United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT

                                     ___________

                                     No. 00-3719
                                     ___________

Medtox Scientific, Inc., formerly      *
known as Editek, Inc.,                 *
                                       *
             Plaintiff/Appellee,       *
                                       *
      v.                               * Appeal from the United States
                                       * District Court for the
Morgan Capital, L.L.C.,                * District of Minnesota.
                                       *
             Defendant/Appellant,      *
                                       *
Alex Bistricer, David Bistricer,       *
                                       *
             Defendants.               *
                                  ___________

                             Submitted: June 11, 2001

                                    Filed: August 3, 2001
                                     ___________

Before WOLLMAN, Chief Judge, HAMILTON,1 and MURPHY, Circuit Judges.
                             ___________

WOLLMAN, Chief Judge.




      1
        The Honorable Clyde H. Hamilton, United States Circuit Judge for the Fourth
Circuit, sitting by designation.
      Morgan Capital, L.L.C. appeals from a district court2 order requiring it to
disgorge the profits of short-swing stock sales. We affirm.

                                           I.

        The facts of this case are undisputed. On February 1, 1996, Medtox Scientific,
Inc.3 issued shares of preferred stock. The preferred stock was convertible to Medtox’s
common stock, at the option of the holder, at a price equal to the average closing price
of the common stock for the five trading days preceding the notice of conversion. The
conversion right became exercisable on March 30, 1996. Morgan Capital purchased
preferred stock in the offering. In a hypothetical conversion on the date of purchase,
Morgan Capital would have received less than 10% of Medtox’s common stock. David
and Alex Bistricer, officers and controlling principals of Morgan Capital’s operations,
served on Medtox’s Board from July 1996 to June 1997.

         On March 28, 1996, the price of Medtox common stock dropped to a point
where, had Morgan Capital converted its preferred shares to common stock, it would
have received more than 10% of the total common stock. As the value of Medtox’s
common stock declined, the Bistricers made weekly phone calls to Medtox’s
management to discuss the company’s affairs. Had Morgan Capital exercised its
conversion right on any day between April 9 and May 1, it would have acquired more
than 10% of Medtox’s common stock. On May 1, 1996, Morgan Capital converted all
of its preferred stock and received more than 10% of the shares of Medtox’s common
stock. In May and June of 1996, Morgan Capital sold some of its shares of common
stock, realizing a profit of $576,785.80.

      2
        The Honorable Ann D. Montgomery, United States District Judge for the
District of Minnesota.
      3
       In the course of this litigation, the plaintiff-appellee has changed its name from
Editek to Medtox; we will identify the corporation as Medtox.

                                          -2-
       Section 16(b) of the Securities Exchange Act of 1934 requires disgorgement of
profits from short-swing stock transactions (a matching purchase and sale of stock
within six months) by insiders.

      For the purpose of preventing the unfair use of information which may
      have been obtained by [a] beneficial owner, director, or officer by reason
      of his relationship to the issuer, any profit realized by him from any
      purchase and sale, or any sale and purchase, of any equity security of
      such issuer (other than an exempted security) within any period of less
      than six months . . . shall inure to and be recoverable by the issuer,
      irrespective of any intention on the part of such beneficial owner, director,
      or officer . . . .

15 U.S.C. § 78p(b).

       Section 16(a) of the Act defines a “beneficial owner” as “[e]very person who is
directly or indirectly the beneficial owner of more than 10 per centum of any class of
any equity security . . . .” 15 U.S.C. § 78p(a). The applicable regulations refer to §
13(d) of the Securities Exchange Act and its regulations for the definition of “beneficial
owner” in § 16(a). 17 C.F.R. § 240.16a-1(a)(1).4 Under the § 13(d) regulations, “a
person shall be deemed to be the beneficial owner of a security . . . if that person has
the right to acquire beneficial ownership of such security . . . within sixty days . . .
through the conversion of a security.” 17 C.F.R. §240.13d-3(d)(1)(i)(B). Thus, the
owner of a conversion right is deemed the beneficial owner of the security it has a right
to acquire through conversion. The term “beneficial owner” in § 16(b) refers to the
class of beneficial owners who own more than 10% of a class of one company’s stock


      4
       Morgan Capital has also directed our attention to provisions containing yet
another definition of beneficial ownership in relation to derivative securities. Because,
as Morgan Capital acknowledges, none of the securities involved in this transaction
were derivatives, these provisions are inapposite.

