Huppe v. WPCS International Inc.
2012 U.S. App. LEXIS 1168
| 2d Cir. | 2012Background
- Two Delaware limited partnerships (QP and PE) invest in WPCS via private investments in public equity (PIPE); each fund is over 10% beneficial owner of WPCS.
- General partners Marxe and Greenhouse control voting and investment decisions for the funds; they act as agents for the funds.
- WPCS announced restatement in March 2006, causing a price drop that undermined a planned secondary offering.
- From December 2005 to January 2006, funds sold WPCS shares on the open market (first leg of short-swing profits).
- In April 2006, the funds, through their general partners, purchased 876,931 additional WPCS shares directly from WPCS at $7.00, with board approval; the funds’ after-market performance improved the stock.
- Maureen A. Huppe, a WPCS shareholder, sued derivatively, seeking disgorgement of short-swing profits under §16(b) for the April purchase and the prior December–January sales; the district court granted summary judgment for Huppe and the funds appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 2006 PIPE purchase is a §16(b) purchase | Huppe asserts the 2006 purchase falls within §16(b) liability. | Funds contend the 2006 purchase is exempt as issuer-initiated and board-approved. | Not exempt; 2006 PIPE is a §16(b) purchase. |
| Whether the funds are “beneficial owners” for §16(b) purposes | Funds are beneficial owners because they hold >10% and bear voting/investment power via agents. | Only Marxe and Greenhouse, as agents, should be viewed as insiders; the funds lack direct control. | Funds are beneficial owners; their actions bind the partnerships under agency principles. |
| Whether Rule 16b-3(d) exempts issuer-insider transactions for ten-percent holders | Rule 16b-3(d) could exempt issuer-insider-style transactions from §16(b). | Rule 16b-3(d) does not apply to ten-percent holders lacking director/officer status. | Rule 16b-3(d) does not apply to the funds; ten-percent holders are not exempt. |
| Whether Kern County’s border-line transaction framework applies | If the transaction is border-line, §16(b) may be avoided. | The PIPE was a deliberate capital infusion with inside information; not border-line. | Not a border-line transaction; the PIPE supports §16(b) liability. |
| Whether the district court correctly granted summary judgment in favor of Huppe | District court correctly treated the transaction as within §16(b) and the funds as beneficial owners. | District court erred by extending exemptions to ten-percent holders. | Affirmed district court; funds liable for short-swing profits. |
Key Cases Cited
- Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973) (borderline transactions; focus on purpose of §16(b))
- Magma Power Co. v. Dow Chemical Co., 136 F.3d 316 (2d Cir. 1998) (§16(b) is a blunt instrument for disgorgement without proof of intent)
- Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966) (recognizes broad scope of §16(b) beyond cash purchases/sales)
- At Home Corp., 446 F.3d 394 (2d Cir. 2006) (Kern County framework limited; borderlines considered in insider transactions)
- Perseus, L.L.C. v. Roth, 522 F.3d 242 (2d Cir. 2008) (upholds Rule 16b-3(d) for directors by deputization; not controlling here)
- Steel Partners II, L.P. v. Bell Indus., Inc., 315 F.3d 120 (2d Cir. 2002) (discusses judicial caution in applying 16(b) to novel transactions)
- Am. Standard, Inc. v. Crane Co., 510 F.2d 1043 (2d Cir. 1974) (interpretation of §16(b) consistent with purpose to deter abuse)