In 1934, the Congress passed a law trying to stop

less ethical executives from exploiting their positions.

The law is generally referred to Section 16 b of the

Securities and Exchange Act of 1934. This law is often

called the short-swing rule. The law makes any profits

from purchases and sales of company equity securities

(not exempt) within six months of each other recoverable

by the company.

In 1991, the SEC declared that the grant transaction

of employee stock options is a purchase for 16 b

purposes.

In February 2007, a federal judge in Roth v. George

Reyes said that even if it was proven that the grants

of options were illegally back-dated and in one case at

least, a jury found that the back-dating was a criminal

offense, the grants were exempt from Section 16b of

the Securities and Exchange Act of 1934 under SEC

rule 16b-3(d). Judge Breyer of the U.S. District Court

stated that the SEC can make rules to exempt

transactions it believes are outside of the scope of 16 b.

But if the SEC wanted to exempt all ESO grants from

16b, then why did the SEC make the grants a matching

purchase in 1991?

Judge Breyer stated "Rule 16b-3(d) thus represents an

indication from the SEC that, in the agency's view, a

company's decision to give stock to officers does not

present a danger of the type "comprended within the

purpose of" Section 16(b). 15 USC section 78p(b). This is

not to say that issuer-to-insider transactions present

no risk of speculative abuse, nor to say that a grant of

stock options is necessarily lawful if it comports with

one of the three conditions set forth in Rule 16b-3.

Rather, it is to say that grants of stock options,

backdated or not do not entail an 'intolerable' risk that

insiders will exploit inside information for their own profit.

Dreiling . 458 .3d at 950.

What the court is saying is that the SEC can pass Rules

that exempt executive trades from 16b, if the SEC

expresses the view that certain types of transactions are

exempt because they do not represent the type

of potential abuse that Section 16b of the Act focused

on.

The idea that grants of Employee Stock Options do

not entail an intolerable risk of speculative abuse is

not supported by any facts or even the slightest bit

of evidence. In fact the evidence is overwhelming

that grants of employee stock options to executives

is the type transaction that is the most prone to

speculative abuse. In fact, in my view, there has

seldom been a type of transaction that is more prone

to speculatie abuse than large grants to executives

of stock options.

No informed person would claim that large options

transactions between an insider and an issuer are not

prone to speculative abuse. In fact, every experienced

trader of options including myself, who is informed on

the ESO 16b issue or not, would claim that the

probability of specuative abuse from ESO grants

is much greater than the same size transaction

in listed options. It is far more easy to front run moves

in the stock by granting ESOs to executives than for

an executive to find a street wise options trader to be

the victim of speculative abuse.

The idea that options grants are less prone to speculative

abuse than trades with market makers on the CBOE is

wrong. Judge Breyer must think that CBOE market makers

working for Goldman Sacks or Citigroup or for their own

accounts are a un-experienced babes and that a

compensation committee allied with the CEO will as a

routine matter protect the interests of the share holders

above the interests of the CEO.

He is very un-realistic.

Why should an executive ever buy options when he is

thinking about pumping and dumping, when he can have

them granted for nothing and escape from 16b. And that

is exactly what is going on in some cases.

When challenged, he now knows that the Ninth Circuit

Court of Appeals will uphold the abusive trades as exempt.

On another point, can we believe that the SEC was not

aware of the fact that they were accomodating the

executive abuses by expanding those exemptions in 1996

and 1991, thereby vitiating 16 (b) altogether.

John Olagues