The US Court of Appeals for the Second Circuit has held that Section 16(b) of the Securities Exchange Act of 1934 does not apply to a transaction where an insider buys and sells shares of different types of stock in the same company when those securities are separately traded, nonconvertible, and have different voting rights.

Defendant, a director of Discovery Communications, Inc., purchased Discovery’s “Series A” stock and sold its “Series C” stock within a thirteen-day period in 2008. Plaintiff asserted a claim under Section 16(b), arguing that the defendant was required to disgorge his profits. The District Court dismissed the complaint.

In affirming the District Court opinion, the Second Circuit reasoned that Congress’s use of the singular term “any equity security” in the statute supported an inference that transactions involving different equity securities cannot be paired. The Second Circuit rejected plaintiff’s argument that the stocks were the same security because they were “economically equivalent.” Instead, the court found that the shares were distinct in “substance” because Series A conferred voting rights and Series C did not. Additionally, the Second Circuit held that because the two securities were not convertible, the principle of “economic equivalence” was irrelevant and the securities could not be paired under Section 16(b).

Plaintiff also failed to persuade the court that his claim was viable because the two securities were “sufficiently similar.” Although the court acknowledged the plausibility of this interpretation because Section 16(b) is not explicit that purchases and sales must be of stocks in the same class, it “decline[d] to go down this road absent SEC direction.”

Gibbons v. Malone, No. 11-3620-cv (2d Cir. Jan 7, 2013).