Deborah DONOGHUE, Plaintiff-Appellee, v. BULLDOG INVESTORS GENERAL PARTNERSHIP, Phillip Goldstein, Defendants-Appellants.
Docket No. 11-1708-CV.
United States Court of Appeals, Second Circuit.
Argued: June 21, 2012. Decided: Oct. 1, 2012.
696 F.3d 170
Before: POOLER, RAGGI, and LYNCH, Circuit Judges.
The third and last supposed error Dehertogh claims is that the district court failed sua sponte to instruct the jury to disregard a specific sidebar exchange that Dehertogh claims the jury overheard. In the sidebar, the prosecutor said that she was leading Lee in her direct examination in order to avoid testimony that he had taken a trip to Cape Cod with Dehertogh “to engage in a drug transaction,” prompting Dehertogh‘s counsel to “dispute that Dehertogh went down there to do anything illegal.”
Dehertogh‘s counsel then informed the court that his partner, sitting in the back of the courtroom, had said earlier that “she could hear everything . . . at sidebar” and apparently signaled that she could hear the ongoing sidebar as well. But defense counsel made no request that the judge caution the jury to ignore anything it might have heard of the sidebar, nor is it certain that the jurors—told earlier that they were free to move around during sidebars—heard or understood the substance of what had been discussed.
There may be rare cases where the prejudicial effect of such a sidebar may be so evident and so extreme that the judge should offer cautions where none was requested; but this is hardly such a case. The offense charged had nothing to do with drugs; defense counsel had denied that Dehertogh was involved in anything illegal; the judge had earlier warned the jury to ignore sidebar conferences; and, of course, any new caution to the jury might only have drawn attention to something that had passed unnoticed.
In planning their appeal, losing counsel are entitled to troll through transcripts to find alleged glitches in the instructions or other phases of the trial. But for sound reason the plain error rule creates a high threshold where the supposed missteps are ones that no one noticed at the time or, if noticed, thought worthy of a timely objection. Whether error or no, none of the unpreserved claims here, singly or together, suggests that the outcome was affected.
Affirmed.
Richard W. Cohen (Scott V. Papp, Uriel Rabinovitz, on the brief), Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, for Defendants-Appellants.
REENA RAGGI, Circuit Judge:
Defendants Bulldog Investors General Partnership and principal Phillip Goldstein (collectively, “Bulldog“) appeal from a judgment entered on March 31, 2011, by the United States District Court for the Southern District of New York (Denise L. Cote, Judge), in favor of plaintiff Deborah Donoghue suing on behalf of Invesco High Yield Investments Fund, Inc. (“Invesco“). The judgment awards plaintiff $85,491.00, representing profits realized by Bulldog from “short-swing” trading in Invesco common shares in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act“), see
I. Background
The facts relevant to this disgorgement action are straightforward and largely undisputed. During July 2008, Bulldog filed a beneficial ownership report on Schedule 13D with the Securities and Exchange Commission, reporting the hedge fund‘s ownership of nearly two million shares, comprising almost 15%, of the common
Between November 2009 and March 2010, while continuing beneficially to own more than 10% of Invesco‘s outstanding common stock, Bulldog purchased and then sold 200,000 additional Invesco shares on the open market, realizing a profit of $85,491.00. Section 16(b) effectively prohibits such short-swing trading by a 10% beneficial owner of an issuer‘s equity securities, by providing that the realized short-swing profits “shall inure to and be recoverable by the issuer.”
Bulldog moved to dismiss the complaint pursuant to
Following this denial, the parties stipulated to the entry of judgment against Bulldog in the total amount of the alleged short-swing profits, with Bulldog preserving the right to appeal the district court‘s standing determination.
II. Discussion
In conducting de novo review of the denial of a
A. Section 16(b)
A vital component of the Exchange Act, § 16(b) was designed to prevent an issuer‘s directors, officers, and principal stockholders “from engaging in specula-
In contrast to “most of the federal securities laws, § 16(b) does not confer enforcement authority on the Securities and Exchange Commission.” Gollust v. Mendell, 501 U.S. at 122, 111 S.Ct. 2173. Rather, the statute authorizes two categories of private persons to sue for relief: (1) “the issuer” of the security traded in violation of § 16(b); or (2) “the owner of any security of the issuer in the name and in behalf of the issuer,” but only “if the issuer shall fail or refuse to bring such suit within sixty days after the request or shall fail diligently to prosecute the same thereafter.”
