Lowinger v. Morgan Stanley & Co.
2016 U.S. App. LEXIS 19887
| 2d Cir. | 2016Background
- Facebook’s May 2012 IPO was underwritten by a 33‑firm syndicate; three firms (Goldman, Morgan Stanley, J.P. Morgan) acted as Lead Underwriters.
- Pre‑IPO shareholders holding more than 10% of Facebook entered standard lock‑up agreements restricting sale of their shares for 91–211 days unless lead underwriters consented.
- Underwriters sold over‑allotted shares, established short positions, and later covered those shorts on the open market after the IPO when the price dropped, generating substantial profits.
- Plaintiff (a Facebook shareholder) sued under Section 16(b) seeking disgorgement of short‑swing profits, alleging the Lead Underwriters and Shareholders formed a Section 13(d) “group” via the lock‑up agreements so the underwriters were 10%+ "beneficial owners."
- The district court dismissed under Rule 12(b)(6), holding standard lock‑up agreements alone are insufficient to establish a Section 13(d) group; this appeal followed. The SEC filed an amicus brief.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether standard lock‑up agreements can create a Section 13(d) "group" so underwriters are 10%+ beneficial owners for Section 16(b) | Lock‑ups gave underwriters control over disposition of pre‑IPO shares, so they acted with Shareholders to "hold/ dispose" and form a group | Lock‑ups are routine, one‑way contractual restraints essential to IPOs and do not evidence an agreement "to act together" to acquire/hold/dispose for purposes of Section 13(d) | Lock‑ups alone are insufficient to establish a Section 13(d) group; affirmed dismissal |
| Whether Section 16(b) should apply to underwriters here or whether Rule 16a‑7 good‑faith underwriting exemption precludes liability | Plaintiff argued underwriters realized short‑swing profits and should disgorge if deemed beneficial owners | Defendants argued (alternative) they are conduits performing underwriting functions and may be exempt under Rule 16a‑7 | Court declined to reach Rule 16a‑7 exemption because plaintiff failed to plead beneficial‑owner status; issue left unresolved |
Key Cases Cited
- Chambers v. Time Warner, 282 F.3d 147 (2d Cir. 2002) (standard for pleading at dismissal stage)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- Magma Power Co. v. Dow Chem. Co., 136 F.3d 316 (2d Cir. 1998) (Section 16(b) is a blunt instrument to be confined narrowly)
- Morales v. Quintel Entm’t, Inc., 249 F.3d 115 (2d Cir. 2001) (lock‑up agreements may bear upon group inquiry but do not automatically create a group)
- CSX Corp. v. Children’s Inv. Fund Mgmt. (UK) LLP, 654 F.3d 276 (2d Cir. 2011) (group inquiry centers on combination in furtherance of a common objective implicating control)
- Wellman v. Dickinson, 682 F.2d 355 (2d Cir. 1982) (Section 13(d) aims to disclose potential changes in corporate control)