Section 16(b) makes a company's officers, directors and anyone owning more than 10% of its stock pay back any profit from a purchase and a sale (or a sale and a purchase) made less than six months apart, whatever their reason for trading. No proof of inside information is needed. In 2026 the rule hit one of the year's most-watched squeezes. On October 5, Avis Budget Group ($CAR) collected $650 million in cash from Pentwater Capital Management to settle its short-swing profit suit. Here is how the rule works, how the matching math can claw back more than an insider actually made, and what the Avis filings show.
This is general information, not legal advice.
Who counts as an insider under Section 16(b)
The statute, Section 16 of the Securities Exchange Act of 1934, covers three groups at a company with a class of equity registered under Section 12:
- Directors.
- Officers.
- Beneficial owners of more than 10% of any class of registered equity security, held "directly or indirectly."
The 10% group catches traders who never sit in a boardroom. Hedge funds that build big stakes, often through several funds run by one adviser, can become insiders as soon as the combined position crosses the line. Pentwater's Form 3 for Avis checks the 10% owner box as of February 20, 2026, and reports 3,562,100 shares held indirectly through its funds.
One carve-out matters for big holders. Section 16(b) "shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale." In plain terms, the purchase that first takes a holder over 10% is generally not matchable. Purchases made after the holder is already over 10% are.
The six-month window and "lowest-in, highest-out" math
The statute reaches profit from "any purchase and sale, or any sale and purchase" within "any period of less than six months." Order does not matter: a sale followed by a cheaper buy-back counts too.
The matching method courts use is harsher than ordinary profit and loss. A 2024 rulemaking petition posted by the SEC traces it to the Second Circuit's 1943 Smolowe v. Delendo decision. That decision allowed "an arbitrary matching to achieve the showing of a maximum profit." The petition also notes that courts adopted the "lowest-in, highest-out" formula from the SEC's own amicus briefs. The method matches the lowest-priced purchase with the highest-priced sale inside the window, then the next lowest with the next highest, and so on. Pairs that lose money are simply left out. Losses do not offset gains.
Hypothetical example (made up to show the formula, not real trades): an insider makes four trades in one stock within five months.
| Date (hypothetical) | Trade | Shares | Price |
|---|---|---|---|
| Jan 10 | Buy | 1,000 | $50 |
| Feb 15 | Sell | 1,000 | $40 |
| Mar 20 | Buy | 1,000 | $30 |
| Apr 25 | Sell | 1,000 | $45 |
- Actual trading result: ($40 − $50) × 1,000 = −$10,000, plus ($45 − $30) × 1,000 = +$15,000, for a net gain of $5,000.
- Lowest-in, highest-out: the lowest buy ($30) is matched with the highest sale ($45): $15 × 1,000 = $15,000. The remaining pair ($50 buy, $40 sale) loses money, so it is dropped.
- Recoverable profit: $15,000, three times what the insider actually made.
That gap is the point of the rule's deterrence. The petition also quotes a 2022 Southern District of New York opinion, Chechele v. Standard General, which called the method "prone to error" in some situations. The same opinion concluded courts are unlikely to drop it without a statutory or rule change.
Strict liability, who can sue, and the two-year clock
- Strict liability. The profit is recoverable "irrespective of any intention" of the insider. No trading on inside information, no bad faith and no harm to anyone has to be shown. Matching trades inside the window are enough.
- Who collects. The profit "shall inure to and be recoverable by the issuer." The company sues, and the money goes to the company, not to the shareholders who sold during the spike.
- Shareholder suits. If the company "shall fail or refuse to bring such suit within sixty days after request," or does not pursue it diligently, any shareholder may sue "in the name and in behalf of the issuer." That is why court approval of the Avis settlement required a finding that Avis "diligently pursued" its claims.
- Two-year limit. "No such suit shall be brought more than two years after the date such profit was realized."
The 2026 case: Avis Budget recovers $650M from Pentwater
TTFY tracked the Avis squeeze and the settlement payout as they happened. Here is the record from the SEC filings:
| Date (2026) | Event | Number |
|---|---|---|
| Feb 20 | Pentwater becomes a 10% owner (Form 3) | 3,562,100 shares; $CAR closed $96.47 |
| Mar 4, 6, 9 | "Deemed purchases" later flagged as matchable on Form 4 | Closes $95.75, $97.51, $95.89 |
| Apr 21 | Call options exercised at $85 and $80 | Holdings reported at 7,824,100 shares; close $713.97 |
| Apr 22 | Sales reported on Form 4 (form 1 of 6) | Prices from $702.24 down to $438.74; close $443.94 |
| Jun 19 | Settlement and Release Agreement signed | $650,000,000 cash, subject to court approval |
| Oct 5 | Court-approved payment received | $650M, recognized in Q4 2026 |
The arithmetic:
- From the February 20 close to the April 21 close: $713.97 ÷ $96.47 − 1 = +640.1%. Over the next two sessions, to the $229.14 close on April 23: $229.14 ÷ $713.97 − 1 = −67.9%.
