On January 7, 2013, the US Court of Appeals for the Second Circuit held in Gibbons v. Malone that, absent guidance from the SEC, Section 16(b) of the Exchange Act (also known as the short-swing profit rule) does not apply when an insider buys and sells shares of different classes of common stock in the same company where those securities are separately traded, non-convertible and come with different voting rights.

At issue were nine sales of non-voting Series C stock and 10 purchases of voting Series A stock within a month of each other by the defendant, a director and large shareholder of Discovery Communications, Inc. Plaintiff brought a shareholder suit, seeking disgorgement of the profits from those transactions under Section 16(b) of the Exchange Act. Section 16(b) is designed to curb the use of nonpublic knowledge by corporate insiders and operates mechanically, with no required showing of intent to profit from the use of inside information.

The Court held that these transactions were not within the scope of Section 16(b) because the transactions could not be paired. The court reasoned that because Congress used the singular term "any equity security," it did not intend for Section 16(b) to pair transactions involving different equity securities, even if issued by the same company.

While different securities may be considered the same security under Section 16(b) if they are economically equivalent, the Court determined that the voting and non-voting stock involved in the transactions are readily distinguishable and not economically equivalent because they:

The risk of short-swing speculation by insiders is higher when the stocks being purchased and sold, or sold and purchased, are effectively the same because a shareholder would typically not convert its holdings among substantially similar stock absent insider information. Because the two securities at issue in this case were "readily distinguishable," the Court reasoned that an insider could prefer the voting stock for reasons unrelated to short-swing profits. The fact that the two securities were classes of common stock issued by the same company would not alone make the transactions the type that Section 16(b) is concerned with preventing.

For more on short-swing profit liability, see Practice Note, Section 16(b) Short-swing Profit Liability: The Perils of Turning a Quick Profit.