Securities Regulation Daily Wrap Up, BENEFICIAL OWNERSHIP—2d Cir.: Second Circuit rejects novel insider trading theory, (May 28, 2025)

By Elena Eyber, J.D.

The Second Circuit ruled that corporate share repurchases cannot be paired with insider sales for liability under Section 16(b), affirming dismissal of claims.

The Court of Appeals for the Second Circuit rejected a novel legal theory proposed by plaintiff-appellant Andrew Roth under Section 16(b) of the Securities Exchange Act. Section 16(b) requires corporate insiders to disgorge profits from paired purchases and sales of an issuer’s equity securities that occur within a six-month period. Roth attempted to apply this rule to situations where controlling shareholders sold shares while the corporations they controlled were repurchasing shares. However, the Second Circuit held that these repurchases, under applicable state law, transform outstanding securities into treasury shares and thus are fundamentally different from market sales by insiders. Therefore, the transactions cannot be paired under Section 16(b), and the Second Circuit affirmed the dismissals issued by two different district courts (Roth v. LAL Family Corporation, No. 24-2464-cv; Roth v. Drahi, No. 24-2761-cv (2d Cir. May 23, 2025)).

The Second Circuit rejected Roth’s theory because it misapplied the strict nature of Section 16(b). The statute aims to prevent insider trading by allowing shareholders to identify improper short-swing profits through public disclosures. Yet Roth sought to treat issuer repurchases as equivalent to insider purchases, which is inconsistent with how these transactions are treated under Delaware law. The appeals arose from two cases with virtually identical facts and legal arguments, both dismissed by district courts in the Southern and Eastern Districts of New York. The Second Circuit found the theory invalid and held that repurchases by an issuer are not of the same kind as purchases or sales by insiders.

The Second Circuit outlined five primary reasons for rejecting Roth’s argument. First, controlling shareholders do not have beneficial ownership over shares repurchased by the issuer, as required under SEC regulations. Second, the securities involved in the two types of transactions are not substantively identical. Third, these differences eliminate the possibility of realizing a profit. Fourth, the remedy of disgorgement to the issuer is inapplicable when the issuer is itself one of the actors in the transaction. Finally, the theory fails under the statute's strict liability framework because the transactions at issue do not clearly fall within the scope of Section 16(b). Therefore, the Second Circuit affirmed the dismissals.

Judge Calabresi concurrence. Judge Calabresi concurred in the judgment but wrote separately, expressing that much of the majority's detailed reasoning was unnecessary. Calabresi emphasized the importance of clarity in applying strict liability under Section 16(b), noting that past rulings have cautioned against imposing such liability based on ambiguous statutory language. Calabresi acknowledged potential for abuse in the kinds of transactions Roth identified but argued for a narrow ruling to leave room for future regulatory or legislative action. Calabresi cautioned that the court’s decision should not be read to preclude future reforms by Congress or the SEC to address possible insider abuses in similar contexts.

The case is Nos. 24-2464-cv and 24-2761-cv.

Judge: Jacobs, D.

Attorneys: Glenn F. Ostrager (Ostrager Chong Flaherty & Broitman PC) for Andrew E. Roth. Zachary D. Tripp (Weil, Gotshal & Manges LLP) for Lal Family Corp. and Lal Family Partners L.P.

Companies: Lal Family Corp.; Lal Family Partners L.P.

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