- Pentwater's April 21 holdings: 7,824,100 ÷ 35,325,754 shares outstanding (July 22 count) = about 22.1% of the company.
- Settlement per share: $650,000,000 ÷ 35,337,823 shares outstanding (October 28 count) = $18.39. That is 15.4% of the $119.81 close on November 4, 2026 ($18.39 ÷ $119.81).
The April 28 Form 4 is unusually revealing. Its footnotes said sales of 20,000, 25,000 and 49,000 shares by three Pentwater funds (94,000 in that form) were "matchable" against March purchases. They also said the reporting persons "have agreed to voluntarily disgorge to the Issuer any short-swing profits realized from these matchable transactions." Other funds' sales were marked not matchable because those funds had not bought shares since Pentwater became subject to Section 16. An amended Form 4/A for the same trades, filed May 12, cut those footnotes down to fund names only. Avis's October 6 Form 8-K confirms that the $650 million "was approved by the court." The company expects to use part of it to repay the remaining $350 million of its 5.750% Senior Notes due 2027. Its third-quarter 10-Q adds that a redemption notice for those notes went out on November 2 for a December 30 repayment.
What traders should watch
- Form 3 and Form 4 filings. New insiders file within 10 days. Changes in ownership are due "before the end of the second business day" after the trade. Check the relationship box: "10% Owner" means every new purchase starts a six-month clock.
- 10% holders in a squeeze. A holder that kept buying above 10% is exposed if it sells into a spike within six months of those buys. Section 16(b) does not bar the sale; it makes the matched profit recoverable by the company. Avis shows a large holder can still sell into a spike when the gain outweighs the potential payback.
- Disgorgement footnotes. Words like "matchable" or "disgorge" in a Form 4 signal a likely payment to the company. That cash belongs to the company, not to holders who sold.
- Schedule 13D/13G amendments. Pentwater amended its Avis 13G on March 6, April 7 and May 7. For how to read stake filings, see how to read a Schedule 13D.
Common mistakes checklist
- Treating it as insider-trading law. Section 16(b) needs no proof of inside information. Intent does not matter.
- Netting losses. Under lowest-in, highest-out, losing pairs are dropped, not subtracted.
- Assuming the order of trades matters. A sale followed by a lower-priced buy within six months is also matchable.
- Counting the over-10% purchase. A holder must be over 10% at both the purchase and the sale. The purchase that crosses the line generally does not count.
- Thinking shareholders get paid. Recoveries go to the company, so any benefit to holders is indirect.
- Forgetting derivatives. The statute also covers security-based swap agreements, and Pentwater's Avis filings list cash-settled total return swaps and call options. Options also matter when a takeover closes; see options in a buyout.
Bull/Bear Verdict
Bull Case: For holders of the company's stock, Section 16(b) can turn a squeeze into balance-sheet cash. Avis's $650M works out to $18.39 per share, and part of it is going toward paying down debt. Form 4s filed within two business days give traders an early look at what a 10% holder is doing.
Bear Case: The rule does not stop a large holder from selling into a spike, and after the April 21 peak $CAR fell 67.9% in two sessions. Recoveries take months, need court approval and go to the company rather than to traders who lost money. Lowest-in, highest-out math can also make 16(b) exposure hard to estimate from outside.
FAQ
Does Section 16(b) require proof of insider trading?
No. Profit is recoverable "irrespective of any intention" of the insider. Matching purchases and sales within less than six months is enough.
Can a shareholder sue under Section 16(b)?
Yes, on the company's behalf, if the company does not sue within 60 days after a request or does not pursue the case diligently. Any recovery goes to the company.
How long does a company have to sue for short-swing profits?
No suit may be brought "more than two years after the date such profit was realized."
How much did Avis recover from Pentwater?
$650 million in cash, received October 5, 2026 under a court-approved settlement signed June 19, 2026. That is about $18.39 per share on 35,337,823 shares outstanding. More case coverage is in the TTFY Analysis section and on the TTFY homepage.