B. Constitutional Standing
It is undisputed that the complaint in this case adequately alleges a § 16(b) claim against Bulldog and that Donoghue, as an Invesco shareholder, is a person statutorily authorized to file such a claim. Bulldog nevertheless contends that the district court was without jurisdiction to hear the claim because it presents no live case or controversy affording plaintiff
The injury in fact required to support constitutional standing is “an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Lujan v. Defenders of Wildlife, 504 U.S. at 560-61, 112 S.Ct. 2130 (internal quotation marks and citations omitted); accord W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d at 106. While the injury-in-fact requirement “is a hard floor of Article III jurisdiction that cannot be removed by statute,” Summers v. Earth Island Inst., 555 U.S. 488, 497, 129 S.Ct. 1142, 173 L.Ed.2d 1 (2009), it has long been recognized that a legally protected interest may exist solely by virtue of “statutes creating legal rights, the invasion of which creates standing, even though no injury would exist without the statute,” Linda R.S. v. Richard D., 410 U.S. 614, 617 n. 3, 93 S.Ct. 1146, 35 L.Ed.2d 536 (1973); accord Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975); see also Lujan v. Defenders of Wildlife, 504 U.S. at 578, 112 S.Ct. 2130 (stating that nothing in denying standing to citizens at large to enforce public rights contradicts principle that statutes may confer rights on specified individuals, the breach of which suffices for standing).
With these principles in mind, we consider plaintiff‘s standing to sue under § 16(b) in this case.
C. Section 16(b) Confers on Issuers a Legal Right to the Short-Swing Profits of Insiders Sufficient To Establish Constitutional Standing
While Bulldog acknowledges that it engaged in precisely the type of short-swing trading in Invesco stock that § 16(b) proscribes, it argues that it cannot be sued for that violation because Invesco, and therefore Donoghue, cannot demonstrate the injury in fact necessary for constitutional standing. Where, as here, a shareholder plaintiff pursues a § 16(b) claim on behalf of an issuer, the claim “is derivative in the sense that the corporation is the instrument . . . for the effectuation of the statutory policy.” Magida v. Cont‘l Can Co., 231 F.2d 843, 846-47 (2d Cir.1956); see
This second step of analysis need not detain us. Neither in the district court nor on appeal has Bulldog challenged Donoghue‘s allegation of a “continuing financial stake” in this litigation. Id. at 125, 111 S.Ct. 2173. Instead, Bulldog argues that plaintiff cannot demonstrate any injury to the issuer from the alleged § 16(b) violation because Invesco “was a non-party to the trades at issue, and no issue of ‘corporate opportunity,’ fiduciary duty, breach of contract or misappropriation is on the table.” Bulldog Br. 16. Indeed, Bulldog insists that it is a “consummate ‘outsider,‘” lacking any “fiduciary, contractual or confidential relationship with Invesco.” Id. at 5. We reject Bulldog‘s argument as without merit. To explain, we must consider not only the purpose animating § 16(b), but the legal rights that Congress conferred on issuers in order to further that purpose. It is Bulldog‘s invasion of those rights that supports plaintiff‘s standing.
The purpose of § 16(b) is stated in its opening clause: to prevent “the unfair use of information which may have been obtained by [a] beneficial owner, director, or officer by reason of his relationship to the issuer.”
Nor can Bulldog deny any injury to the issuer from its short-swing trading by pointing to the fact that § 16(b) operates without regard to whether the statutory fiduciaries were actually privy to inside information or whether they traded with the intent to profit from such information. This confuses the wrongdoing that prompted the enactment of § 16(b)—trading on inside information—with the legal right that Congress created to address that wrongdoing—a 10% beneficial owner‘s fiduciary duty to the issuer not to engage in any short-swing trading. As Judge Hand explained, even at common law, a fiduciary‘s duty to a beneficiary often required more than the avoidance of actual unfair dealing: “‘A trustee with power to sell trust property is under a duty not to sell to himself either at private sale or at auction, whether the property has a market price or not, and whether the trustee makes a profit thereby.‘” Gratz v. Claughton, 187 F.2d at 49 (quoting Restatement of Trusts § 170(1), cmt. b). Drawing an analogy between trust law and the fiduciary duty created by § 16(b), Judge Hand observed that “[n]obody is obliged to become a director, an officer, or a ‘beneficial owner‘; just as nobody is obliged to become the trustee of a private trust; but, as soon as he does so, he accepts whatever are the limitations, obligations and conditions attached to the position, and any default in fulfilling them is as much a ‘violation’ of law as though it were attended by the sanction of imprisonment.” Id. (emphasis added).6
Thus, pursuant to § 16(b), when a stock purchaser chooses to acquire a 10% beneficial ownership stake in an issuer, he becomes a corporate insider and thereby accepts “the limitation[]” that attaches to his fiduciary status: not to engage in any short-swing trading in the issuer‘s stock. Id. At that point, injury depends not on whether the § 16(b) fiduciary traded on inside information but on whether he traded at all. A corporate issuer, after all, has an “interest in maintaining a reputation of
To be sure, this statutory arrangement provides issuers (and their shareholders) with an incentive to police short-swing trading by beneficial owners, directors, and officers, to the benefit of the market as a whole. Nevertheless, because the issuer‘s right to profits under § 16(b) derives from breach of a fiduciary duty created by the statute in favor of the issuer, the issuer is no mere bounty hunter but, rather, a person with a cognizable claim to compensation for the invasion of a legal right. This distinguishes the instant case from Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000), a qui tam action under the False Claims Act, in which the Supreme Court ruled that a claimant needs more than an interest in “the bounty he will receive if the suit is successful” to establish constitutional standing. Id. at 772-73, 120 S.Ct. 1858 (comparing such interest to “wager” on suit‘s outcome). The claimant‘s alleged “interest must consist of obtaining compensation for, or preventing, the violation of a legally protected right.” Id. (holding relator-plaintiff to satisfy injury-in-fact requirement in False Claims Act case due to statute‘s implied partial assignment of government‘s damages claim). As we recognized in Gratz, § 16(b) effectively gives issuers a legally protected fiduciary right to expect statutory insiders not to engage in short-swing trading of their stock, and compensates them for the violation of that right by allowing them to claim any profits realized from such trading.
