Bob then bought at $80 and sold at $70. Bob has suffered a loss of $20. No profit, so at least no 16(b) problem, right?
Not so fast. Suppose all four of those transactions took place inside of 6 months. The short swing profit calculation doesn't really care about timing. It just looks for the highest sale price and lowest purchase purchase price in the window and matches as many shares up at those prices as it can. Then do the same thing for the remaining shares, and so on, until as many shares as possible have been matched up.
Bob's buy $100/sell $90, buy $80/sell $70, which is a $20 loss according to Bob's bank account, would be seen as a $10 profit--the buy $80 would be matched with the sell $70. Bob ends up coughing up $10 to the company, on top of the $20 he actually lost, and whatever he has to pay the lawyers who sue him if it comes to that.
This turned out to be so effective at stopping officers, directors, and 10% shareholders from making money off of these short swing trades (or even from breaking even) that they largely stopped even trying--and with no enforcement cost to the SEC. Those people, if they want to trade in their own company's stock, have to pick a direction (buy or sell) and stick with that. If they want to change direction, they need to wait more than 6 months.