06-0784
Roth v. Jennings
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 - - - - - -
4 August Term, 2006
5 (Argued: February 21, 2007 Decided: June 6, 2007)
6
7 Docket No. 06-0784-cv
8 _________________________________________________________
9 ANDREW E. ROTH, derivatively on behalf of METAL
10 MANAGEMENT, INC.,
11 Plaintiff-Appellant,
12 - v. -
13 T. BENJAMIN JENNINGS, EUROPEAN METAL RECYCLING, LTD.,
14 and METAL MANAGEMENT, INC.,
15 Defendants-Appellees.
16 _________________________________________________________
17 Before: KEARSE, CABRANES, and KATZMANN, Circuit Judges.
18 Appeal from a judgment entered pursuant to Fed. R. Civ. P.
19 12(b)(6) in the United States District Court for the Southern
20 District of New York, Deborah A. Batts, Judge, dismissing a
21 derivative action brought under § 16(b) of the Securities Exchange
22 Act of 1934, 15 U.S.C. § 78p(b), for disgorgement of short-swing
23 profits from stock sales made by one defendant as part of an alleged
24 "group" within the meaning of the Act.
25 Affirmed in part; vacated and remanded in part.
26 PAUL D. WEXLER, New York, New York (Bragar Wexler &
27 Eagel, New York, New York, Ostrager Chong Flaherty &
28 Broitman, New York, New York, on the brief),for
29 Plaintiff-Appellant.
1 ALLAN T. SLAGEL, Chicago, Illinois
2 (Heather A. Jackson, Shefsky & Froelich,
3 Chicago, Illinois, John J. Clarke, Jr.,
4 DLA Piper Rudnick Gray Cary, New York, New
5 York, on the brief), for Defendant-
6 Appellee Jennings.
7 THOMAS E. LYNCH, New York, New York
8 (Steven C. Bennett, Jones Day, New York,
9 New York, on the brief), for Defendant-
10 Appellee European Metal Recycling, Ltd.
11 KEARSE, Circuit Judge:
12 Plaintiff Andrew E. Roth, suing derivatively on behalf of
13 nominal defendant Metal Management, Inc. ("MMI" or "Metal
14 Management"), for disgorgement to MMI of "short-swing profits" under
15 § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or
16 "Act"), 15 U.S.C. § 78p(b), appeals from a final judgment of the
17 United States District Court for the Southern District of New York,
18 Deborah A. Batts, Judge, granting motions by defendants T. Benjamin
19 Jennings and European Metal Recycling, Ltd. ("EMR") (collectively
20 "defendants"), to dismiss the complaint for failure to state a claim
21 on which relief can be granted. The complaint alleged that Jennings
22 and EMR as a "group," within the meaning of the Act, owned more than
23 10 percent of MMI's outstanding stock; that within a period of less
24 than six months, Jennings purchased and sold MMI stock at a profit
25 of some $4.25 million; and that § 16(b) required the disgorgement of
26 that profit to MMI. The district court granted both defendants'
27 motions to dismiss on the ground that the complaint was insufficient
28 to plead that defendants acted as a group, given the disclaimers of
29 group status in documents filed by defendants with the Securities
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1 and Exchange Commission ("SEC"). The court ruled that the claim
2 against EMR was also dismissable on the ground that the complaint
3 did not allege that EMR itself had engaged in any short-swing
4 transactions or received any pecuniary profit from the MMI stock
5 transactions by Jennings. For the reasons that follow, we affirm
6 the dismissal of the claim against EMR, but we vacate the dismissal
7 of the claim against Jennings and remand for further proceedings.
8 I. BACKGROUND
9 For purposes of reviewing the dismissal of a complaint for
10 failure to state a claim, we accept the complaint's factual
11 allegations, and all reasonable inferences that can be drawn from
12 those allegations in the plaintiff's favor, as true. See, e.g.,
13 Leatherman v. Tarrant County Narcotics Intelligence & Coordination
14 Unit, 507 U.S. 163, 164 (1993); Overton v. Todman & Co., 478 F.3d
15 479, 483 (2d Cir. 2007). The following description is taken from
16 allegations in the complaint and from documents referred to in the
17 complaint which were filed by EMR or Jennings with the SEC pursuant
18 to SEC Rule 13d-1 and Schedule 13D, 17 C.F.R. §§ 240.13d-1(a),
19 240.13d-101 ("Schedule 13D" filings).
20 A. The Parties and the Transactions in MMI Stock
21 Metal Management (or "the Company"), which describes
22 itself as one of the nation's largest full-service scrap metal
23 recyclers, is a publicly owned Delaware corporation headquartered in
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1 Chicago, Illinois. EMR is a privately owned scrap metal processing
2 company headquartered in the United Kingdom. Jennings, an Illinois
3 resident, is a former chairman and chief executive officer of MMI.
4 On May 15 and May 21, 2003, EMR purchased a total of
5 1,503,100 shares of MMI common stock in open-market transactions.
6 These shares represented approximately 14.8 percent of MMI's
7 outstanding common stock. (See Complaint ¶ 13.) The Schedule 13D
8 filed by EMR with respect to those transactions stated that
9 EMR has taken certain actions that indicate that EMR
10 may be deemed to have the current intent to seek to
11 change or influence control of the Company, although
12 it has not formulated any specific plan or proposal
13 in this regard. . . . Any such plan or proposal
14 that may be formulated could involve, among other
15 things, entering into one or more privately
16 negotiated acquisitions of additional Company
17 securities, open-market purchases, proposing a
18 business combination transaction with the Company,
19 making a tender offer for some or all of the Shares
20 or waging a proxy contest for control of the
21 Company.
22 (EMR Schedule 13D dated June 2, 2003, at 4 (emphases added).)
23 On May 29 and 30, 2003, Jennings, in open-market
24 transactions, purchased a total of 842,000 shares of MMI common
25 stock. (See Complaint ¶ 9.) These shares constituted approximately
26 8.3 percent of MMI's outstanding stock. (See Jennings Schedule 13D
27 dated June 9, 2003, at 2.) The per-share prices ranged from $10.95
28 to $11.55, for a total purchase price of $9,517,350; Jennings paid
29 for the shares by obtaining a $10 million loan from EMR. (See
30 Complaint ¶¶ 8, 9, 14.) According to the terms of the EMR-Jennings
31 loan agreement, the loan was unsecured; the interest rate was
32 4 percent per annum. (See Jennings Schedule 13D dated June 9, 2003,
33 Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I.)
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1 Roth's complaint alleged that "[t]he loan was made for the
2 specific purpose of buying MMI securities in furtherance of EMR's
3 and Jennings [sic] agreement to work together to effect a change of
4 control or similar transaction involving MMI" (Complaint ¶ 8), and
5 that Jennings and EMR therefore constituted a "group" within the
6 meaning of § 13(d) of the Act for purposes of determining each
7 entity's beneficial ownership of MMI stock under § 16 of the Act
8 (e.g., id. ¶¶ 6, 7, 11). The complaint alleged that under § 16(b),
9 "each member of [the] Group is liable to pay to the issuer all
10 profits earned by that Group member in stock transactions effected
11 within a six-month period during which time the Group owned a
12 greater than 10% beneficial interest in the issuer's stock." (Id.
13 ¶ 12.)
