Traps for the Unwary: Section 16 Issues for Hedge Fund Managers to Consider

Highlights

• Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") applies not only to directors and officers but also to institutional investors. Institutional investors have been subject to numerous lawsuits under Section 16 seeking hundreds of millions of dollars in damages for engaging in "short-swing" transactions – that is, purchases and sales, or sales and purchases within six months.

• An institutional investor can become subject to Section 16 in two ways:
• by having a representative serve on the Board of Directors of the issuer; or

• by acquiring 10% of the issuer’s stock or being deemed part of a group that collectively owns more than 10% of the issuer’s stock.