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District Court Retroactively Applies the SEC's 2005 Amendment to Rule 16b-3 Instead of Applying Levy

Posted In Securities

Tinney v. Geneseo Communications, Inc., C.A. No. 03-1126-SLR (D. Del. Oct. 10, 2006). In this securities action, the shareholder of a parent company, Airgate, brought a claim against the principal shareholders (the defendants) of a wholly owned subsidiary called iPCS for "short-swing trading" under Section 16(b) of the Exchange Act. Airgate purchased iPCS in a stock deal, in which the defendants received .1594 shares of Airgate common stock per iPCS share. Within six months of the transaction, though, the defendants sold nearly 4 million of their newly issued shares. Plaintiff argued that these sales constituted "short-swing trades" and sought damages in the amount of any profits realized. Defendants, in turn, brought a motion for judgment on the pleadings. The Court ended up denying defendants' motion on the ground that a number of material issues of fact remained in the case. Nonetheless, in route to this holding based on the facts, the Court did resolve an interesting legal question involving federal securities law and Third Circuit precedent.

Defendants argued that their actions were exempt under Rule 16b-3, which precludes liability for short-swing trades in certain circumstances for transactions between an issuer and its officers and directors. Plaintiff, however, argued that defendants' transactions were not exempt under Rule 16b-3, citing the Third Circuit opinion of Levy v. Sterling Holding Co., 314 F.3d 106 (3d Cir. 2002), which interpreted Rule 16b-3 to require a compensatory element. (And no such compensatory element existed in this case.) Defendants responded by arguing that Levy was not applicable: the SEC disagreed with the decision and consequently amended Rule 16b-3 in 2005 to more clearly state that it did not contain a compensatory requirement. The legal question before the Court, then, was whether the defendants' transactions, which occurred in 2001, were controlled by the Levy Court's interpretation of the unamended version of Rule 16b-3 or the SEC's 2005 "retroactive clarification." The Court held that the 2005 amendment controlled and could be given retroactive force, since it merely stated the agency's view of what existing law required. It was not a retroactive rule change meant to alter existing legal rights and obligations.

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