Microbot v Mona

Joseph Mona, a retired grandfather in his eighties, is just one of countless unsuspecting traders who have found themselves on the receiving end of lawsuits brought by lawyers who are making a career out of pursuing (often inadvertent) violations of Section 16(b) of the Exchange Act and associated rules, collectively known as the short-swing profit rule.

Originally conceived to protect individual investors from securities manipulation, the rule prohibits “insiders” from reaping short-term profits from trading. The rule defines “insiders” as officers and directors of a company or anyone owning 10% or more of the stock of a company. However, as a judge in Mr. Mona’s case described it, the rule serves too often as a “blunt instrument” that can entrap average Americans, such as day traders, who, “rather than trading on insider information, may have errantly surpassed ten percent ownership and then engaged in assorted buy and sell transactions within months, weeks, days, or even minutes.” Widely considered obsolete and ineffective at deterring actual insider trading, the rule has created a cottage industry of lawyers serving, with the full support of the SEC, as deputy law enforcement attorneys, springing this legal trap on investors who are not true insiders - like our client - and obtain monetary judgments even the SEC itself couldn’t obtain.


Like many Americans, Mr. Mona began actively trading to increase his retirement savings. He invested in the stock of a company called Microbot, which often traded below $5 per share and only had about 3 million shares outstanding, and at one point, he briefly exceeded the 10% ownership threshold. He was not an “insider” in any normal sense of the word: he was not an officer or director of the company, he was not a controlling shareholder, had no affiliation with the company, no insider status or information, and did not profit from the investments in Microbot. Furthermore, Microbot didn't suffer any harm from his trades.

In the world of fast-paced digital trading, it is incredibly easy for an “outsider” to “trip the wire” of the 10% threshold, as Mr. Mona did. Traders often look for volatility, often found in lower priced stocks like Microbot, which also may have a lower quantity of publicly available shares. Most traders are not only unaware of the existence of 16(b) but are often also unaware of the percentage of outstanding shares they may own at any time. With most online trading platforms, buy and sell orders are executed in seconds. Things have changed considerably for traders and investors since 1934, while the laws have not.

Most short-swing profit cases start with one or more plaintiffs’ lawyers using sophisticated software to comb through SEC filings to identify possible violations. The asset management firm handling Mr. Mona’s trading filed such reports, catching the attention of the plaintiff’s lawyers, who typically seek a fee of 25% of any profits ordered to be disgorged. The SEC has filed amicus briefs in support of such cases (see here), arguing that (unlike in SEC insider trading cases) private plaintiffs should not have to prove that the traders had inside information or that any shareholder or company suffered any tangible harm.

At the conclusion of the litigation in federal district court, Mr. Mona had spent nearly $400,000 in legal fees and had exhausted his ability to pay counsel. He had to take out a home equity loan to cover a portion of the bond required while the appeal remains pending. His son pledged his house as collateral and is paying the home equity loan payments. Then ICAN stepped in.

ICAN is now representing Mr. Mona on appeal in an effort to both bring much-deserved relief to our client and to reform this dangerous area of the law. On June 28, we filed our opening brief on appeal to the Second Circuit with our co-counsel on the case, Aaron T. Morris and Andrew W. Robertson of Morris Kandinov LLP. We’re proud to work with our partners to defend Mr. Mona in this potentially precedent-setting case where we seek to cement a ruling that halts the predatory legal persecution of traders, like our client, who inadvertently exceed the 10% ownership threshold in a small company, but that causes no harm to investors.

Our client is far from the first trader to face this unfair fight and to have exhausted their resources doing so. Without ICAN by his side, Mr. Mona would be just another easy win for the self-appointed “deputy SEC lawyers” enriching themselves and their clients at an innocent trader’s expense.

It is imperative that Mr. Mona and others like him are able to fight back. We must halt this predatory behavior that is entrapping innocent Americans and contributing to a growing environment of risk and uncertainty, serving as another de facto barrier preventing average Americans from pursuing the benefits of our capital markets.

If you’d like to contribute to Mr. Mona’s defense and our work to reform this landmine law, please visit our donation page.

A Dangerous Rule in Desperate Need of Reform

While we work to secure precedents to protect traders, at ICAN, we are also staunch supporters of reforming this perilous rule.

The principal purpose of the Securities Exchange Act of 1934 was to protect individual investors against securities fraud and manipulation. The short swing profit rule, as applied in Mr. Mona's case, is the antithesis of this purpose: at the expense of an individual investor who is not an insider of the company, the rule enriches a company that has suffered no harm. Meanwhile, the rule created financial chaos for a grandfather and his family.

Technological advancements have made obsolete any public policy justification for preventing suspected insider trading by “outsiders” that may have once existed for the 90-year-old provision. The SEC has access to advanced algorithms and massive databases to detect unusual trading activities that may constitute actual illegal insider trading. Real-time stock quotes, EDGAR filings, and countless news sites are instantaneously available to the general public. The short-swing profit rule makes little sense in today's world. In addition, the rule may actually discourage the transparency that the Exchange Act purports to champion, as prospective filers may not want to risk the chance of getting ensnared by this draconian rule. A judge in Joseph’s case described 16(b) as a “blunt instrument” that can entrap people such as “day traders for example, who, rather than trading on insider information, may have errantly surpassed ten percent ownership and then engaged in assorted buy and sell transactions within months, weeks, days, or even minutes.”

Stuart Kaswell, a former SEC attorney in the Division of Trading & Markets and current Fordham Law School Adjunct Professor, published an article for the American Bar Association’s Business Law Today: Repeal or Amend Section 16(b) of the Securities Exchange Act of 1934, the “Short Swing” Disgorgement Provision, which makes the case for repealing or amending the rule because it: (1) never achieved its original purpose of preventing insider trading; (2) creates a trap for the unwary; and (3) needlessly complicates ordinary business transactions, and (4) does not confer a public benefit proportionate to its attendant cost, often imposing legal expense, delay, an uncertainty to prevent what would be a harmless transaction.

We couldn’t agree more with Attorney Kaswell:

    "Section 16(b) was just one of a multitude of provisions that Congress enacted in 1934 with the             hope of cleaning up Wall Street. Faced with 85 years of evidence, it is time to recognize that               Section 16(b) was a mistake and that keeping it on the books causes much more harm than                   good."

Our work to protect investors from and reform the hazards of Section 16(b) wouldn’t be possible without our stalwart co-counsel and the support of our generous donors.