Pentwater’s Activity Amid Avis Share Price Volatility Raises Questions Around Short-Swing Profit Rules

The recent price activity in Avis, and comments by CEO Brian Choi that “Pentwater has acknowledged that its sale of Avis stock, at least in part, was violative of the SEC Section 16 short swing profit rules,” raises several questions – most importantly, what section 16 is, and what a violation of it might bring.

A summary of Avis’ stock price and Pentwater’s ownership stake is shown below:
 

On Feb. 24, Pentwater filed a Form 3 indicating that it held over 10% of Avis’ common shares and disclosing that it directly held 3.56 million shares, or 10.1% of Avis’ shares outstanding as of Feb. 20. Pentwater used an options strategy to acquire 4.26 million shares, increasing its direct share ownership to 22% by April 21, the day Avis’ stock price closed at $714 per share. The following day, Avis’ stock price hit $847 per share before plummeting to close at $444 per share.

In addition to its direct share ownership, Pentwater had a 29% synthetic ownership stake through cash-settled total return swaps, which it disclosed on Feb. 20. These swaps represented approximately 10.2 million shares, which had reference prices ranging from $57 per share to $204 per share, as shown below:
 

On April 22 and April 23, Pentwater sold 4.3 million shares at an average price of $404 per share for gross proceeds of $1.75 billion, leaving it with roughly 3.5 million direct shares, representing 9.9% of Avis’ outstanding shares.
 

A summary of Pentwater’s sales by fund is shown below:
 

According to the sale disclosures on April 28, Pentwater “is engaged in discussion with [Avis] and [has] agreed to voluntarily disgorge to [Avis] any short-swing profits realized” from matchable transactions in accordance with section 16(b) in an amount totaling 94,000 shares. We estimate that this amount is out of the total potential 300,000 shares (via call options) purchased on March 4, March 6 and March 9 and exercised on April 21.

Section 16(b) Short-Swing Liability

Simply stated, the rules in section 16 provide guidance on the activities of insiders of a company with regard to that company’s stock. For the purposes of this situation, an insider includes beneficial owners of more than 10% of a company’s securities, with a person deemed to be a beneficial owner if that person, directly or indirectly, has or shares the power to vote or sell those securities.

Most importantly, section 16 includes short-swing rules under section 16(b), which require insiders to disgorge any short-swing trading profits to the company. These short-swing profits are derived by the purchase and sale, or sale and purchase, of equity securities within a period of less than six months. As well, the rules within section 16(b) match the lowest purchase price with the highest sales price within that period to determine the “short swing profits.”

The Second Circuit held in its 2025 Roth v. LAL Family Corp. decision that to establish a claim under section 16(b), a plaintiff must prove that “(1) an insider (2) has made a purchase and (3) a sale (4) within a six-month period (5) of substantively identical equity securities (6) and thereby realized a profit.” The “paired” purchase and sale must also “involve substantively identical equity securities” – purchases and sales of different classes of securities, especially those with different voting rights, cannot be paired.

Section 16(b) is a strict-liability statute – meaning that a beneficial holder of more than 10% of a company’s shares must disgorge short-swing profits even if it were unaware it was a 10% holder, had no intent to violate the provision and traded without material nonpublic information. As the U.S. Court of Appeals for the Second Circuit explained in its 2020 Packer v. Raging Capital Management LLC decision, section 16(b) serves as “strong medicine for the ill Congress sought to address.”

In that decision, however, the Second Circuit noted that because section 16(b) creates strict liability for an insider short swing-seller, courts have “been reluctant to exceed a literal, ‘mechanical’ application of the statutory text” and employ the section 16(b) remedy “cautiously to avoid unfair application.”

The U.S. Supreme Court also held in Reliance Elec. Co. v. Emerson Elec. Co. that holders are free to structure a transaction specifically to avoid section 16(b) – meaning “substance over form” arguments are generally unavailing. “Liability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under § 16(b),” Justice Potter Stewart wrote for the majority in Reliance. In his dissent, Justice William O. Douglas warned that the result was a “mutilation” of section 16(b), “contrary to its broad remedial purpose,” “inconsistent with the flexibility required in the interpretation of securities legislation” and “not required by the language of the statute itself.” But the majority rule stood and, as evidenced by Packer, narrow interpretation of section 16(b) remains the norm.

These limitations on section 16(b) liability often come in the form of strict construction of the term “beneficial owner.” For example, in Packer, the Second Circuit concluded that a shareholder that contractually delegates all voting and investing authority to an advisor is not a “beneficial owner” of the shares the manager sells during the short-swing period and cannot be held liable under section 16(b) unless the plaintiff proves the holder had the power to unilaterally terminate the advisory agreement on behalf of all delegating parties or the advisor was an agent of the holder under state law.

