Challenge to Rule 16b-3(e) Exemption Dismissed as Time-Barred

A judge in the Southern District of Florida has dismissed one of John Olagues’ complaints challenging the availability of Rule 16b-3(e) to exempt an insider’s disposition of shares to the issuer through the cashless exercise of a derivative security. See Olagues v. Frost. The court dismissed the complaint on statute of limitations grounds, however, and did not reach the Rule 16b-3 issue.

The holding is unremarkable, although the plaintiff’s inattention to the claim, which is what led to the dismissal, is a little surprising. The second leg of the alleged short-swing transaction, an open market purchase, occurred on January 31, 2015. The plaintiff filed a complaint on January 21, 2017, well within Section 16(b)’s two-year statute of limitations. On February 8, 2017, the court directed the parties to file a proposed scheduling order within 20 days, in accordance with a local rule. The parties did not submit the order, so the insider moved to dismiss the complaint. The court granted the motion, without prejudice, on August 28, 2017. The plaintiff refiled the complaint on September 6, 2017.

The insider moved to dismiss again, this time arguing that the action was barred by the statute of limitations and that, in any case, the alleged “sale” was exempted by Rule 16b-3(e). In accepting the first argument, the court noted that dismissal of a complaint without prejudice puts the parties in the position they would be in if the complaint had never been filed. As a result, the plaintiff was deemed to have initiated the action on September 6, outside the statute of limitations. The court declined to address whether Section 16(b)’s statute of limitations is a statute of repose, but concluded that, even if it isn’t, the plaintiff was not entitled to equitable tolling. The 11th Circuit has held that equitable tolling is appropriate only in “extraordinary circumstances” that are beyond the plaintiff’s control, and here the dismissal of the first complaint resulted from factors within Mr. Olagues’ control.

So far, none of Mr. Olagues’ 16b-3 challenges has been successful.