14 On July 14 and 15, 2003, Jennings sold 16,000 of his MMI
15 shares, at prices ranging from $18.6483 to $19.06 per share. (See
16 Complaint ¶ 15.) From August 19 through September 9, 2003, he sold
17 an additional 602,900 shares, at prices ranging from $18 to $18.59
18 per share. (See id. ¶ 16.) The complaint alleged that "[a]t all
19 relevant times during the period while Jennings purchased and sold
20 MMI common stock, the Group owned in excess of 10% of MMI's
21 outstanding common stock." (Id. ¶ 13.) It alleged that Jennings's
22 sales, which occurred less than six months after his purchases,
23 resulted in profits totaling at least $4,249,408.80, and that
24 Jennings and EMR are each "liable to the extent of its [sic]
25 pecuniary [interest] in the . . . disgorgeable profits." (Id. ¶ 18;
26 see id. ¶ 20.)
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1 B. The Motions To Dismiss and the District Court's Decision
2 Jennings and EMR moved for dismissal pursuant to Fed. R.
3 Civ. P. 12(b)(6) for failure to state a claim under § 16(b). They
4 attached to their respective motions several documents they had
5 filed with the SEC--some of which were referred to in the complaint-
6 -which described, inter alia, the loan agreement between EMR and
7 Jennings, certain of their transactions in MMI stock, and their
8 respective MMI holdings. The loan agreement, in the form of a June
9 9, 2003 letter from EMR to Jennings, signed as "[a]ccepted and
10 agreed to" by Jennings ("Loan Agreement") stated--in the version
11 attached to the Schedule 13D filed by EMR--as follows:
12 This letter will evidence our legally binding
13 agreements effective as of June 2, 2003:
14 (1) European Metal Recycling Ltd. ("EMR")
15 has agreed to provide you with a bridge loan in
16 an aggregate of up to U.S. $10,000,000 (the
17 "Loan").
18 (2) The Loan shall be unsecured, shall
19 accrue interest at the rate of Four Percent
20 (4%) per annum, and shall be due and payable in
21 full no later than ninety (90) days from the
22 effective date hereof.
23 (3) EMR hereby acknowledges that you have
24 used proceeds of the Loan to purchase shares of
25 Common Stock of Metal Management, Inc. EMR
26 hereby acknowledges and agrees that you
27 currently are not, nor in the future shall you,
28 be under any obligation to vote, retain or
29 dispose of such shares as part of, nor
30 otherwise to participate in any way in any
31 plans or proposals of, any "group" within the
32 meaning of the applicable federal and state
33 securities laws in regard to the securities of
34 Metal Management, Inc., including any "group"
35 that may in the future involve EMR in any way.
36 (EMR Schedule 13D dated June 9, 2003, Exhibit I; see also Jennings
37 Schedule 13D dated June 9, 2003, Exhibit A (with slight linguistic
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1 differences from EMR's Exhibit I).) Jennings and EMR argued that
2 the complaint failed sufficiently to allege that they were a group
3 within the meaning of the pertinent securities laws and that the
4 Loan Agreement and their other SEC filings showed that they had
5 disclaimed group status.
6 In a Memorandum and Order dated February 1, 2006, the
7 district court agreed, granting both defendants' motions to dismiss.
8 See 2006 WL 278135 (Feb. 2, 2006) ("District Court Opinion"). The
9 court found principally that defendants' SEC filings disclaimed
10 group status, and it held that notwithstanding the contrary
11 allegations of the complaint, defendants' disclaimers were
12 controlling.
13 The court began its discussion by noting that in
14 considering a motion to dismiss pursuant to Rule 12(b)(6), the court
15 is required to accept as true the factual allegations in the
16 complaint, draw all reasonable inferences in favor of the plaintiff,
17 and refrain from assessing the weight of the evidence that might be
18 offered in support of the complaint. The court noted that such a
19 motion should be granted "'only if, after viewing plaintiff's
20 allegations in this favorable light, "it appears beyond doubt that
21 the plaintiff can prove no set of facts in support of his claim
22 which would entitle him to relief."'" District Court Opinion, 2006
23 WL 278135, at *3 (quoting Walker v. City of New York, 974 F.2d 293,
24 298 (2d Cir. 1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46
25 (1957)), cert. denied, 507 U.S. 961 (1993)). The court also stated
26 that
27 consideration of a Rule 12(b)(6) motion is limited
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1 to the factual allegations in the complaint,
2 documents attached to the complaint as exhibits or
3 incorporated in it by reference, to matters of which
4 judicial notice might be taken, or to documents
5 either in plaintiff's possession or of which
6 plaintiffs had knowledge and relied on in bringing
7 suit.
8 District Court Opinion, 2006 WL 278135, at *3. It added that
9 the Second Circuit has held that "when a district
10 court decides a motion to dismiss a complaint
11 alleging securities fraud, it may review and
12 consider public disclosure documents required by law
13 to be and which actually have been filed with the
14 SEC," as these are documents that should be noticed
15 by the Court. Cortec Indus., Inc.[ v. Sum Holding
16 L.P.], 949 F.2d [42, 47 (2d Cir. 1991)] (referencing
17 Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d
18 Cir. 1991)).
19 District Court Opinion, 2006 WL 278135, at *3.
20 As to the merits of the motions, the court noted that, in
21 order to show that Jennings's purchases, amounting to 8.3 percent of
22 MMI's shares, were subject to § 16(b), Roth was required to show
23 that EMR and Jennings constituted a "group" within the meaning of
24 the Act, that is, that they "'combined in furtherance of a common
25 objective.'" District Court Opinion, 2006 WL 278135, at *4 (quoting
26 Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982), cert.
27 denied, 460 U.S. 1069 (1983)). The court stated that "[i]n order to
28 plead group activity sufficiently, Plaintiff is not required to
29 allege that a common objective of actual corporate control existed
30 among the defendants, but simply that the defendants acted together
31 in furtherance of a common objective with regard to acquiring,
32 holding, voting or disposing of securities of the issuer," although
33 "the concerted action of the group's members need not be expressly
34 memorialized in writing." District Court Opinion, 2006 WL 278135,
- 8-
1 at *4 (internal quotation marks and brackets omitted).
2 The court ruled, however, that Roth's complaint "d[id] not
3 sufficiently allege such an agreed-upon common purpose" between EMR
4 and Jennings. Id. at *5. Citing Schedule 13D filings by EMR and
5 Jennings, respectively, the court observed that the Schedule 13D
6 filed by Jennings in June 2003, which disclosed Jennings's purchases
7 of MMI shares and the loan from EMR, stated (a) that "'[t]here are
8 no arrangements or understandings between EMR and [Jennings] as to
9 how [Jennings] would utilize the proceeds of the [L]oan,'" and (b)
10 that Jennings "'does not have any definite plans regarding an
11 extraordinary corporate transaction, such as a merger,
12 reorganization or liquidation involving [MMI] or a sale or transfer
13 of a material amount of assets of [MMI] or any of its
14 subsidiaries.'" District Court Opinion, 2006 WL 278135, at *1-*2
15 (quoting Jennings Schedule 13D dated June 9, 2003, at 3) (emphasis
16 ours). The court noted also that EMR's Schedule 13D disclosing its
17 loan to Jennings stated that
18 [EMR] has no contract, arrangement[] or
19 understanding of any kind with Mr. Jennings with
20 respect to the Common Stock [of MMI] owned by [EMR]
21 or by Mr. Jennings; . . . expressly disclaims any
22 direct or indirect beneficial ownership in the
23 Common Stock [of MMI] owned by Mr. Jennings; and
24 further disclaims any "group" status with Mr.
