Opinion ID: 567929
Heading Depth: 2
Heading Rank: 1

Heading: Distinctions Between Stock and Option Traders

Text: 26 Susquehanna first asserts that the SEC plan arbitrarily treats options traders differently from stock traders because options sellers can only recover if they were short and thereby suffered out-of-pocket losses, while net common stock sellers are compensated whether or not they were short or suffered out-of-pocket losses. Although we agree that the SEC and the district court may have mischaracterized the relief its plan affords in that it does not limit recovery solely to those traders who have suffered out-of-pocket losses, the mischaracterization does not render the plan inequitable and unreasonable. 27 To make a claim under the Revised Plan, a stock seller must meet several requirements. He must first show he is a contemporaneous trader--i.e., he sold an eligible security (the same class of stock purchased fraudulently by defendants) on one or more of the dates that same security was purchased by defendants. A trader of common stock must also have sold more shares than he purchased of the same stock after the trader's first contemporaneous trade with Lee through the end of the trading period (the period commencing with Lee's earliest fraudulent purchase to the date the previously confidential information was publicly disclosed) for the stock trader to participate in the distribution of funds allocated to the common stock pool of that particular issuer. Under the plan, such a stock trader is determined to be a net stock seller. After offsetting a stock seller's purchases--subsequent to his first contemporaneous sale--the plan allows that stock seller to recover the difference between the price at which he sold and the price at the close of trading on the public disclosure date--less any off-setting profits he made on purchases of call option contracts on the common stock of the same issue--after his first contemporaneous trade through the end of the trading period. 28 Thus, a stock trader who, contemporaneously with Lee, sells stock he already possesses, is entitled to compensation for his economic losses (attributable to his sale without knowledge of information that would have increased the price of the stock had it been known), even though he is not out-of-pocket as the result of the trade. Further, if prior to his first contemporaneous trade with defendants, a stock seller held either a greater amount of common stock of the same issuer than he sold during the trading period or held options on the common stock of the same issuer, he is not required to offset his gains that followed public disclosure (whether realized or unrealized) as the result of the increase in the value of such inventory. In sum, the only gains the stock seller is required to offset are those attributable to purchases made after his first contemporaneous trade with defendants. 29 Susquehanna is quite correct in pointing out that some options traders are treated differently from these stock traders. Under the Revised Plan only options traders selling contemporaneously to Lee's purchases and who were short in that particular eligible security (defined as a call option contract for the same issuer which has the same expiration date and strike price as the contracts purchased by the defendants) through the end of the trading period are considered eligible. Hence, the Plan treats injured stock and options sellers differently, that is to say, recovery is not afforded to an options trader who sells Lee options already in his inventory (since he does not maintain a short position), but is available to stock traders selling from inventory. Susquehanna argues that this distinction renders the plan unfair and unreasonable. We disagree. 30 The distinction between stock and options traders is justified because of differences in the nature of the losses borne by such traders as a result of defendants' misconduct. For example, options traders that wrote uncovered call options, that is, options on stock not in inventory, assumed great risk of loss if the underlying stock price rose, particularly those obligated to do so by virtue of requirements applicable to market makers. Faced with a limited pool of money available for injured investors, the SEC chose to distinguish in some fashion between those options traders--like Susquehanna--who sold options that they held, and those that maintained short positions and bore a greater risk of loss by not hedging their short positions. 31 Such distinction was not drawn in the case of stock traders because there simply were no comparable losses (or risks of loss) suffered by market makers in stocks. Further, the SEC represents, without contradiction from Susquehanna, that administrative costs associated with drawing that sort of distinction in the case of stocks would be high due to the large number of contemporaneous stock transactions, making such difference in the case of stocks both pointless and costly. Consequently, the SEC's decision to treat some options traders differently from stock traders was reasonable and fair. 32