                                           -3-
and have access to, and an opportunity to exploit, corporate information not generally
available to the public. See Foremost-McKesson, Inc. v. Provident Secs. Co., 

, 253 (1976).

       In Medtox’s initial action for disgorgement, the district court held that Morgan
Capital was not a beneficial owner of Medtox common stock until it converted its
preferred stock to common stock. Because a purchase of stock that puts a holder over
the 10% threshold does not count as a purchase for purposes of determining whether
a short swing profit must be disgorged, see 

and Morgan Capital had not
owned more than 10% of the preferred stock, the court dismissed the action for failure
to state a claim. Editek, Inc. v. Morgan Capital, L.L.C., 

(D. Minn.
1997) (Editek I). We reversed and held that, under the “within sixty-days rule,”
Morgan Capital was by virtue of its option to convert a beneficial owner of Medtox
Common stock once it had acquired the preferred stock. Editek, Inc. v. Morgan
Capital, L.L.C., 

, 833 (8th Cir.1998) (Editek II). We expressly did not
decide whether Morgan Capital had met the 10% threshold prior to its stock
conversion, instead remanding the case to the district court for a determination of this
question.

       On remand, the district court held that Morgan Capital was a beneficial owner
of more than 10% of Medtox’s common stock when the stock price dropped to the
point that a conversion of stock would have given Morgan Capital more than 10% of
the common stock, that its conversion was a purchase for purposes of determining
whether a short-swing transaction had taken place, and that the profits from Morgan
Capital’s sale of Medtox stock within six months of that purchase were subject to
disgorgement under § 16(b). Medtox Scientific, Inc. v. Morgan Capital, L.L.C., 

, 907 (D. Minn. 1999). The court also considered for the first time on remand
Morgan Capital’s challenge to venue and concluded that venue was proper in the
district of Minnesota because some of the events leading up to the transactions,
although not the transactions themselves, took place in Minnesota. 

The

                                          -4-
court entered judgment in favor of Medtox in the amount of $675,000, which included
prejudgment interest and the profits subject to disgorgement.5 

Capital raises three arguments on appeal. First, it contends that the
district court erred in holding that Morgan Capital was an owner of more than 10% of
the common stock, and hence an insider for purposes of § 16(b), before it converted its
preferred stock to common stock.6 Second, it argues that the court erred in holding that
its conversion of the stock was a purchase for purposes of that section. Third, it asserts
that venue was improper in the District of Minnesota.

                                   A. Insider Status

       Section 16(b) does not apply in the instant case unless Morgan Capital was an
insider at the time of the transactions. Morgan Capital was not an officer or director
of Medtox at that time, and it was therefore not an insider unless it was a “beneficial
owner” within the meaning of that term as used in § 16(b). Section 16(a) defines
“beneficial owner” as used in § 16(b) as a “beneficial owner of more than 10 per
centum of any class of any equity security.” The Securities Exchange Commission
(SEC) regulations define “beneficial owner” as used in § 16(a) as including those with
a right to acquire the stock within sixty days. 17 C.F.R. § 240.16a-1(a)(1). Therefore,
in order to be an insider subject to disgorgement, at the time of the purchase and sale


      5
       That amount reflects an amended calculation of the total profits of the common
stock sales as agreed by the parties in a consent decree.
      6
       Because the bulk of the confusion in this case comes from the multiple meanings
of “beneficial owner” within the Securities Exchange Act and particularly within §16,
see Editek 

, for the purposes of this opinion, we use the term
“insider” to denote someone whose actions are subject to § 16(b).