25 Jennings.
26 District Court Opinion, 2006 WL 278135, at *2 (quoting EMR Schedule
27 13D dated June 9, 2003, at 3) (other internal quotation marks
28 omitted) (emphasis ours). And the court noted that
29 [t]he loan agreement signed by both Jennings and
30 EMR's managing director expressly states that
31 Jennings and EMR are in no way, either by the loan
32 of June 9, 2003 or at any time in the future, to be
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1 considered a "group" or part of any group that might
2 include more than the Defendants. . . . EMR filed
3 an amended 13D schedule after loaning money to
4 Jennings, which further declared that the loan did
5 not constitute group activity.
6 District Court Opinion, 2006 WL 278135, at *5 (emphases added). The
7 court stated that defendants had thus "filed three separate
8 statements with the SEC, asserting that their actions do not
9 constitute group activity"; that their disclaimers conflicted with
10 the allegations of the complaint; and that the complaint did not
11 "explain the documents [that EMR and Jennings had] filed with the
12 SEC." Id. The court accepted defendants' disclaimers as true. See
13 id.
14 The district court rejected Roth's contention that, in
15 ruling on the Rule 12(b)(6) motions, the court should not rely on
16 defendants' disclaimers:
17 Plaintiff contends that the disclaimer of group
18 status in the loan agreement and the subsequent
19 amended 13D schedules by both Defendants was meant
20 to circumvent liability even though the two were
21 acting in concert. However, "unadorned allegations"
22 based on "unmitigated speculation" that defendants
23 are acting as a group are inadequate to sustain a
24 Section 13(d) claim.[] Segal v. Gordon, 467 F.2d
25 602, 608 (2d Cir. 1972). In the instant case,
26 Defendants have filed three separate statements with
27 the SEC, asserting that their actions do not
28 constitute group activity. The express disclaimer
29 of group status conflicts with Plaintiff's
30 allegations. Even interpreting the pleadings in a
31 light most favorable to the Plaintiff, the
32 Defendants' statements, which have been submitted to
33 a government agency and made public, should not be
34 contradicted or taken as perjurious simply because
35 the Plaintiff, without evidence, says they are. See
36 Matusovsky v. Merrill Lynch, 186 F.Supp.2d 397, 400
37 [(S.D.N.Y. 2002)] (stating that if a plaintiff's
38 allegations are contradicted by a document
39 considered in determining a Rule 12(b)(6) motion,
40 those allegations are insufficient to defeat the
41 motion); Rap[o]port v. Asia Elecs., 88 F.Supp.2d
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1 179, 184 (S.D.N.Y. 2000) (stating that when
2 documents contain statements that contradict the
3 allegations in the complaint, the documents control
4 and the court need not accept as true the
5 allegations contained in the complaint).
6 District Court Opinion, 2006 WL 278135, at *5 (emphases added).
7 In addition, the district court ruled that the complaint
8 would be dismissable "[e]ven were this Court not to accept the truth
9 of Defendants' statements in their SEC filings." Id. The court
10 concluded that § 16(b) was inapplicable because other evidence
11 submitted by defendants indicated that EMR and Jennings could not be
12 considered to have been a group at the time of Jennings's sales.
13 Citing the language in § 16(b) that "[t]his subsection shall not be
14 construed to cover any transaction where such beneficial owner was
15 not such both at the time of the purchase and sale, or the sale and
16 purchase, of the security . . . involved," 15 U.S.C. § 78p(b), the
17 court concluded that "for traders to constitute a 'group', the
18 Exchange Act requires that their coordinated activity persist during
19 the time of purchase and during the time of sale of the securities,"
20 District Court Opinion, 2006 WL 278135, at *6 (emphasis in
21 original). The court noted that, according to documents submitted
22 by defendants, EMR had offered in August 2003 to buy Jennings's
23 shares at a below-market price and that Jennings had declined that
24 offer and sold shares on the open market. See id. at *5 (citing EMR
25 Schedule 13D dated August 12, 2003, Exhibit 1 (EMR letter offering
26 to pay Jennings $13.50 per share)). The court found that
27 [s]uch transactions do not reflect two group members
28 acting in concert to effectuate a common objective
29 with regard to acquiring, holding, voting or
30 disposing of securities of the issuer. . . . Had
31 Defendants held a common purpose, Jennings likely
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1 would have accepted EMR's offer. While group
2 members need not march in lock step to qualify as a
3 "group", . . . marching in opposite directions
4 certainly counsels against concluding that Jennings
5 acted with EMR as a "group". Jennings' refusal of
6 EMR's offer contradicted precisely what one would
7 have expected of him had he been acting in concert
8 with EMR.
9 District Court Opinion, 2006 WL 278135, at *5 (internal quotation
10 marks and brackets omitted) (emphases added); see id. ("[t]his
11 evidence does not in any way approximate an instance of group
12 activity, and belies allegations of any common objective shared by
13 the Defendants" (emphasis added)); id. at *6 (in selling his shares
14 on the open market, "Jennings did not act in concert with EMR at the
15 time of sale; he did the opposite"). The court concluded that,
16 [a]ccordingly, EMR's shares cannot be aggregated
17 with Jennings' to constitute the more than ten
18 percent ownership required to warrant Section 16(b)
19 liability. Neither EMR nor Jennings may be
20 considered part of a "group."
21 Because the Complaint does not sufficiently
22 aver that Defendants acted as a group at the time
23 Jennings sold his MMI shares, because public SEC
24 filings indicate that Defendants never intended to
25 act as a group, and because Jennings alone did not
26 own ten percent of a class of MMI's equity
27 securit[ies], Jennings' Motion to Dismiss
28 Plaintiff's Complaint is hereby GRANTED.
29 Id. (emphases added).
30 The court ruled that the claim against EMR should be
31 dismissed on the additional ground that the complaint did not allege
32 that EMR had made any sales of its own shares or had any direct or
33 indirect pecuniary interest in the shares sold by Jennings.
34 Judgment was entered dismissing the complaint, and this
35 appeal followed.
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1 II. DISCUSSION
2 On appeal, Roth contends principally that the district
3 court erred in concluding that the complaint failed to state a claim
4 on which relief can be granted against Jennings, arguing that the
5 complaint sufficiently pleaded that EMR and Jennings acted as a
6 group for the purpose of Jennings's acquisition of MMI shares, that
7 defendants' disclaimers of group activity were not entitled to
8 evidentiary weight in the consideration of Rule 12(b)(6) motions,
9 and that Jennings's sales of his shares were not a basis for
10 concluding that the "group" provisions no longer applied. For the
11 reasons that follow, we agree.
12 A. Section 16(b)
13 Section 16 of the Exchange Act, with respect to any
14 company whose securities are registered on a national securities
15 exchange, imposes certain obligations and restrictions on the
16 company's officers, directors, and "[e]very person who is directly
17 or indirectly the beneficial owner of more than 10 percent of any
18 class of any equity security (other than an exempted security),"
19 15 U.S.C. § 78p(a)(1). "[D]efining directors, officers, and [such]
20 beneficial owners as those presumed to have access to inside
21 information," Foremost-McKesson, Inc. v. Provident Securities Co.,
22 423 U.S. 232, 243 (1976) ("Foremost-McKesson"), Congress enacted
23 § 16(b) of the Act, which provides, in pertinent part, as follows:
24 (b) Profits from purchase and sale of security
25 within six months. For the purpose of preventing
26 the unfair use of information which may have been
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1 obtained by such beneficial owner, director, or
2 officer by reason of his relationship to the issuer,
3 any profit realized by him from any purchase and
4 sale, or any sale and purchase, of any equity
5 security of such issuer (other than an exempted
6 security) . . . within any period of less than six
7 months, . . . shall inure to and be recoverable by
8 the issuer, irrespective of any intention on the
9 part of such beneficial owner, director, or officer
10 in entering into such transaction of holding the
11 security . . . purchased or of not repurchasing the
12 security . . . sold for a period exceeding six
13 months. . . . This subsection shall not be
14 construed to cover any transaction where such
15 beneficial owner was not such both at the time of
16 the purchase and sale, or the sale and purchase, of
17 the security . . . .
