Supreme Court’s Credit Suisse Securities Decision Shields Corporate Insiders from Endless Liability for Short-Swing Profits Under § 16(b) of the Securities Exchange Act of 1934


Corporate officers and directors received some assurance from the Supreme Court on Monday that they will not be required to defend against decades-old claims to disgorge short-swing profits. In Credit Suisse Securities LLC v. Simmonds, the Supreme Court unanimously overturned a lower court decision that would have allowed shareholders to sue insiders for “short-swing” profits under § 16(b) of the Securities Exchange Act of 1934 for an indefinite period of time so long as Forms 4 describing the transactions were not filed, and regardless of whether the plaintiff knew of the challenged conduct. The Supreme Court’s decision prevents significant erosion of § 16(b)’s statute of limitations and provides officers and directors with some protection against stale claims.

Section 16(b) imposes “strict liability” on any officer, director, or beneficial owner of a public company who realizes profits from the purchase and sale of the corporation’s securities within a six-month time period. This “short-swing profits” rule allows shareholders to sue for disgorgement of any profits realized in such a sale, whether the transactions were conducted with any improper purpose or not. The rule is intended to act as a broad prophylactic against the “unfair use of information” by corporate insiders. A well-organized plaintiffs’ bar actively monitors public reports of insiders’ securities transactions in order to pursue such disgorgement claims.

In 2007, Vanessa Simmonds filed 55 actions against the underwriters of initial public offerings in the late 1990s and 2000. She alleged that corporate insiders and the underwriters conspired to drive up the price of the securities in the aftermarket, and as a result made short-term profits when they sold their personal shares. Ms. Simmonds claimed that the defendants should be forced to disgorge their profits to the issuers under § 16(b).

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