                                           -5-
of the common stock Morgan Capital must have been a “beneficial owner” (as defined
by the regulations) of more than 10% of the common stock. See Editek 

. In Editek II, we determined that Morgan Capital was a § 16(a) beneficial
owner at the time of the conversion. 

16(b) applies to the conversion and
sale if Morgan Capital’s beneficial ownership of the common stock established in
Editek II exceeded 10% of the common stock.

       Morgan Capital argues that § 16(b) does not require it to disgorge its profits
because a short-swing sale and purchase requires three separate transactions (an initial
transaction giving rise to the insider status, followed by a matchable purchase and sale),
and there were only two transactions in this case (purchase and sale). It argues that it
was not an insider until the preferred stock was converted into common stock because
the conversion price was floating, rather than fixed, and that therefore it was not the
beneficial owner of any particular quantity of common stock until it exercised its
conversion option. By this reasoning, because the purchase of stock which creates
insider status cannot be considered in locating a matching purchase and sale under §
16(b), see Editek 

, Morgan Capital is not required to disgorge the
profits from its sale of the common stock. We disagree.

        We conclude that Morgan Capital was an insider on any day when it had the
right, applying the conversion formula, to convert its preferred stock into more than
10% of Medtox’s common stock. At any point in time, the conversion value of the
preferred stock was readily ascertainable because it depended only on past events (i.e.,
the market price of the common stock for the preceding five days). It is undisputed
that, unless Morgan Capital became an insider prior to exercising its conversion rights,
§ 16(b) does not apply and disgorgement of profits is not required. See Editek 

(“the acquisition that takes a buyer above ten percent ownership does not
count as a ‘purchase’ matchable against a later sale for § 16 purposes”). Morgan
Capital’s purchase of preferred stock in February of 1996 did not make it an insider
because Morgan Capital did not have a right to acquire more than ten percent of the

                                           -6-
common stock . Instead, Morgan Capital gained the ability to acquire more than 10%
of the common stock passively through the operation of the market rather than by an
affirmative act of its own. Under our holding in Editek II, Morgan Capital was a
“beneficial owner” of Medtox common stock within the meaning of § 13(d) “on every
day within sixty days on which [it] had the right to acquire Editek common stock
through conversion,” including May 1, 1996. See Editek 

. The
determinative question, then, is whether Morgan Capital became a beneficial owner of
more than 10% of the common stock prior to the conversion.

       The district court answered this question in the affirmative, reasoning that the
relevant indicator of insider status was the amount of common stock Morgan Capital
had a right to acquire at the time of the conversion, rather than whether Morgan Capital
had taken affirmative steps to gain insider status.

      After March 30, 1996, if Morgan Capital could have converted its
      Preferred Stock into more than ten percent of the outstanding shares of
      [Medtox’s] Common Stock on any given day, then the presumption arises
      under Section 16(b) that Morgan Capital’s holdings afforded it the
      potential for access to corporate information not available to a smaller
      shareholder on that day . . . . At the same time, however, due to the
      floating conversion rate of the Preferred Stock, Morgan Capital’s standing
      as a “ten percent beneficial owner” was potentially subject to change
      daily. Thus, to establish liability under Section 16(b), Plaintiff will . . .
      have to show . . . that Morgan Capital could have obtained more than ten
      percent of the Common Stock on the day before it actually




                                          -7-
      made the illicit purchase--April 30, 1996. Otherwise, Morgan Capital
      presumably would not have had access to inside information when it
      actually purchased the Common Stock and, therefore, would not be
      subject to the strictures of Section 16(b).7

.

       We agree with the district court’s analysis. We held in Editek II that beneficial
ownership does not depend on an affirmative act of acquisition or a distinct transaction.
Editek 

. A short-swing transaction requires a pre-existing status
(insider) and two transactions (purchase and sale). Once the fact of beneficial
ownership is established, the matter of determining what portion of the common stock
is beneficially owned is a matter of applying the mathematical formula set out by the
preferred stock.8 Morgan Capital was an insider on every day when it had the right to
acquire more than ten percent of the common stock, and even if it had that status thrust
upon it by operation of the market, it is still subject to the strictures of § 16(b).