18 15 U.S.C. § 78p(b).
19 The general purpose of Congress in enacting
20 § 16(b) is well known. See Kern County Land Co.[ v.
21 Occidental Petroleum Corp., 411 U.S. 582, 591-92
22 (1973)]; Reliance Electric Co. [v. Emerson Electric
23 Co., 404 U.S. 418, 422 (1972)], and the authorities
24 cited therein. Congress recognized that insiders
25 may have access to information about their
26 corporations not available to the rest of the
27 investing public. By trading on this information,
28 these persons could reap profits at the expense of
29 less well informed investors. In § 16(b) Congress
30 sought to "curb the evils of insider trading [by] .
31 . . taking the profits out of a class of
32 transactions in which the possibility of abuse was
33 believed to be intolerably great." Reliance
34 Electric Co., supra, at 422.
35 Foremost-McKesson, 423 U.S. at 243 (emphasis added).
36 Profits resulting from purchase-and-sale, or sale-and-
37 repurchase, transactions within a period of less than six months are
38 commonly known as "short-swing" transactions, see, e.g., id. at 234;
39 SEC Rule 16a-1(a)(3), 17 C.F.R. § 240.16a-1(a)(3). As indicated by
40 the "irrespective of any intention" clause in § 16(b), that section
41 is a strict-liability provision; it "requires the inside,
42 short-swing trader to disgorge all profits realized on all
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1 'purchases' and 'sales' within the [six-month] period, without proof
2 of actual abuse of insider information, and without proof of intent
3 to profit on the basis of such information," Kern County Land Co. v.
4 Occidental Petroleum Corp., 411 U.S. 582, 595 (1973) (emphasis
5 added); see, e.g., Foremost-McKesson, 423 U.S. at 251 ("Section
6 16(b) imposes a strict prophylactic rule with respect to insider,
7 short-swing trading.").
8 The Exchange Act also recognizes that the abuses it
9 targets may be accomplished by persons acting not individually but
10 in combination with others. See, e.g., 15 U.S.C. § 78m(d)(3). With
11 respect to § 16, SEC Rule 16a-1(a)(1) provides that, "[s]olely for
12 purposes of determining whether a person is a beneficial owner of
13 more than ten percent of any class of equity securities," the term
14 "beneficial owner" means, with exceptions not pertinent here, "any
15 person who is deemed a beneficial owner pursuant to section 13(d) of
16 the Act and the rules thereunder." 17 C.F.R. § 240.16a-1(a)(1).
17 Section 13(d) of the Act provides, in pertinent part, that
18 [w]hen two or more persons act as a partnership,
19 limited partnership, syndicate, or other group for
20 the purpose of acquiring, holding, or disposing of
21 securities of an issuer, such syndicate or group
22 shall be deemed a "person" for the purposes of this
23 subsection.
24 15 U.S.C. § 78m(d)(3) (emphases added). And SEC Rule 13d-5(b)(1)
25 promulgated thereunder provides, with exceptions not pertinent here,
26 that
27 [w]hen two or more persons agree to act together for
28 the purpose of acquiring, holding, voting or
29 disposing of equity securities of an issuer, the
30 group formed thereby shall be deemed to have
31 acquired beneficial ownership, for purposes of
32 sections 13(d) and (g) of the Act, as of the date of
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1 such agreement, of all equity securities of that
2 issuer beneficially owned by any such persons.
3 17 C.F.R. § 240.13d-5(b)(1) (emphases added). Accordingly, under
4 § 13(d)(3) and this Rule, if two or more entities agree to act
5 together for any of the listed purposes, a "group" is "thereby"
6 formed.
7 Thus, "the touchstone of a group within the meaning of
8 Section 13(d) is that the members combined in furtherance of a
9 common objective." Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir.
10 1982) ("Wellman"), cert. denied, 460 U.S. 1069 (1983). Although a
11 common purpose to acquire control of the issuing company would be an
12 indicium of collective action within the meaning of § 13(d), it is
13 not an essential.
14 [T]he agreement required by § 13(d)(3) need not be
15 an agreement to gain corporate control or to
16 influence corporate affairs. . . . The plain
17 language of § 13(d)(3) demands only an agreement
18 "for the purpose of acquiring, holding, or disposing
19 of securities," 15 U.S.C. § 78m(d)(3), and Rule 13d-
20 5 is similarly satisfied by that sort of agreement,
21 17 C.F.R. § 240.13d-5(b)(1).
22 Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 124-25 (2d
23 Cir. 2001). Further, evidence that group members "might not always
24 make identical investment decisions" does "not preclude existence of
25 agreement." Id. at 127 (internal quotation marks omitted).
26 Importantly, for purposes of this case, the actors need
27 not have combined for all of the purposes listed in § 13(d)(3) or
28 Rule 13d-5(b)(1). Acquiring, holding, and disposing of are listed
29 in the disjunctive. Hence, "[a]ll that is required is that the
30 members of the group have combined to further a common objective
31 with regard to one of those activities." Morales v. Freund, 163
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1 F.3d 763, 767 n.5 (2d Cir. 1999) (emphasis added); see, e.g.,
2 Morales v. Quintel Entertainment, Inc., 249 F.3d at 124; Wellman,
3 682 F.2d at 363.
4 The questions of (a) whether two or more persons "act[ed]"
5 as a group or agreed to act together, and (b) whether their purpose
6 was the acquisition, holding, or disposition of an issuer's equity
7 securities are questions of fact. See, e.g., Morales v. Quintel
8 Entertainment, Inc., 249 F.3d at 124. If they in fact so acted or
9 agreed to so act, the legal consequences are specified in § 13(d)(3)
10 and Rule 13d-5(b)(1): If the persons agreed to act together for the
11 purpose of purchasing an issuer's shares, a "group" was "thereby"
12 formed, 17 C.F.R. § 240.13d-5(b)(1); if they acted as a "group,"
13 they must be treated as a single person, 15 U.S.C. § 78m(d)(3)
14 ("shall be deemed a 'person'"); and each person in the group "shall
15 be deemed" to be the beneficial owner "of all equity securities of
16 that issuer beneficially owned by any" member of the group, 17
17 C.F.R. § 240.13d-5(b)(1).
18 An agreement to act together for the purpose of acquiring,
19 holding, or disposing of shares need not be unconditional in order
20 to support a finding that the actors constituted a group within the
21 meaning of those provisions. See, e.g., Wellman, 682 F.2d at 363.
22 Nor need the group "be committed to acquisition, holding, or
23 disposition on any specific set of terms." Id.; see, e.g., Morales
24 v. Freund, 163 F.3d at 767 n.5. And, "[o]f course, the concerted
25 action of the group's members need not be expressly memorialized in
26 writing." Wellman, 682 F.2d at 363. The formation of such a group
27 "may be formal or informal and may be proved by direct or
- 17-
1 circumstantial evidence." Morales v. Quintel Entertainment, Inc.,
2 249 F.3d at 124; see also id. at 125-26 (sworn statements by
3 defendants, alleged group members, that the members "never 'agreed'
4 among themselves to acquire [the] stock" are insufficient to support
5 the granting of summary judgment in favor of the defendants where
6 there is circumstantial evidence from which "a reasonable trier of
7 fact could discredit the . . . sworn statements and infer instead
8 that" the defendants entered into an agreement with one another,
9 "with an agreed purpose to acquire [the] stock").
