Section 16(b) of the Securities Exchange Act of 1934 allows for the recovery of profits realized by certain insiders from trading in a corporation's stock within a period of less than six months. For more than seventy years, U.S. courts and corporate attorneys have calculated this liability following the greedy algorithm described in Smolowe v. Delendo Corp. (2nd Cir. 1943), which the Securities and Exchange Commission proposed as a method of maximizing the recovery in that case. Even though Dantzig's simplex algorithm (1947) subsequently provided a more accurate method for calculating the maximum recovery as the solution to a linear programming problem, the legal community to date has resisted its adoption. This paper provides (1) a brief introduction to Section 16(b) and the Smolowe algorithm; (2) a review of the caselaw that has enshrined the Smolowe algorithm in legal precedent; (3) a proof that the Smolowe algorithm's worst case error is 50%; (4) a description of a new Web-based liability calculator for the legal community's use; and (5) a historically important case where the new calculator yields a larger recovery than the amount actually sought and obtained by the plaintiffs.
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