August 21st, 2024
Introducing Our Newest Case
Dear ICAN Partners,
Most of the average Americans who go online each day to trade stocks have no idea how easily they could become ensnared in the dense web of laws and regulations that is increasingly restricting or complicating access to capital markets.
Joseph Mona, a retired grandfather, saw his retirement savings and the financial security of his family destroyed after he inadvertently ran afoul of Section 16(b) of the Securities Exchange Act of 1934, an antiquated law that has become a cash cow for predatory lawyers acting like “deputy SEC attorneys.” ICAN has stepped in to represent Mr. Mona in his appeal, a potentially precedent-setting case that could help break down one more barrier to entry to capital markets and allow other hard-working Americans to avoid Mr. Mona’s fate.
Today, we’re bringing you his story and information about the push to reform this archaic rule. If you’d like to donate to support our defense of Mr. Mona and our other pro-bono work, please click here or reply to this email.
With thanks,
Nick Morgan
Founder and President of ICAN
Meet Joseph 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 his overall 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 federal Second Circuit Court of Appeal 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 expended enormous 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 traders 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.
Wrapping Up and How You Can Help
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.”
Before ICAN was formed, people like Mr. Mona had limited, if any, options for pro-bono assistance. With the power of our network and donors, we’re able to fight for everyday investors who have encountered traps for the unwary embedded in the federal securities laws.
If you’d like to donate to our legal fund to support this case and future cases, please click here or reply to this email.
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