10 B. Rule 12(b)(6)
11 In considering a motion under Fed. R. Civ. P. 12(b)(6) to
12 dismiss a complaint for failure to state a claim on which relief can
13 be granted, the district court is normally required to look only to
14 the allegations on the face of the complaint. If, on such a motion,
15 "matters outside the pleading are presented to and not excluded by
16 the court," the court should normally treat the motion as one for
17 summary judgment pursuant to Fed. R. Civ. P. 56. Fed. R. Civ. P.
18 12(b); see, e.g., Global Network Communications, Inc. v. City of New
19 York, 458 F.3d 150, 154-55 (2d Cir. 2006) ("Global"). In any event,
20 a ruling on a motion for dismissal pursuant to Rule 12(b)(6) is not
21 an occasion for the court to make findings of fact. See, e.g.,
22 Leonard F. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d
23 Cir. 1999).
24 In certain circumstances, the court may permissibly
25 consider documents other than the complaint in ruling on a motion
26 under Rule 12(b)(6). Documents that are attached to the complaint
- 18-
1 or incorporated in it by reference are deemed part of the pleading
2 and may be considered. See, e.g., Pani v. Empire Blue Cross Blue
3 Shield, 152 F.3d 67, 71 (2d Cir. 1998), cert. denied, 525 U.S. 1103
4 (1999). In addition, even if not attached or incorporated by
5 reference, a document "upon which [the complaint] solely relies and
6 which is integral to the complaint" may be considered by the court
7 in ruling on such a motion. Cortec Industries, Inc. v. Sum Holding
8 L.P., 949 F.2d 42, 47 (2d Cir. 1991) ("Cortec") (emphases added),
9 cert. denied, 503 U.S. 960 (1992); see, e.g., Global, 458 F.3d at
10 156.
11 This principle has its greatest applicability in cases
12 alleging fraud. See, e.g., Cortec, 949 F.2d at 47-48; Kramer v.
13 Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) ("Kramer"). When
14 a complaint alleges, for example, that a document filed with the SEC
15 failed to disclose certain facts, it is appropriate for the court,
16 in considering a Rule 12(b)(6) motion, to examine the document to
17 see whether or not those facts were disclosed. See, e.g., id. Or
18 when the complaint alleges that such a document made a particular
19 representation, the court may properly look at the document to see
20 whether that representation was made. See, e.g., id. at 775.
21 Consideration of such documents filed with the SEC is appropriate
22 with respect to a nondisclosure or misrepresentation claim because
23 "no serious question as to their authenticity can exist," and
24 because the court is to consider them on a Rule 12(b)(6) motion
25 "only to determine what the documents stated," and "not to prove the
26 truth of their contents." Kramer, 937 F.2d at 774 (emphases added).
27 Similarly, where public records that are integral to a
- 19-
1 fraud complaint are not attached to it, the court, in considering a
2 Rule 12(b)(6) motion, is permitted to take judicial notice of those
3 records. See, e.g., id.; Brass v. American Film Technologies, Inc.,
4 987 F.2d 142, 150 (2d Cir. 1993). If the court takes judicial
5 notice, it does so in order "to determine what statements [they]
6 contained"--but "again not for the truth of the matters asserted."
7 Kramer, 937 F.2d at 774 (emphases added); see, e.g., Liberty Mutual
8 Insurance Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d
9 Cir. 1992).
10 A decision that a complaint fails to state a claim on
11 which relief can be granted is a ruling of law, see, e.g., De Jesus
12 v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir.), cert. denied, 519
13 U.S. 1007 (1996); McCall v. Pataki, 232 F.3d 321, 322 (2d Cir.
14 2000), and we review such a decision de novo, see, e.g., Gregory v.
15 Daly, 243 F.3d 687, 691 (2d Cir. 2001). In our review, we, like the
16 district court, "must accept as true all of the factual allegations
17 set out in plaintiff's complaint, draw inferences from those
18 allegations in the light most favorable to plaintiff, and construe
19 the complaint liberally." Id. (internal quotation marks omitted).
20 And whatever documents may properly be considered in connection with
21 the Rule 12(b)(6) motion, the bottom-line principle is that "once a
22 claim has been stated adequately, it may be supported by showing any
23 set of facts consistent with the allegations in the complaint."
24 Bell Atlantic Corp. v. Twombly, 2007 WL 1461066, at *11 (U.S. May
25 21, 2007) ("Twombly").
- 20-
1 C. The Claim Against Jennings
2 1. Sufficiency of the Allegation of "Group" Action
3 Because Jennings apparently owned no MMI stock just prior
4 to the May 2003 purchases he made with the loan from EMR, he was not
5 a statutory insider to whom § 16 applied unless he and EMR--which
6 already owned 14.8 percent--acted as a group for the purpose of
7 Jennings's acquisition, holding, or disposition of MMI shares. The
8 district court, in ruling that the complaint did not sufficiently
9 allege that EMR and Jennings had acted as a group, did not properly
10 apply the above principles.
11 The district court correctly noted that SEC filings may
12 properly be considered in ruling on a Rule 12(b)(6) motion to
13 dismiss a complaint alleging claims of fraud. But this is not a
14 fraud case. It is, rather, a § 16(b) action seeking the
15 disgorgement of short-swing profits, for which an insider is to be
16 held strictly liable. Defendants' submissions of their Schedule 13D
17 filings thus presented material that was inappropriate for
18 consideration on Rule 12(b)(6) motions to dismiss a § 16(b)
19 complaint that contained no allegation of a failure to disclose or
20 of a factual misrepresentation.
21 Further, even if there had been allegations of fraud,
22 defendants' SEC filings could not properly be considered for the
23 truth of their contents. The district court's view that "the
24 Defendants' statements, which have been submitted to a government
25 agency and made public, should not be contradicted or taken as
26 perjurious simply because the Plaintiff, without evidence, says they
27 are," District Court Opinion, 2006 WL 278135, at *5--although a
- 21-
1 possible argument to a jury--was not an appropriate rationale for
2 ruling on a motion under Rule 12(b)(6).
3 The cases cited by the district court for the proposition
4 that "if a plaintiff's allegations are contradicted by a document
5 considered in determining a Rule 12(b)(6) motion, those allegations
6 are insufficient to defeat the motion," id. (citing Matusovsky v.
7 Merrill Lynch, 186 F.Supp.2d 397, 400 (S.D.N.Y. 2002)) (emphases
8 ours), i.e., that "when documents contain statements that contradict
9 the allegations in the complaint, the documents control and the
10 court need not accept as true the allegations contained in the
11 complaint," District Court Opinion, 2006 WL 278135, at *5 (citing
12 Rapoport v. Asia Electronics Holding Co., 88 F.Supp.2d 179, 184
13 (S.D.N.Y. 2000)) (emphasis ours), are not applicable to the present
14 case. Matusovsky was a case in which the plaintiff claimed that a
15 general release he had signed was without consideration, whereas the
16 signed release itself recited the consideration he received; and the
17 cited discussion in Rapoport concerned a fraud claim alleging that
18 a prospectus failed to disclose certain facts. These cases fall
19 squarely within the principle that the contents of the document are
20 controlling where a plaintiff has alleged that the document
21 contains, or does not contain, certain statements. As we noted in
22 Kramer, however, such documents may properly be considered only for
23 "what" they contain, "not to prove the truth" of their contents.
