## Facts

- CBI Industries, Inc. sued John T. Horton, a CBI director, seeking recovery of alleged short-swing profits under § 16(b) of the Securities Exchange Act of 1934.
- Horton personally sold 3,000 shares of CBI stock on the open market in 1980.
- Within six months, Horton caused a family trust—of which he and a bank were co-trustees—to buy 2,000 shares of CBI stock on the open market at a lower price than Horton’s sale price.
- The difference between Horton’s sale price and the trust’s purchase price, multiplied by 2,000 shares, was $25,000.
- The trust’s beneficiaries were Horton’s two adult sons (full-time students living apart from Horton much of the time); Horton was not a present beneficiary.
- Horton’s potential future interest in the trust was contingent and remote (arising only under unlikely conditions).
- The district court held Horton liable and entered judgment for CBI for $25,000.
- Horton appealed, arguing the $25,000 was not “profit realized by him” because it accrued to the trust for his sons.

## Issues

1. Whether a corporate director “realizes” recoverable profit under § 16(b) when he sells issuer stock and, within six months, causes a trust for his adult children (of which he is co-trustee) to buy issuer stock at a lower price.

## Decision

- The Seventh Circuit reversed the district court’s judgment.
- The court held that the $25,000 gain attributable to the trust’s purchase was not “profit realized by” Horton within the meaning of § 16(b).
- Because the gain belonged to the trust for the exclusive use of Horton’s sons, CBI could not recover the $25,000 from Horton under § 16(b).

## Legal Principles

- Section 16(b) permits recovery only of “profit realized by” the insider; the phrase limits liability to gains the insider personally obtains and can use or dispose of.
- A gain accruing solely to a trust for third-party beneficiaries is not the insider’s § 16(b) profit when the insider lacks present beneficial ownership and has, at most, a remote contingent interest.
- Indirect advantages to the insider—such as possible reduction in future support obligations or emotional satisfaction from benefitting family members—do not constitute “profit realized by” the insider under § 16(b).
- Although § 16(b) serves a prophylactic purpose against insider speculative trading, its remedy cannot be extended beyond the statutory requirement of insider realization of profit.

## Conclusion

The court held that § 16(b) did not allow the issuer to recover short-swing profits from a director when the economic gain from the matching transaction accrued only to a trust for the director’s adult children and was not a gain the director personally realized or controlled.


CBI Indus., Inc. v. Horton, 682 F.2d 643 (7th Cir. 1982)