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Violationsof

Section 16 b) of the Securities Act of 1934

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Section 16 b) requires that when there is a non-exempt sale and a non-exempt purchase of issuer securities with in 6 months, by officers or directors or holders of 10% or more of the issuer stock, any profits that result are recoverable by the issuer.

If the issuer refuses to recover the profits by demand or suit after notification 60 days prior to the suit, any owner of stock at the time can sue the 16 b violator to recover the profits for the issuer in a private right of action. It is not a derivative suit and does not have to meet pleading requirements of FRCP 23.1. The suit can be made by a shareholder suing pro se. The suit is a strict liability suit with no need to prove intent by the defendant.

The following slides 3 and 4 give hypothetical examples of such violations.

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Mr. Emeral, CEO of XYZ Company

Mr. Emerald executes a non-exempt buy of 121,000 shares of stock on July 20, 2012 at $34.50Mr. Emerald executes a non-exempt sale of 121,000 shares of stock on January 13, 2013 at $45.50

He would owe 121,000 x $11 = $1,321,000 to XYZ and could be sued by anyone who owns XYZ stock on the day of the 16 b suit.

Attorney(s) for the shareholder can earn legal fees and others who assisted the attorney can also receive fees from the issuer for such recovery.

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Mr. Emeral CEO of XYZ company

Mr. Emerald executes a non-exempt sale of 355,000 shares of stock on March 2, 2012 at $40.50Mr. Emerald executes a non-exempt buy of 355,000 shares of stock on July 20, 2012 at $34.50

He would owe 355,000 x $6 = $2,130,000 to XYZ and could be sued by anyone who owns XYZ stock on the day of the 16 b suit to enforce the recovery.

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If any of the 4 transactions in the above two slides were exempt from 16 b, those exempt transactions are not matched with any of the other transactions for a 16 b violation. And for 16 b purposes the exempt transactions are considered non existent

Now what would make any of the 4 transactions exempt from 16 b?The answer is that the SEC has issued rules that exempt certain transactions from being included as a matched trade.

Those exempt trades are generally transactions with the issuer and are approved in advance with sufficient specificity by a proper committee of the Board of Directors.

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Grants of Employee Stock Options, SARs, Restricted Stock, and Restricted Stock Units are considered purchases for 16 b purposes.

Purchases of traded calls and over the counter calls are considered purchases for 16 b purposes. Purchases of warrants, convertible bonds, notes and preferred stock are also considered purchases for 16 b. Sales of puts are considered purchases for 16 b.

Sales of stock or calls, purchases of puts, sales of warrants, convertible bonds, notes and preferred stock are considered sales for 16 b.

Whether the transactions above are exempt from 16 b depends on several considerations. The SEC has made rules giving certain of these exemptions. When transactions are exempt from 16 b, it means that they do not exist for 16 b purposes.

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SEC Rule 16 b-3(d) generally makes grants of Equity Compensation in the form of Employee Stock Options and SARs, Restricted Stock and Restricted Stock Units, by the issuer to the section 16 executives, exempt from 16 b.

However, it is possible that the grants Employee Stock Options and SARs, Restricted Stock and Restricted Stock Units made by the issuer to executives can be non-exempt. But this is very rare. Effectively, when grants of equity compensation are made, the grants are generally exempt from 16 b, although Rules 16 b-3(d) and 16 b-3(e) exemptions do not apply for those subject to 16 b only as a holder of 10 % or more of the stock.

However, when the issuer stock from equity compensation grants is received and sold, the sale can be non exempt or exempt. The exemption depends on to whom the sales are made and whether there was proper approval by the compensation committee prior to the sale.

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Purchases from the issuer of warrants, convertible bonds, notes and preferred stock are often exempt from 16 b via 16 b-3-(d). This depends on when the terms of the warrants, convertible bonds, notes and preferred stock are fixed and whether there is prior approval by the issuer.

But sometimes when the exercise prices or conversion prices are not fixed prior but float, the actual conversion or exercise becomes the purchase which can be exempt or non exempt.

And sometimes convertible bonds, notes and preferred stock have provisions in the indenture agreements which allow the conversion to be made at the discretion of the issuer. This brings up the question whether the conversion by the issuer becomes the purchase because of a non fixed exercise or conversion price or it may be an entirely new purchase for 16 b purposes.

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So with slides 3-8 in mind, lets consider some different hypothetical trades by Mr. Emerald.

Assume that the sale that he made of 121,000 shares on January 13, 2013 was a transaction to the issuer XYZ of stock received as a result of an exercise of some employee stock options granted by the issuer XYZ. The grant was six years prior to the exercise. The sale to XYZ was to pay the exercise price immediately after the exercise and designated as an “F” transaction.

Was this transaction exempt from 16 b? And if so under what legal authority?

It may or may not be exempt. It depends on whether the disposition to the issuer is sufficiently specific in the approval by a proper board prior to the disposition.

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Now looking at the transaction in slide 4, where Emerald sold 355,000 shares, assume that the sale was to the issuer, XYZ and its purpose was for a tax liability that may have been occurred when 700,000 shares of Restricted Stock vested.

Was the sale of the 355,000 shares exempt from 16 b via 16 b-3(e)? And if so, under what authority?

Did he have a tax liability on Mar 2, 2012 or was it differed for perhaps up to 6 months pursuant to IRC 83 c-3. Can he get an exemption for a tax withholding prior to his incurring a tax liability?

I doubt that a transfer of stock to the company to pay today a tax liability that may occur 5 months, if at all, after the exercise of ESOs, or vesting of Restricted Stock can be approved by a compensation committee.

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When transactions by executives are not exempt from 16 b, when thought to be exempt, there can be quite large penalties to the executives if someone identifies the 16 b violation and prosecutes the violation.

Call me for guidlines on this very complicated subject.

John Olagues504-875-4825olagues@gmail.comhttp://truthinoptions.net