Second Circuit Dismisses Short-Swing Profit Claim

In a case of first impression, the Second Circuit in Gibbons v. Malone, No. 11–3620–cv, 2013 WL 57844 (2d Cir. Jan. 7, 2013) declined to apply Section 16(b) of the Securities Exchange Act of 1934, more commonly known as the "short-swing profit rule," to a corporate insider transaction involving shares of two different classes of stock of the same issuer. By doing so, the Second Circuit signaled that, absent any SEC guidance to the contrary, it would strictly adhere to the statutory text of the federal securities laws. The decision also sheds light on what security transactions will fall within the statute's purview.

Section 16(b) was designed to prevent insiders from profiting through the use of material non-public information when trading in a company's securities. The relevant text of the statute provides as follows: