363 F. Supp. 3d 379
S.D. Ill.2019Background
- IVA (investment advisor) disclosed via Schedule 13D that it and affiliated accounts (including a John Doe–managed JD Account) beneficially owned ~19.5% of DeVry and stated a "control purpose." Michael Malafronte of IVA joined DeVry's board under a support agreement.
- Complaint alleged Doe owned the JD Account and IVA had discretionary authority over acquisition, holding, voting, and disposition of its DeVry shares; one JD Account purchase and many sales of DeVry stock occurred within six months.
- Plaintiff Rubenstein sued derivatively under § 16(b) seeking disgorgement of short-swing profits, alleging IVA and Doe formed a § 13(d) "group" so Doe qualified as an insider.
- Defendants moved to dismiss for failure to plead that Doe and IVA agreed to act together with respect to DeVry shares; IVA also later produced a management agreement (not considered on the motion to dismiss).
- The court considered whether delegation of investment authority to an advisor—or the advisor’s public "control purpose"—permits inferring a § 13(d)/Rule 13d-5(b)(1) group as to a particular issuer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether delegation of discretionary authority to IVA alone establishes a § 13(d) "group" with respect to DeVry securities | Rubenstein: delegating investment and voting authority shows agreement to act together; thus shares may be aggregated | IVA: mere advisor–client relationship does not create an agreement to act together with respect to a particular issuer | Dismissal: delegation alone insufficient to infer a § 13(d) group as to a particular issuer |
| Whether IVA’s public disclosure of a "control purpose" for DeVry establishes a group with Doe | Rubenstein: Doe understood/authorized IVA’s DeVry control strategy (alleged by silence/continued retention) | IVA: disclosure of control purpose does not show Doe’s assent or an agreement to act jointly regarding DeVry | Dismissal: allegation that Doe agreed or authorized is conclusory and not plausibly pled |
| Whether allegations suffice to treat Doe as an § 16(b) insider via aggregation with IVA | Rubenstein: aggregation of holdings reaches >10% and creates short-swing liability | Defendants: no pleaded agreement to act together; thus no aggregation and no insider status | Dismissal: without a pleaded agreement to act together for that issuer, no aggregation and no § 16(b) liability |
| Whether complaint should be converted to summary judgment based on management agreement | Rubenstein sought leave to amend and argued liability; IVA sought conversion relying on the management agreement showing fee structure | Plaintiff did not press an alternative pecuniary-interest § 16(a)-1(a)(2) theory; court declined to consider extraneous contract on 12(b)(6) motion | Court did not convert motion; it dismissed on pleading grounds |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions not entitled to pleading deference)
- Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305 (2d Cir.) (overview of § 16(b) short-swing disgorgement regime)
- Magma Power Co. v. Dow Chem. Co., 136 F.3d 316 (2d Cir.) (strict liability purpose of § 16(b))
- Morales v. Quintel Entm’t, Inc., 249 F.3d 115 (2d Cir.) (group inquiry: agreement to act together for particular issuer)
- Lowinger v. Morgan Stanley & Co. LLC, 841 F.3d 122 (2d Cir.) (lock-up alone insufficient to form a group)