Opinion ID: 567929
Heading Depth: 2
Heading Rank: 2

Heading: Distinctions Between Similarly-Situated Options Traders

Text: 33 Susquehanna also asserts that the approved Plan operates illogically by compensating options traders who sold call options they did not have in their inventory, but who had hedged them with call options from a different series, yet denying compensation to options traders who simply sold the same call options from inventory. We disagree not with the facts asserted, but with the conclusions drawn from them. 34 Again, as distinguished from stock sellers, only options traders selling contemporaneously with defendants who maintained a short position in that particular eligible security through the end of the trading period are considered eligible under the Plan. The loss on such a sale of options is referred to as the gross call options loss, calculated as the difference between the actual price at which the option sold and the price on the close of trading on the public disclosure date. 35 The Plan provides for an offset on an options seller's gross call options loss comparable to that applied in determining the amount of a stock seller's claim. It works as follows: a claimant's loss is offset by gains made on call options of any series in the same class of options, put options, and common shares of the same underlying security purchased or sold after the claimant's first contemporaneous trade with Lee for which a gross call options loss is claimed. Only options traders suffering a net loss after deducting such offsetting gains, are eligible to receive a distribution under the plan, a feature of the plan Susquehanna does not appeal. Gains on inventory positions held prior to the first contemporaneous trade and still held through the end of the trading period are not deducted from the claimant's gross call options loss. 36 The Plan also limits eligibility to an option trader who is out-of-pocket on the identical option series sold to Lee. Although it considers and offsets for gains made on call options of any series in the same class of options, put options, and common shares of the same underlying security purchased or sold after the claimant's first contemporaneous trade for which a gross call options loss is claimed, the SEC Plan does not consider any offsetting inventory position held at the time of the first contemporaneous trade in a different series in the same class of options, even though that series may be comparable in price to the one sold. By limiting eligibility to short sellers in the same option series, the plan treats inventory in the same option series as a setoff, while it does not consider the effect of inventory in price-comparable option series of the same class. Susquehanna claims this distinction renders the Plan unreasonable and unfair. 37 But here the SEC was required to make a choice between either expanding the class of contemporaneous traders to include all persons--like Susquehanna--who sold any option for the purchase of the underlying security contemporaneously with the defendants, or to narrow the definition of contemporaneous trader to the particular series. As noted earlier, separate pools of funds were established for each security Lee traded, allocated according to profits he made on each. It is conceded that the potential total losses incurred by contemporaneous traders (those who sold on the same day Lee was buying) exceeded the profits made on the securities Lee and Wang purchased. Consequently, because of the limited amount of money available to distribute, the Commission chose to use the narrower definition and thereby excluded Susquehanna from eligibility for recovery. As Susquehanna concedes, had the Commission chosen to expand the definition, the costs of administration would have increased because the SEC would have been required to process a greater number of claims, and the pool of money available for distribution to the victims would have been reduced. 38 Were we drafting the Plan, we might well have decided--out of a desire for simplicity--to ignore the pre-existing inventory positions of each seller--as Susquehanna requested and the SEC declined to do. It is important to keep in mind though that the primary purpose of disgorgement is not to compensate investors, see Commonwealth Chem Sec., Inc., 574 F.2d at 102, but to ensure that those guilty of securities fraud are not unjustly enriched. This kind of line-drawing--which inevitably leaves out some potential claimants--is, unless commanded otherwise by the terms of a consent decree, appropriately left to the experience and expertise of the SEC in the first instance. See Santa Fe, 817 F.2d at 1021 (SEC decision to give preferential treatment of options traders who suffered out-of-pocket losses appropriate in insider trading settlements). The district court's task is to decide whether, in the aggregate, the plan is equitable and reasonable. In our view, the district court understood the essence of the Revised Plan and did not abuse its discretion in approving it.