By Nate Raymond
NEW YORK, Jan 7 (Reuters) - The CEO of Liberty Media did not
contravene SEC regulations by buying and selling stock in a
subsidiary of Liberty in just over two weeks, the 2nd U.S.
Circuit Court of Appeals ruled Monday.
The court held that John Malone did not have to disgorge
nearly $314,000 in alleged profits earned when he sold Series C
shares in Discovery Communications Inc., a subsidiary of
Liberty, and purchased Series A shares 15 days later.
The question on appeal was whether Malone had violated U.S.
Securities & Exchange Commission's so-called "short swing profit
rule" by engaging in those trades during that period, even
though he was selling one type of Discovery share to buy
Alexandra Walsh, a lawyer for Malone at Baker Botts, in an
email said they were pleased with the decision, which
represented the first time a court had ruled on the issue.
"The opinion properly interprets the text of the statute and
properly defines the reach of this strict liability provision,
consistent with congressional intent," she said.
Liberty Media spun off Discovery Communications, the company
behind cable television's Discovery Channel, in 2005. Discovery
Communications went public in September 2008.
Over a 15-day period in December 2008, Malone, who was on
Discovery's board, made three sales of Discovery's Series C
stock and 10 purchases of its Series A stock.
A shareholder in Discovery, Michael Gibbons, subsequently
sued Malone and the company as a nominal defendant in 2010,
alleging Malone obtained "illicit profits" of $313,573 on those
The two types of stocks were different equity securities,
separately registered and traded with different ticker symbols,
according to the decision. Among the differences were that
Series A had voting rights and was generally traded at higher
prices than Series C, the decision said.
in August 2011 U.S. District Judge Barbara Jones in New
York, who stepped down from the court Friday, ruled for Malone
and dismissed the lawsuit in its entirety.
The 2nd Circuit on Monday affirmed Monday.
Circuit Judge Jose Cabranes, writing for the panel, said
while the risk of short-swing speculation is higher when two
types of stock aren't "meaningfully different," the Discovery
shares were "readily distinguishable," particularly given that
Series A had voting rights.
"An insider could easily prefer one security over the other
for reasons not related to short-swing profits," Cabranes wrote.
He acknowledged the plausibility of Gibbons's argument,
since the SEC statute isn't explicit on whether the purchases
and sales must be of stocks in the same class.
"Nonetheless, we decline to go down this road without SEC
direction," he wrote.
Without establishing the equivalence of the two stocks,
Cabranes said the 2nd Circuit would be entering "uncharted
territory" by holding the stocks were sufficiently similar under
the SEC rule.
Daniel Doherty, a lawyer for the plaintiff, said he was
disappointed in the ruling, saying the court was "overly
cautious" in its interpretation of the statute.
Judge Pierre Leval and Robert Katzmann rounded out the
The case is Gibbons v. Malone, 2nd U.S. Circuit Court of
Appeals, No. 11-3620.
For Gibbons: Daniel Doherty, Law Offices of Daniel Doherty.
For Malone: Alexandra Walsh, Baker Botts.
For Discovery Communications: John Batter III, Wilmer Cutler
Pickering Hale and Dorr.
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