Similarly, in September 2025, U.S. District Judge Mary Kay Vyskocil dismissed short-swing claims brought by Bed Bath & Beyond against Hudson Bay Capital, concluding that Hudson Bay was not a “beneficial owner” of more than 10% of BBBY shares because it was subject to contractual “blocker” provisions prohibiting it from converting enough convertible preferred stock into common equity to reach or exceed the 10% threshold.

“The Derivative Securities issued to Defendants gave them the right to buy heavily discounted, tradable BBBY common stock that they could sell to public investors at market price for a profit,” the plaintiffs alleged, and in the first two weeks after the convertibles were issued, Hudson Bay “sold more than numerous shares into the public market, nearly doubling the number of publicly traded BBBY shares” and causing the share price to plummet. The company filed chapter 11 and eventually liquidated.

Even though the plaintiffs alleged that in reality Hudson Bay converted enough shares to exceed the 10% cap before selling to secure an approximately $310 million short-swing profit and BBBY had no way to verify compliance with or enforce the cap, the judge found that Hudson Bay never became a beneficial holder of 10% of BBBY common equity because the conversions that put Hudson Bay over the cap were voided by the blockers, and the blockers prevented Hudson Bay from voting or transferring shares in excess of the cap.

“Where a binding conversion cap denies an investor the right to acquire more than 10% of the underlying equity securities of an issuer, at any one time, the investor is not, by virtue of his or her ownership of convertible securities, the beneficial owner of more than 10% of those equity securities,” Judge Vyskocil explained. The judge relied on the Second Circuit’s guidance, repeated in Packer, that section 16(b) should be narrowly construed. The plaintiff appealed the decision to the Second Circuit, where oral argument is scheduled for June 2026.

These limitations are not absolute, however. In April 2025, U.S. District Judge Naomi Reice Buchwald denied a motion to dismiss separate section 16(b) claims brought by the BBBY liquidating trust against an entity controlled by former CEO and meme-stock pioneer Ryan Cohen. Judge Buchwald found that “based on BBBY’s SEC filings and plaintiff’s allegations, there appears to have been ample publicly available information that would have indicated to the Cohen defendants that they had crossed the ten percent ownership threshold in March 2022.”

That said, since the enactment of section 16(b) shareholders have developed numerous ways to exploit the courts’ narrow interpretation of the provision. The SEC often attempts to eliminate certain structures in guidance, but new structures using options, derivatives and other mechanics have sprung up in response. Whether Pentwater employed such structures in this case remains to be seen, though the size of the alleged short-swing profits and Pentwater’s use of swaps and synthetic positions suggests Pentwater must have considered ways to sell while insulating at least some of its profits.

Under section 16, a party holding short put options should exclude the underlying securities from its beneficial ownership calculation, as long as the counterparty to the put retains discretion over when to exercise the options. The application of this provision appears limited to the determination of whether a party meets the statutory threshold of an insider, however, because any profits from these securities would still be deemed “short swing profits.”

Breakdown of Pentwater’s Stake in Avis

Pentwater reported that it directly held 3.101 million, or 8.8%, of Avis’ common shares as of Dec. 31, 2025.
 

Prior to its buying activity starting on Feb. 20, Pentwater disclosed that it directly held 3.562 million, 10.1%, of Avis’ common shares. On Feb. 20, Pentwater bought 425,000 shares, or a 1.2% stake, at $94 per share, and disclosed a series of options transactions in which it had sold puts with strike prices ranging from $110 to $150 per share and sold calls with strike prices ranging from $150 to $310 per share, all with expiration dates of March 20.

Pentwater exercised the majority of its put option transactions in the days just before or on March 20, and its out-of-the-money call option transactions expired with no exercise.
 

Pentwater supplemented its strategy of selling puts and calls after Feb. 20 by buying calls and selling puts with the same strike price ($85 per share) and expiration date. The firm then exercised the majority of these in-the-money call options with strike prices of $80 and $85 per share on April 21, when the stock price closed at $714 per share.
 

We estimate, on the basis of the April 28 sale disclosures, that Pentwater “has agreed” to voluntarily disgorge 94,000 shares out of the total potential 300,000 shares (via call options) purchased on March 4, March 6 and March 9 and exercised on April 21.

In addition to the sales discussed above, it appears that Pentwater entered into transactions on April 23 to sell calls representing about 174,000 underlying shares with strike prices ranging from $220 to $400 per share and expiration dates ranging from April 24 through June 18.