24 In the present case, the gravamen of the complaint was
25 simply that defendants were subject to strict liability for
26 Jennings's profits on his short-swing transactions as members of a
27 group that owned more than 10 percent of MMI's shares. The district
- 22-
1 court's ruling that the complaint failed to state a claim that EMR
2 and Jennings constituted a group because of defendants'
3 "disclaimer[s] of group status" in their Schedule 13D filings with
4 the SEC, District Court Opinion, 2006 WL 278135, at *5, was flawed
5 for several reasons. First, it improperly considered the
6 representations in defendants' filings for the truth of their
7 assertions that there were no current agreements or understandings
8 between Jennings and EMR as to how Jennings would vote or dispose of
9 his shares in the future. Even assuming that those factual
10 assertions were relevant, they raised issues of fact that should not
11 have been determined at the pleading stage.
12 Second, the court apparently assumed that defendants'
13 representations, which used the present tense as to their current
14 understandings with respect to Jennings's future obligations, also
15 meant that they had had no past understanding, when EMR made the
16 loan to Jennings, that the purpose of the loan was to fund his
17 purchase of MMI shares. The Schedule 13D filings did not, however,
18 actually state that there had not been such an agreement with regard
19 to Jennings's acquisition of the shares. For example, EMR's June 9
20 Schedule 13D acknowledged that Jennings had used the loan to fund
21 his May 29-30 purchases of MMI shares and stated that EMR "has" no
22 understanding with respect to the MMI shares "owned" by Jennings.
23 Jennings's June 9 Schedule 13D made similar use of the present
24 tense, stating there "are" no agreements as to how he would use the
25 proceeds of the EMR loan. Thus, even if it had been appropriate to
26 consider defendants' SEC filings for the truth of their assertions,
27 their representations would not have warranted rulings in their
- 23-
1 favor, for they did not actually assert that EMR had not agreed to
2 make the loan to Jennings for the purpose of the MMI stock
3 acquisition.
4 Third, in disclaiming "group" status, defendants were in
5 effect attempting to disclaim the legal effects of their conduct.
6 The district court's acceptance of and reliance on defendants'
7 "express[] state[ment]s that Jennings and EMR are in no way, either
8 by the loan of June 9, 2003 or at any time in the future, to be
9 considered a 'group,'" as a disclaimer that was "control[ling],"
10 District Court Opinion, 2006 WL 278135, at *5, gave no recognition
11 to the terms of § 13(d)(3) and Rule 13d-5(b)(1). If in fact EMR and
12 Jennings acted together for the purpose of Jennings's acquiring MMI
13 shares, EMR and Jennings "thereby," under those provisions of law,
14 "formed" a "group," regardless of their attempted disclaimers of the
15 legal effect of such joint action.
16 Finally, looking at the "group" allegations in the
17 complaint, i.e., that EMR's loan to Jennings was made for the
18 purpose of allowing him to buy MMI shares in furtherance of an EMR-
19 Jennings agreement "to work together to effect a change of control
20 or similar transaction involving MMI" (Complaint ¶ 8), and at the
21 documents to which the complaint referred, we cannot agree with the
22 district court's view that the "group" allegations were "unmitigated
23 speculation" or "unadorned" allegations made "without evidence,"
24 District Court Opinion, 2006 WL 278135, at *5 (internal quotation
25 marks omitted). Leaving aside the principle that "[t]he pleading of
26 additional evidence," beyond what is required to enable the
27 defendant to respond, "is not only unnecessary, but in contravention
- 24-
1 of proper pleading procedure," Geisler v. Petrocelli, 616 F.2d 636,
2 640 (2d Cir. 1980); see, e.g., 2A Moore's Federal Practice -- Civil
3 § 8.04[1][b][5] (3d ed. 2007), the complaint's allegation of
4 collaboration between EMR and Jennings was hardly "unadorned" or an
5 "unmitigated speculation." That allegation was accompanied by other
6 allegations, and by references to defendants' respective June 2003
7 Schedule 13D filings, that included the following:
8 - On May 21, 2003, EMR completed its accumulation of
9 1,503,100 shares of MMI's stock, or 14.8 percent of the
10 outstanding shares (see Complaint ¶ 13; EMR Schedule 13D
11 dated June 2, 2003, at 2, 5).
12 - In connection with its May 2003 purchases, EMR stated
13 that it might "seek to change or influence control of" MMI
14 by, inter alia, "waging a proxy contest for control of the
15 Company" (EMR Schedule 13D dated June 2, 2003, at 4).
16 - On May 29 and 30, 2003, Jennings, in open-market
17 purchases, acquired 842,000 shares of MMI's stock (see
18 Complaint ¶ 9), which constituted 8.3 percent of MMI's
19 stock (see Jennings Schedule 13D dated June 9, 2003, at
20 2).
21 - Jennings paid for his May 29-30 purchases with a
22 $10 million loan from EMR (see Complaint ¶ 8).
23 - The rate of interest on EMR's loan to Jennings,
24 according to the Loan Agreement, was 4 percent per annum
25 (which we judicially notice was below the then-current
26 prime rate, see, e.g., Wall Street Journal, Nov. 8, 2002,
27 at C12 (prime rate 4.25%); id. June 27, 2003, at C11, and
28 June 30, 2003, at C15 (prime rate cut from 4.25% to 4.00%
29 effective June 27, 2003)).
30 - EMR's $10 million loan to Jennings was unsecured (see
31 Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR
32 Schedule 13D dated June 9, 2003, Exhibit I).
33 Although we do not suggest that Roth was required to
34 adduce such evidence at the pleading stage, see, e.g., Twombly, 2007
35 WL 1461066, at *8 ("a complaint attacked by a Rule 12(b)(6) motion
36 to dismiss does not need detailed factual allegations"), we note
- 25-
1 that on this record, no rational factfinder would be compelled to
2 believe that EMR and Jennings had had no agreement with respect to
3 Jennings's acquisition of his shares. Given evidence that EMR
4 acquired a 14.8 percent stake in MMI and stated that it might
5 attempt to gain control of MMI, that within days of its acquisition
6 of that 14.8 percent EMR made a cheap and unsecured loan of
7 $10 million to Jennings, that Jennings was MMI's former chairman and
8 CEO, and that Jennings used the EMR loan to acquire 8.3 percent of
9 MMI's stock, a rational factfinder could instead easily infer that
10 EMR and Jennings acted together for the purpose of Jennings's
11 purchase of shares in MMI. And upon such a finding, § 13(d)(3) and
12 Rule 13d-5(b)(1) would require that EMR and Jennings be treated as
13 a group, with each being deemed to own the total of their holdings
14 of MMI stock.
15 In sum, the district court erred in accepting defendants'
16 SEC filings for the truth of their contents, in inferring that those
17 contents were sufficient and controlling, and in concluding that the
18 complaint itself did not allege facts sufficient to show that EMR
19 and Jennings constituted a group, within the meaning of the Exchange
20 Act, for the purpose of having Jennings purchase shares of MMI.
21 2. The Duration of the Group
22 The remaining question is whether the complaint was
23 nonetheless properly dismissed on the ground that § 16(b) was
24 inapplicable because EMR and Jennings were no longer a "group"--on
25 the theory that their interests had diverged--when Jennings sold his
26 shares. The district court answered this question in the
- 26-
1 affirmative. Because the final sentence of § 16(b) states that
2 [t]his subsection shall not be construed to cover
3 any transaction where such beneficial owner was not
4 such both at the time of the purchase and sale, or
5 the sale and purchase, of the security,
6 15 U.S.C. § 78p(b) (the "exemptive provision"), the court reasoned
7 that two or more persons are not to be considered a group unless
8 they pursued a common purpose in selling the issuer's stock, see
9 District Court Opinion, 2006 WL 278135, at *5-*6. In light of the
10 language of § 13(d)(3) and Rule 13d-5(b)(1), and the purpose of
11 § 16(b), we disagree with this interpretation.