      Morgan Capital acknowledges that as of April 30, 1996, exercise of its
conversion right entitled it to more than 10% of Medtox’s common stock. Moreover,
Morgan Capital’s conduct during the months leading up to the conversion and sale
comports with the sort of exploitation of inside information that the statute guards
against. The Bistricers were in regular contact with Medtox officers, had close
connections to the company, and were privy to insider information. Thus, the district


      7
       Because the conversion formula calculates the conversion rate based on the five
days prior to the conversion demand, Morgan Capital could calculate at the close of the
market on April 30 how much common stock it would receive in a May 1 conversion.
      8
       We note, as did the district court, that a case in which the calculation of or right
to acquire the security depends on contingent or future events at the time of conversion
would present a different question. See, e.g., Levner v. Prince Alwaleed, 

(2d
Cir. 1995); Transcon v. A.G. Becker, Inc., 

(S.D.N.Y. 1979).

                                           -8-
court correctly determined that Morgan Capital was an insider when it converted its
preferred stock to common stock.

                      B. Conversion of Stock as a Purchase

      Morgan Capital next argues that if it was the beneficial owner of the Medtox
common stock prior to conversion, then its conversion of preferred stock is not a
purchase for § 16(b) purposes but merely a change in the form of beneficial ownership.
Under Rule 16a-13 of the applicable regulations, a transaction that effects only a
“change in the form of beneficial ownership” is exempt from § 16(b) liability. 17
C.F.R. § 240.16a-13. In Editek II, however, we held that for purposes other than
determining insider status, Morgan Capital was not a beneficial owner of the common
stock until it exercised its conversion rights.

      In other words, Morgan Capital, as holder of floating-price convertible
      Preferred Stock, did not own derivative securities, did not have an indirect
      pecuniary interest in the underlying common stock, and accordingly
      (assuming Morgan Capital had no other form of pecuniary interest) was
      not a beneficial owner of the common stock until the conversion--for
      purposes other than ten percent beneficial ownership. It may seem odd
      that Morgan Capital both was and was not a beneficial owner of [Medtox]
      common before the conversion but the SEC has long recognized the two
      different definitions of beneficial owner can result in different
      determinations of beneficial 

.

      The SEC has made clear that conversion is a purchase for the purposes of
determining whether a § 16(b) purchase and sale transaction has occurred.

      [A] right to purchase an equity security is deemed acquired as of the date
      the exercise or conversion price becomes fixed, and the acquisition,

                                          -9-
      absent an exemption, will be matchable for § 16(b) purposes with a
      disposition within six months of the fixing of the price. For example, the
      acquisition of an option having an exercise price equal to 90% of the
      market price as of the date of exercise would be deemed to be a purchase
      of the underlying stock as of the date of exercise.

Ownership Reports and Trading By Officers, Directors and Principal Security Holders,
S.E.C. Release Nos. 34-28869, 35-2524, IC-12,991, 

at *18 (1991).
Thus, the conversion was a purchase for purposes of § 16(b). Consequently, the
district court was correct in determining that Morgan Capital was an insider that
profited from a purchase and sale of Medtox’s common stock within a six-month period
and that under § 16(b), that profit must be disgorged.

                                       C. Venue

      Finally, Morgan Capital contends that venue was not proper in the District of
Minnesota. Under § 27 of the Securities Exchange Act, venue for a § 16(b) action is
proper only in the district where (1) the defendant is found or is an inhabitant or
transacts business, or (2) any act or transaction constituting the violation occurred. 15
U.S.C. § 78aa. The Bistricers repeatedly placed phone calls to the Minnesota offices
of Medtox in order to obtain information about the company’s finances on Morgan
Capital’s behalf, served on the Medtox’s Board for approximately one year while
Medtox was based in Minnesota, and personally toured the company’s facilities there.
We agree with the district court’s conclusion that because Morgan Capital transacts
business in Minnesota, venue was proper there.

      The judgment is affirmed.




                                          -10-
A true copy.

      Attest:

         CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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