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Abstract

Sections I and II of this paper consist of an examination of Section 16(b) and the intent of Congress in establishing this section. It further discusses the policy behind Congress’ allowance of non-owners of the security at the time of the “short swing” transaction to establish standing to sue by acquiring the security even after the alleged transaction has taken place.

Sections III through VI discuss the abuses by attorneys in making large profits in connection with Section 16(b) cases. In this section it will be shown that the practice of receiving such large attorney’s fees is actually longstanding. Gollust v. Mendell is the most recent case addressing this issue. However, there is a history of cases which date back as early as the 1940s. This section will also consider the issues of contingent fee agreements and champerty and how these compensation practices may facilitate the self interest of attorneys who initiate Section 16(b) suits. Lastly, this section will deal with the issues of solicitation and whether attorneys who find someone to purchase the security of the “issuer” (such as friends or family) for the sole purpose of initiating a law suit are acting ethically.

Section VII discusses possible solutions to the problems associated with Section 16(b) actions, including other alternatives to the problems associated with instituting a Section 16(b) suit. One such solution may be to amend Section 16(b) to permit, as plaintiffs, only those who are shareholders at the time of the alleged trade. In the alternative, the United States v. O’Hagan decision, may offer a solution, thereby determining that there may no longer be a need for Section 16(b). It concludes with a focus on a contemporary view of the intent and purpose of Section 16(b), and discusses what measures could be taken to cure the ongoing problems associated with this Section.

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