12 As discussed in Part II.A. above, the stated purpose of
13 § 16(b) is "preventing the unfair use of information which may have
14 been obtained by [an insider] by reason of his relationship to the
15 issuer," 15 U.S.C. § 78p(b). Section 16(b) itself contains no
16 provision as to who is an insider. The provisions delineating who
17 is an insider by reason of size of stock ownership are §§ 16(a) and
18 13(d) of the Act and SEC Rules 16a-1(a)(1) and 13d-5(b)(1). Thus,
19 § 16(a) of the Act deems insiders to include any person who is
20 directly or indirectly the beneficial owner of more than 10 percent
21 of any class of the issuer's stock. SEC Rule 16a-1(a)(1) provides
22 that more-than-10-percent owners include any person who is deemed a
23 beneficial owner of more than 10 percent by reason of § 13(d) of the
24 Act and the rules thereunder. And § 13(d)(3) and Rule 13d-5(b)(1)
25 provide that if any two or more persons act together for the purpose
26 of acquiring, holding, or disposing of shares of an issuer, each
27 actor is deemed to be the beneficial owner of the total number of
28 shares owned by all of them.
- 27-
1 The disgorgement provision of § 16(b) simply dictates the
2 consequences when an insider profits from short-swing transactions.
3 However, because § 16(b) "was designed to prevent a corporate
4 director or officer or the beneficial owner of more than 10 per
5 cent[] of a corporation from profiteering through short-swing
6 securities transactions on the basis of inside information,"
7 Foremost-McKesson, 423 U.S. at 234 (internal quotation marks and
8 footnote omitted), the exemptive provision was needed to be sure
9 that a person who was an insider solely by reason of his beneficial
10 ownership of more than 10 percent of the issuer's stock would be
11 held strictly liable for short-swing profits only if he was an
12 insider at the time of both his purchase and his sale (or sale and
13 repurchase). If he was not an insider at both of those times, there
14 is no presumption that he was privy to inside information at both
15 times. Accordingly, the exemptive provision means that "in a
16 purchase-sale sequence, a beneficial owner must account for profits
17 only if he was a beneficial owner [of more than 10 percent] before
18 the purchase," id. at 250 (internal quotation marks omitted); and it
19 means that a sale made after a former beneficial owner of more than
20 10 percent has already reduced his holdings to 10 percent or below
21 is exempted from § 16(b) by the phrase "at the time of . . . sale,"
22 Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 419-20
23 (1972). The exemptive provision in § 16(b) does not purport to
24 define insider status; it merely says that, for the disgorgement
25 provision to apply, the short-swing trader must have insider status
26 "at the time of" both of his transactions.
27 Under § 13(d)(3) and Rule 13d-5(b)(1), which delineate the
- 28-
1 insider status of joint actors, if two or more persons act together
2 for the purpose of acquiring, holding, "or" disposing of shares of
3 an issuer, they are deemed a group, and each is deemed the
4 beneficial owner of all the shares beneficially owned by all of the
5 collaborators. Because the statute and the Rule list those purposes
6 in the disjunctive, a group is formed as a matter of law if those
7 persons act for any one of the listed purposes.
8 The district court thus erred in holding that "for traders
9 to constitute a 'group', the Exchange Act requires that their
10 coordinated activity persist during the time of purchase and during
11 the time of sale of the securities," District Court Opinion, 2006 WL
12 278135, at *6 (emphasis in original). That ruling gave a
13 conjunctive reading to provisions that are disjunctive.
14 In sum, §§ 16 and 13(d) and the rules thereunder mean that
15 where, as alleged here, two persons acted together for the purpose
16 of acquiring the stock of an issuer, and collectively those persons
17 owned more than 10 percent of that stock both before any transaction
18 leading to a short-swing profit and at the time of the matching
19 short-swing transaction, the final sentence of § 16(b) provides them
20 no exemption. All of the joint actors in such circumstances are
21 deemed to be insiders and are presumed to have access to insider
22 information.
23 These provisions appropriately address the Congressional
24 concern that such short-swing sales may have been based on access to
25 inside information. In the present case, for example, evidence of
26 EMR's cheap, unsecured loan of $10 million to Jennings for his
27 purchase of MMI stock, following close on the heels of EMR's own
- 29-
1 acquisition of a 14.8 percent stake in MMI, would, as discussed
2 above, permit an inference that EMR and Jennings acted together in
3 order to allow Jennings to purchase his 842,000 shares in MMI, and
4 require the legal conclusion that EMR and Jennings were thereby a
5 group. Thus, both EMR itself, which owned 14.8 percent of MMI's
6 stock, and Jennings as its collaborator would be presumed to have
7 access to inside information. Jennings's decision to sell the
8 majority of his shares on the open market could well have been based
9 on inside information. For example, in May, EMR had purchased its
10 14.8 percent stake in MMI at prices below $11 a share (see EMR
11 Schedule 13D dated June 2, 2003, at 5), and it disclosed that it
12 might seek control of MMI through, inter alia, additional open-
13 market purchases or a tender offer (see id. at 4). By mid-July, the
14 market price of MMI shares had risen to more than $19 a share. (See
15 Jennings Schedule 13D dated July 18, 2003, at 5.) However, "[o]n
16 September 8, 2003 EMR and MMI signed a 'standstill agreement,'"
17 District Court Opinion, 2006 WL 278135, at *3, pursuant to which MMI
18 agreed to make certain information available to EMR and EMR agreed
19 that it would, inter alia, neither purchase nor "make any proposal
20 to acquire" any more MMI shares before June 15, 2004 (MMI Form 8-K
21 dated September 9, 2003, Exhibit 10.1, at 4). Prior to the public
22 announcement of this standstill agreement, Jennings sold thousands
23 of his MMI shares. A shareholder in his position could well have
24 reasoned that the imminent MMI-EMR agreement removing EMR as a
25 potential open-market buyer of, or a potential tender offeror for,
26 MMI shares for the better part of year made it attractive for him to
27 sell shares before the standstill agreement was made known to the
- 30-
1 rest of the investing public. That type of trading on the basis of
2 advance information is the sort of conduct that Congress sought to
3 deter by enacting § 16(b) and making short-swing profits
4 automatically disgorgeable "without proof of actual abuse of insider
5 information, and without proof of intent to profit on the basis of
6 such information," Kern, 411 U.S. at 595.
7 Thus, taking the allegations of the present complaint as
8 true, we cannot agree with the district court's ruling that, as a
9 matter of law, § 16(b) permits an insider--here, the owner of 14.8
10 percent of an issuer's stock--to fund the purchase of up to 10
11 percent more of such stock by an ally, and permits the ally to make
12 profits on short-swing sales of those shares and not disgorge those
13 profits to the issuer. We conclude that the district court's ruling
14 is contrary to the language and intent of the Exchange Act.
15 Finally, even if we agreed with the district court's
16 interpretation of § 16(b) as inapplicable unless EMR and Jennings
17 were a "group" both at the time Jennings acquired his MMI shares and
18 at the time he sold, we would nonetheless be constrained to vacate
19 the dismissal of the claim against Jennings because the court, in
20 concluding that defendants were not a group at the time of those
21 sales, impermissibly made findings of fact. And, again without
22 suggesting that detailed factual allegations were required at the
23 pleading stage, we note that the present record would easily permit
24 a rational factfinder draw to factual inferences contrary to those
25 drawn by the court.
