Analytical Surveys, Inc. v. Tonga Partners, L.P.
2012 U.S. App. LEXIS 11241
| 2d Cir. | 2012Background
- Tonga Partners, Cannell Capital, and Cannell appeal a district court judgment disgorging $4,965,898.95 to ASI for short-swing profits under §16(b).
- Tonga previously held ASI debt via a 2002 note; ASI later issued 2003 and 2004 notes with varying maturity and conversion terms.
- Tonga converted the 2004 note into ASI stock in November 2004 and sold all shares shortly after, prompting §16(b) liability.
- District court held the 2004 note was a new issuance, that conversion was a §16(b) purchase, and neither debt nor borderline exemptions applied.
- Defendants argued SEC regulations and case law exempt the transactions under debt and borderline rules; district court rejected it.
- On appeal, court affirms liability and denial of reconsideration, with jointly and severally liable defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did debt exception apply to 2004 note? | Debt exception should shield only matured debt; 2004 note not matured debt. | Debt previously contracted applies due to May 2004 default and ASI’s debt owed. | Debt exception does not apply; debt not matured at issuance. |
| Is the 2004 note a new security or an amendment? | Material changes created a new security, triggering §16(b). | Minor amendments; not a new security; may not trigger §16(b) purchase. | Changes were material; 2004 note is a new security. |
| Application of hybrid derivative treatment under §16(b)? | Hybrid security acquisition constitutes §16(b) purchases for both fixed and floating components. | Treat hybrid as non-purchase when floating price; only fixed-price triggers §16(b). | Adopt bifurcated approach: fixed-price purchase and additional floating-price purchases; both match to sale. |
| Who are 'beneficial owners' liable under §16(b)? | Cannell Capital and Tonga liable as agents of Tonga; Nobility extends to all owners. | Limit liability to Cannell personally as beneficial owner. | Tonga and Cannell Capital are beneficial owners; jointly and severally liable with Cannell. |
Key Cases Cited
- Kern County v. Occidental Petroleum Corp., 411 U.S. 582 (U.S. 1973) (borderline transactions exception applies to certain insider deals)
- Huppe v. WPCS Int’l Inc., 670 F.3d 214 (2d Cir. 2012) (affirms broad interpretation of §16(b) and agency/ownership concepts)
- At Home Corp. v. Cox Communications, Inc., 446 F.3d 403 (2d Cir. 2006) (borderline transaction framework for insiders with information access)
- Roth ex rel. Beacon Power Corp. v. Perseus, L.L.C., 522 F.3d 242 (2d Cir. 2008) (permissible reliance on SEC exemptions after Perseus decision)
- Magma Power Co. v. Dow Chemical Co., 136 F.3d 316 (2d Cir. 1998) (derivative securities treated as underlying securities for §16(b))
- Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966) (insider profit disgorgement and derivative scope in §16(b))
- NML Capital v. Republic of Argentina, 17 N.Y.3d 250 (N.Y. 2011) (New York law on maturation and default acceleration informing §16(b) analysis)