The Courts of Appeals for the Second and Eleventh Circuits have both rejected a novel theory of strict liability under Section 16(b) of the Exchange Act, which requires company insiders to disgorge trading profits from matched purchases and sales of company stock in a six-month window. The appeals stemmed from lawsuits brought by a single investor against controlling shareholders of five companies seeking to recover trading profits by matching shareholder stock sales with corporate repurchases pursuant to stock buyback programs. Both appellate courts overwhelmingly rejected this theory as inconsistent with the plain language of the statute, agency interpretation and principles of equity. These opinions are welcome news to controlling shareholders and corporate insiders seeking to transact in company stock, and reinforce courts’ reluctance to expand the “harsh result” of strict liability statutes.
Factual Background
Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), is a strict liability statute designed to prevent company insiders from profiting on the basis of nonpublic information. The statute requires the “beneficial owner, director, or officer” of an “issuer” to disgorge to the issuer any profits realized from a paired purchase and sale of company stock within a six-month period, “irrespective of any intent[],” subject to certain exemptions.
Beginning in 2023, an investor named Andrew Roth brought a series of lawsuits pursuing a novel theory of Section 16(b) liability against the controlling shareholders of five different companies—Estée Lauder Companies Inc., Altice USA, Inc., Luminar Technologies, Inc., Hertz Global Holdings, Inc. and T-Mobile US, Inc. In each case, Roth argued that the controlling shareholders—“beneficial owners” under the statute—were required to disgorge millions of dollars in short-swing profits to the respective companies because, within six months of the controlling shareholders selling shares, the companies repurchased their own shares pursuant to stock buyback programs. Roth argued that these transactions—the shareholders’ sales and the companies’ repurchases—were matchable under Section 16(b) because the controlling shareholders had an indirect pecuniary interest in the issuer repurchases.
The federal district courts repeatedly rejected Roth’s theory and dismissed all five of Roth’s actions. The courts held, among other things, that the plain text of Section 16(b) treats “beneficial owners” and “issuers” as separate entities that necessarily cannot have matched transactions. Roth appealed four dismissals: the Second Circuit combined oral argument on two appeals and held a third appeal in abeyance pending the outcome of the two argued appeals. Another dismissal was appealed to the Eleventh Circuit.[1]
The Second Circuit Opinion
In May 2025, the Second Circuit issued an opinion affirming the dismissal of Roth’s cases against the controlling shareholders of Estée Lauder and Altice. Judge Jacobs, writing for himself and Judge Nathan, explained that because the statute provided for the “harsh measure of strict liability”—which is “arbitrary, some might say Draconian”—Congress imposed “narrowly drawn limits on Section 16(b)’s scope.” The court held that plaintiff’s theory did not fit within these limits because it was incompatible with the “mechanical application” of matching purchases and sales under Section 16(b). The court elaborated on five ways in which plaintiff failed to state a claim:
First, the statute requires a defendant to have “beneficial ownership” in the shares in each matched transaction. But repurchased shares are instantly transformed into treasury shares, which are valueless and not shares in which a corporate insider can have a pecuniary interest. Second, and relatedly, matched transactions must involve substantively identical equity securities, but the controlling shareholder’s sold equity shares were different in kind from the repurchased treasury shares. Third, because the controlling shareholder lacked a pecuniary interest in the repurchased shares, it did not realize any profit, as required by the statute. Fourth, it would be inequitable to require the controlling shareholder to disgorge profits to the issuer based on the issuer’s decision to repurchase shares. Fifth, the court refused to impose strict liability on company insiders for corporate repurchases over which they may have no inside knowledge, and rejected plaintiff’s attempt to expand Section 16(b) strict liability “by invoking a policy argument to the contrary.”
Judge Calabresi wrote separately, concurring in the judgment and “not disagree[ing] with the majority’s analysis,” but noting his preference to decide the issues more “narrowly.”
Although Roth initially indicated his intent to pursue Supreme Court review, he did not file a petition for certiorari before the deadline, and the Second Circuit opinion is now final.
Following the Second Circuit’s opinion, Roth also stipulated to the dismissal, with prejudice, of his appeal from the dismissal of his substantially similar suit against the controlling shareholders of Hertz, which had been held in abeyance. Roth then sought to withdraw that stipulation, but on June 25, the Second Circuit denied that request and so-ordered the stipulation of dismissal.
The Eleventh Circuit Opinion
In June 2025, Judges Luck, Lagoa and Abudu of the Eleventh Circuit issued a unanimous, per curiam opinion also affirming the dismissal of Roth’s case against the controlling shareholder of Luminar Technologies. Like the Second Circuit, the Eleventh Circuit noted that it was inappropriate to impose strict liability “on the basis of unclear language” or without an “unmistakable reference.” The court held that the plain text of Section 16(b) did not apply to issuer repurchases of its own stock on the open market and that a controlling shareholder does not have a pecuniary interest in repurchased shares. The court also relied on an SEC rule that previously exempted stock repurchases from Section 16(b). Although that rule was repealed in 1991, this was done because, in the SEC’s view, “transactions by the issuer are not subject to Section 16 since the issuer is the beneficiary of the short-swing profit provision,” and therefore the exemption was unnecessary.
The deadline to seek Supreme Court review of the Eleventh Circuit’s opinion has also passed, and that decision is now final.
Implications
The decisions by the Second and Eleventh Circuits resoundingly reject Roth’s theory that a controlling shareholder sale can be matched against an issuer repurchase simply because these shareholders may have a pecuniary interest in the transactions of the company. These opinions should provide comfort to controlling shareholders—and company insiders more generally—who sell shares (or intend to sell shares) of company stock. More broadly, these opinions reinforce the principle that courts will narrowly interpret statutes, such as Section 16(b), that impose the “harsh result” of strict liability, and treat with skepticism “policy argument[s]” or other creative attempts to expand such liability. We will continue to monitor for further developments and provide updates if additional cases pursuing similar theories are filed.
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[1] In the final action, against the controlling shareholder of T-Mobile, Roth voluntarily dismissed his action following the Second Circuit opinion discussed below. Roth subsequently requested to withdraw his voluntary dismissal, but the district court denied his request and terminated the case.
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