Opinion ID: 430771
Heading Depth: 1
Heading Rank: 3

Heading: the profit computation method

Text: 17 Both Gund and First Florida challenge the profit calculation employed by the district court. The district court calculated Gund's profits by using a computation suggested by SEC Rule 16b-6(b). This rule is designed to calculate profits from a sale of securities within six months of the exercise of an employee stock option. See 17 C.F.R. Sec. 240.16b-6(b) (1980). In its supplemental opinion and order, the district court concluded: 18 Under [Rule] 16b-6 the SEC, in order to alleviate the inherent unfairness of matching a sale at current market price with a purchase price established at a much earlier date when the option was granted, limits profits to the difference between the actual sales price and the lowest market price within six months before or after the sale date. The computation of profits in the instant case can be treated in a similar manner by matching the actual purchase price the plaintiff paid for the common stock with the highest market price of the common stock within six months before or after the date on which the debentures (convertible into common stock) were sold. Calculation of profit by this method yields a figure of $29,084.00.... 19 R. at E-42. 20 Gund urges that the profits should have been computed in the amount of $5,904.14, while First Florida urges a recovery of $164,643.12. 8 21 The profit computation method most frequently utilized by courts in section 16(b) cases is that set forth long ago by the Second Circuit in Smolowe v. Delendo Corp., 136 F.2d 231, cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943). See Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir.1981); Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d 736, 742-43 (8th Cir.1965), cert. denied, 382 U.S. 987, 86 S.Ct. 556, 15 L.Ed.2d 475 (1966); Morales v. Mylan Laboratories, Inc., 443 F.Supp. 778, 780 (W.D.Pa.1978); Heli-Coil Corp. v. Webster, 222 F.Supp. 831, 837 (D.N.J.1963), aff'd as modified on other grounds, 352 F.2d 156 (3d Cir.1965); Arkansas Louisiana Gas Co. v. W.R. Stephens Investment Co., 141 F.Supp. 841, 847 (W.D.Ark.1956); See also Ohio Drill & Tool Co. v. Johnson, 498 F.2d 186, 194-95 (6th Cir.1974) (directing that Smolowe rule be used in profit computation under state insider trading statute). Under the Smolowe rule, the highest sales price is matched with the lowest purchase price in any given six-month period in order to calculate the recoverable profit. 22 Were we writing on a clean slate today, we might well conclude that a district court in a section 16(b) case should employ the Smolowe rule rather than utilize a method patterned after Rule 16b-6. The district court's computation method yields a slightly different result from that calculated under the Smolowe rule. We, however, find either method to be consistent with the language and purpose of the 1934 Act. Both methods limit the profits recoverable in this type of case to those that accrued within the six-month period surrounding the short-swing transactions. Such a limitation is clearly consistent with the remedial, rather than punitive, nature of section 16(b). Accordingly, we uphold the district court's calculation of the amount recoverable by First Florida. 23 Finding that the district court properly found Gund's transactions to be controlled by section 16(b) and that the district court's profit computation method is consistent with the statute, we AFFIRM.