Insider Trading — Section 16 Violations and Equitable Tolling

Section 16(a) of the Securities Exchange Act of 1934 requires officers, directors and other insiders of a public company to report their trades in company securities, and § 16(b) prohibits short-swing insider profits. Section 16(b) imposes a two-year statute of limitations on any action for disgorgement of those profits. This two-year limitations period is tolled, however, if the insiders fail to file the necessary disclosures with the SEC. See, e.g., Whitaker v. Whitaker Corp, 639 F.2d 516, 528 (9th Cir.), cert. denied, 545 U.S. 1031 (1981); Litzler v. CC Invs., L.D.C., 362 F.3d 203, 208 (2d Cir. 2004).

What if disclosures are filed but the insider fails to disclose information about he character of the transaction that provides notice, for the first time, of the basis for a § 16(b) disgorgement action? Does tolling apply? That issue of apparent first impression was presented in Roth v. Reyes, 2007 U.S. Dist. LEXIS 14532 (N.D. Cal. Feb. 13, 2007). Although District Judge Charles Breyer found it unnecessary to resolve the issue, he lays out the arguments pro and con at length in an extended footnote 1 that is quite useful for anyone litigating the issue.

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