26 The district court's rationale for concluding that EMR and
27 Jennings were not a "group" at the time Jennings sold his shares on
- 31-
1 the open market was that EMR had offered on August 12, 2003, to buy
2 826,000 shares of MMI stock from Jennings, and that Jennings
3 rejected that offer and instead sold 602,900 shares on the open
4 market. The court found that if Jennings and EMR "held a common
5 purpose," Jennings "likely" would have accepted EMR's offer to
6 purchase his shares, and that "Jennings' refusal of EMR's offer
7 contradicted precisely what one would have expected of him had he
8 been acting in concert with EMR," District Court Opinion, 2006 WL
9 278135, at *5 (emphases added). What Jennings's purposes had been,
10 what he was "likely" to have done, and what decisions he "would have
11 [been] expected" to make, are questions of fact as to which the
12 court should not have made findings in making its legal ruling on
13 whether Roth had pleaded a claim that could entitle him to relief.
14 Moreover, the district court's assessment of the
15 "likel[ihood]" that Jennings's interests and those of EMR were no
16 longer aligned does not appear to take into account facts indicated
17 by the record, even as it exists at this stage. For example, in
18 inferring that Jennings was no longer interested in the control of
19 MMI, the court does not appear to have taken into account the fact
20 that the Schedule 13D filed by Jennings with respect to his sale of
21 602,900 shares through September 9, 2003, stated that, after those
22 sales, Jennings still owned 423,100 shares of MMI's outstanding
23 stock (see Jennings Schedule 13D dated September 10, 2003, at 3)--a
24 statement forcing the mathematical inference that Jennings had
25 acquired additional shares of MMI after his initial purchase of
26 842,000 shares in May and before his sale of 602,900 shares.
27 Accordingly, the record showed that despite selling most of the
- 32-
1 shares he had bought in May, Jennings remained the owner of a
2 substantial block of MMI stock--approximately 4 percent. (See id.)
3 Thus, despite the district court's surmise, Roth may well be able to
4 prove that Jennings continued to have a control-seeking interest
5 aligned with that of EMR.
6 Further, although the district court mentioned that the
7 price at which EMR offered to buy "826,000 of the [MMI] shares" then
8 owned by Jennings (EMR Schedule 13D dated August 12, 2003, Exhibit
9 1), was below the then-market price, the court did not quantify the
10 disparity. EMR offered to buy those shares for $13.50 a share.
11 (See id.) However, in the weeks before and after EMR's offer, MMI
12 shares sold on the open market for more than $18 a share. (See
13 Jennings Schedule 13D filings dated July 18, 2003, at 5, and
14 September 10, 2003, at 6.) We cannot uphold the ruling that the
15 complaint was legally insufficient on the basis of the court's
16 theory that, had EMR and Jennings had a common purpose, Jennings
17 would "likely" have sold 826,000 shares to EMR for $13.50 a share,
18 thereby forgoing an additional profit of more than $4.50 per
19 share--a total of more than $3.7 million.
20 Indeed, the fact that EMR's offering price was so much
21 lower than the market price could allow Roth to prove that
22 Jennings's decision to reject EMR's offer and instead make open-
23 market sales bespoke his continued interest, rather than a loss of
24 interest, in achieving control of MMI. Attachments to the Schedule
25 13D filings suggest that Jennings needed to sell at least some of
26 his MMI shares in order to repay the loan given him by EMR. Yet, as
27 a matter of common sense, it seems likely that the more MMI stock
- 33-
1 Jennings owned, the greater his chances of sharing in MMI's control.
2 The total price that EMR offered for 826,000 shares, at $13.50 per
3 share, was little more than the gross amount that Jennings received,
4 according to his September 10, 2003 Schedule 13D, for selling just
5 602,900 shares on the open market. Thus, by selling 602,900 shares
6 on the open market, Jennings grossed roughly the same amount of
7 money, but he was able to keep 223,100 shares of MMI stock, or more
8 than 2 percent of its outstanding shares, that he otherwise would
9 have lost. The district court's inference that Jennings's sale of
10 826,000 shares to EMR was "what one would have expected" if Jennings
11 wished to share in the control of MMI was thus questionable and
12 certainly was not a proper basis for a Rule 12(b)(6) dismissal.
13 In sum, even if the disgorgement provision of § 16(b) were
14 inapplicable unless EMR and Jennings had a common purpose at the
15 time Jennings sold his shares, the complaint should not have been
16 dismissed on the premise that Roth could not show such a purpose.
17 D. The Claim Against EMR
18 The district court dismissed Roth's claim against EMR on
19 the alternative ground that the complaint did not allege either that
20 EMR had engaged in any short-swing transactions in MMI securities or
21 that EMR had received, directly or indirectly, any profit from the
22 sale of Jennings's shares. Roth contends that the district court
23 also erred in dismissing his claim against EMR on this ground. We
24 disagree.
25 Section 16(b) requires an insider to disgorge "'any profit
26 realized by him' from short-swing transactions." Blau v. Lehman,
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1 368 U.S. 403, 414 (1962) (quoting § 16(b)) (emphasis in Blau). Roth
2 "concedes that the complaint does not specifically allege that EMR
3 has a pecuniary interest in any of Jennings' profits" (Roth reply
4 brief on appeal at 10); but he argues that the "highly unusual
5 transaction by which EMR financed Jennings' trades in MM[I] stock,
6 followed by a merger offer, certainly gives rise to a presumption
7 that EMR derived some pecuniary benefit from Jennings' purchases and
8 sales" (Roth brief on appeal at 28 (emphasis added)). It may well
9 be that EMR improved its prospects for an eventual merger by funding
10 Jennings's purchases of MMI shares. But what is required for the
11 imposition of strict liability on EMR is that EMR itself have
12 realized profits from short-swing transactions. No such
13 "presumption" (id.) arises from EMR's loan to Jennings; and no such
14 allegation appears in the complaint. The complaint's assertion that
15 "[e]ach member of the Group is liable to the extent of its [sic]
16 pecuniary [interest] in the foregoing disgorgeable profits"
17 (Complaint ¶ 18 (emphasis added)) does not constitute an allegation
18 that EMR in fact realized any such profits.
19 Nor does Roth suggest that he should have been given leave
20 to file an amended complaint in order to allege that EMR shared in
21 Jennings's short-swing profits. Rather, urging that he should have
22 been given an opportunity for discovery (Roth brief on appeal at
23 28), Roth asks, "Is it not possible, maybe even probable, that there
24 was some understanding between Jennings and EMR that was not
25 revealed in the SEC filings?" (Roth reply brief on appeal at 11
26 (emphases added)). This is a far cry from any suggestion that Roth
27 would be able to file a pleading consistent with the Rule 11
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1 requirement that a complaint's factual assertions "have evidentiary
2 support or, if specifically so identified, are likely to have
3 evidentiary support after a reasonable opportunity for further
4 investigation or discovery," Fed. R. Civ. P. 11(b)(3) (emphasis
5 added).
6 "[W]hen the allegations in a complaint, however true,
7 could not raise a claim of entitlement to relief, this basic
8 deficiency should . . . be exposed at the point of minimum
9 expenditure of time and money by the parties and the court."
10 Twombly, 2007 WL 1461066, at *9 (internal quotation marks omitted).
11 The allegations of Roth's complaint, taken as true, show no basis
12 for entitlement to relief against EMR.
13 CONCLUSION
14 We have considered all of the parties' contentions on this
15 appeal and, except as indicated above, have found them to be without
16 merit. So much of the judgment as dismissed the complaint against
17 EMR is affirmed. So much of the judgment as dismissed the complaint
18 against Jennings is vacated, and the matter is remanded for further
19 proceedings with respect to the claim against him.
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