819 F. Supp. 2d 342
S.D.N.Y.2011Background
- Chechele, a New Jersey shareholder, sues Scheetz, former Morgans CEO, seeking to disgorge short-swing profits under §16(b).
- Morgans is a Delaware corporation with principal offices in New York; Scheetz allegedly part of a Section 13(d) group.
- Plaintiff alleges a shareholder group comprising Scheetz, NorthStar, Hamamoto, and Gordon controlled Morgans and thus held >10% of Morgans stock.
- Plaintiff identifies five categories of alleged agreements (Control, Lock-Up, Registration Rights, NorthStar, Other) forming the basis for the group.
- Court analyzes whether the Complaint plausibly alleges a Section 13(d) group; grant of Rule 12(b)(6) dismissal sought by Scheetz.
- Court dismisses, holding the Complaint fails to plead sufficient facts to show a Section 13(d) group existed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Complaint plausibly alleges a Section 13(d) group. | Chechele contends the five agreements show coordination to control Morgans. | Scheetz argues the pleadings lack sufficient factual content to establish a group. | Dismissed; no plausible Section 13(d) group pleaded. |
| Whether the Control Agreement allegations, even with reference to external Credit Agreement, establish a group. | Credit Agreement terms imply a Control Agreement existed. | Plaintiff failed to plead reliance or integration; independent external document cannot be used to plead a group. | Dismissed; Control Agreement not sufficiently pled. |
| Whether Lock-Up Agreements establish group coordination. | Parallel lock-ups among Group members indicate coordination. | Each member had separate lock-ups; no mutual agreement among all to act as a group. | Dismissed; lack of inter-member agreement defeats group inference. |
| Whether Registration Rights Agreements show a group. | Registration Rights Agreements with Morgans and NorthStar imply joint action. | No member of the alleged group signed the Registration Rights Agreement; no basis for group. | Dismissed; insufficient to plead a Section 13(d) group. |
| Whether NorthStar or Other Agreements plausibly form a group. | SEC filings referencing NorthStar entities suggest coordination. | Filing materials are not incorporated or relied upon in the Complaint; no concrete pleadings of an agreement to act together. | Dismissed; pleadings fail to show a concerted group. |
Key Cases Cited
- Morales v. Quintel Entm't, Inc., 249 F.3d 115 (2d Cir. 2001) (two-tier beneficial ownership framework for Section 16(a) group considerations)
- Iqbal v. Ashcroft, 556 U.S. 662 (Supreme Court 2009) (plausibility pleading standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Supreme Court 2007) (facially plausible pleading required)
- CSX Corp. v. Children's Inv. Fund Mgmt. (UK) LLP, 654 F.3d 276 (2d Cir. 2011) (group formation requires a common objective and agreement)
- Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002) (integral documents may be considered; need proper reliance)
- Staehr v. Hartford Fin. Servs. Group, Inc., 547 F.3d 406 (2d Cir. 2008) (judicial notice of regulatory filings; content not proven true)
- Roth ex rel. Beacon Power Corp. v. Perseus L.L.C., 522 F.3d 242 (2d Cir. 2008) (strict liability for Section 16(b) insider profits)