Steginsky v. Xcelera Inc.
2014 U.S. App. LEXIS 1523
2d Cir.2014Background
- Gloria Steginsky, a former minority Xcelera shareholder, sues alleging securities fraud and fiduciary breaches.
- Xcelera insiders allegedly conducted a tender offer via OFC, a shell, without disclosing Xcelera’s financial condition.
- Xcelera had been de-listed in 2004 and de-registered by the SEC in 2006; insiders allegedly stopped disclosures since then.
- In 2010 OFC tendered for Xcelera stock at $0.25; Steginsky sold 100,010 shares in 2011 pursuant to the offer.
- The district court dismissed market manipulation and insider trading claims at pleading stage; fiduciary claims dismissed without prejudice.
- On appeal, the court vacates as to insider trading (10(b), 20(a), 20A) and pendent fiduciary claims, but affirms dismissal of market manipulation and 14(e) claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether insider trading duty applies to unregistered securities | Insider duty extends to unregistered securities. | Duty is limited or undefined for unregistered securities and Cayman law may apply. | Duty applies to unregistered securities; Cayman law inapplicable. |
| Whether insider trading liability arises from control persons trading through OFC | Vik defendants control OFC and traded on undisclosed information. | No duty or liability established for control persons under these facts. | Insider trading liability and control person liability were not appropriately dismissed. |
| Whether 10(b)/20(a) insider trading claims are time-barred | Claims timely under 28 U.S.C. § 1658 since purchase in 2011 within 2-year window from tender offer. | Manipulation period began in 2004, exceeding the 5-year/2-year limits. | Insider trading claims timely; market manipulation claims untimely. |
| Whether §14(e) market-trading claims survive | Tender-offer insiders possessed material information; §14(e) could apply. | §14(e) requires possession of material information by others, not the insiders’ information. | Section 14(e) claims properly dismissed. |
| Whether nonfederal breach of fiduciary claims should be reconsidered | Pendent claims should proceed alongside federal claims. | District court lacked reason to retain pendent claims after federal dismissal. | Vacated dismissal of pendent fiduciary duty claims; remanded for further proceedings. |
Key Cases Cited
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (heightened pleading standards for securities fraud; scienter requirements)
- Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001) (duty to disclose or abstain applies to insiders in closed corporations)
- United States v. O’Hagan, 521 U.S. 642 (U.S. 1997) (classic insider trading liability framework; material nonpublic information)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (no reliance requirement where duty to disclose violated)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (U.S. 2008) (foreign to the necessary nexus; broadened conduct standard)
- Merck & Co. v. Reynolds, 559 U.S. 633 (U.S. 2010) (timing of complaint in relation to discovery and five-year period)
- SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (earlier articulation of disclosure duties)
- Guz v. Whitman, 904 F. Supp. 2d 363 (S.D.N.Y. 2012) (federal common-law nature of insider trading duty)
- McClure v. Borne Chem. Co., 292 F.2d 824 (3d Cir. 1961) (Securities Act generated federal corporation law)