Legal Definitions - short-swing profits

Short-swing profits refer to any financial gains made by a corporate insider from buying and selling (or selling and buying) their company's stock within a period of less than six months. The law considers these profits to be potentially unfair because insiders have access to non-public information that could give them an advantage over other investors. To prevent insiders from exploiting this privileged position, any such profits are legally required to be returned to the company.

Here are some examples to illustrate this concept:

• Example 1: Director's Quick Gain

  Imagine Sarah, a director on the board of "Tech Innovations Inc." Through her role, she learns that the company is about to announce a groundbreaking new product that is expected to significantly boost stock prices. On January 15th, she purchases 10,000 shares of Tech Innovations Inc. stock. When the product is officially announced on March 1st, the stock price surges. Sarah then sells all 10,000 shares on April 1st, realizing a substantial profit. Since her purchase and sale occurred within a six-month period (January to April), these would be considered short-swing profits, and she would be legally obligated to return the profit to Tech Innovations Inc.

• Example 2: Officer's Anticipated Dip

  Consider Mark, the Chief Financial Officer (CFO) of "Global Logistics Corp." He becomes aware of an upcoming, temporary operational issue that is likely to cause a brief dip in the company's stock price before a quick recovery. On February 10th, he sells 5,000 shares of Global Logistics Corp. stock. As anticipated, the stock price falls after the issue becomes public. On May 1st, seeing the stock at a lower price and confident in its recovery, Mark buys back 5,000 shares. The difference between his selling price and his buying price constitutes a profit. Because both transactions (sale and purchase) happened within six months (February to May), this profit would be classified as short-swing profit and must be returned to Global Logistics Corp.

• Example 3: Major Shareholder's Advantage

  Let's say "Investment Fund X" owns 12% of "Green Energy Solutions Inc.," making it a corporate insider. A representative from Fund X, due to their board seat, learns that Green Energy Solutions Inc. is in advanced talks to acquire a smaller competitor, a deal that is not yet public but is expected to increase the company's value. On March 5th, Fund X purchases an additional 50,000 shares of Green Energy Solutions Inc. stock. The acquisition is publicly announced on June 1st, causing the stock price to rise. On August 1st, Fund X sells the 50,000 shares it bought in March, making a profit. Even though Fund X is an entity rather than an individual, its status as a major shareholder (over 10%) makes it an insider. The profit from the March purchase and August sale, occurring within six months, would be deemed short-swing profits and must be disgorged to Green Energy Solutions Inc.