Further, because the fiduciary obligation created by § 16(b) is not general, but rather confers a specific right on issuers to expect their insiders not to engage in short-swing trading, this case is distinguishable from Kendall v. Employees Retirement Plan of Avon Products, 561 F.3d 112 (2d Cir.2009). There, we held that an ERISA plaintiff bringing a disgorgement claim could not satisfy the injury requirement of standing by alleging defendant‘s general “breach of fiduciary duty under ERISA without a showing of individualized harm.” Id. at 120 (rejecting proffered Article III injury of “right to a plan that complies with ERISA“). Instead, such a plaintiff “must allege some injury or deprivation of a specific right that arose from a violation of that duty.” Id. at 119.
In distinguishing these cases, we note that where, as here, a plaintiff‘s claim of injury in fact depends on legal rights conferred by statute, it is the particular statute and the rights it conveys that guide the standing determination. See generally Warth v. Seldin, 422 U.S. at 500, 95 S.Ct. 2197 (“Essentially, the standing question in such cases is whether the constitutional or statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff‘s position a right to judicial relief.“). Thus, just as
The parties discuss Edwards at length because that standing determination was pending review in the Supreme Court at the time we heard oral argument. See First Am. Corp. v. Edwards, — U.S. —, 131 S.Ct. 3022, 180 L.Ed.2d 843 (2011) (granting writ of certiorari in part). In Edwards, the Ninth Circuit upheld a plaintiff‘s standing to sue under RESPA to recover three times the amount of any charge paid for real estate settlement services provided in violation of that law even though the plaintiff did not—and could not—allege that the charges were higher than they would have been but for the violation. See 610 F.3d at 516 (observing that state law dictated that all providers charge same specified amount for settlement services at issue). Nevertheless, because it construed RESPA‘s text to confer on plaintiff a legal right to recovery without regard to an overcharge, the Ninth Circuit held that the plaintiff had satisfied the injury requirement of Article III. See id. at 517. In light of the Supreme Court‘s dismissal of its writ of certiorari, see First Am. Corp. v. Edwards, — U.S. —, 132 S.Ct. 2536, 183 L.Ed.2d 611 (2012) (dismissing writ as improvidently granted), Edwards remains good law in the Ninth Circuit, and has been cited approvingly in our own, see Galiano v. Fid. Nat‘l Title Ins. Co., 684 F.3d 309, 315 n. 9 (2d Cir.2012) (“An allegation of overcharge is not necessary to sustain a [RESPA] claim.” (citing Edwards v. First Am. Corp., 610 F.3d at 518)).
To the extent this case differs from Edwards, the differences provide greater support for recognizing plaintiff‘s standing here. Unlike RESPA, § 16(b) is not a law that permits defendants to engage in particular conduct, specifically, short-swing trading, subject to certain conditions. Much less is this a case in which Bulldog can argue that, although it failed to comply with § 16(b), the prices at which it bought and sold Invesco shares and the profit realized therefrom were all dictated by some law that applied uniformly to all buyers and sellers, negating the possibility of actual injury to anyone. As we recognized in Gratz, § 16(b) is a statute that addresses the problem of insider trading by conferring on securities issuers a legal right, one that makes 10% beneficial owners “constructive trustee[s] of the corporation,” 187 F.2d at 48, with a fiduciary duty not to engage in short-swing trading of the issuer‘s stock at the risk of having to remit to the issuer any profits realized from such trading. It is the invasion of this legal right, without regard to whether the trading was based on inside information, that causes an issuer injury in fact and that compels our recognition of plaintiff‘s standing to pursue a § 16(b) claim here.
While this particular legal right might not have existed but for the enactment of § 16(b), Congress‘s legislative authority to broaden the injuries that can support constitutional standing is beyond dispute. “Statutory broadening of the categories of injuries that may be alleged in support of standing is a different matter from abandoning the requirement that the party seeking review must himself have suffered an injury.” Lujan v. Defenders of Wildlife, 504 U.S. at 578, 112 S.Ct. 2130 (internal quotation marks and brackets omitted). While the principle is not so elastic as to permit the general “public interest in
Although Congress enacted § 16(b) to serve a general interest in safeguarding the integrity of the stock market against insider trading, it did not eliminate the injury requirement of standing. Rather, it created legal rights that clarified the injury that would support standing, specifically, the breach by a statutory insider of a fiduciary duty owed to the issuer not to engage in and profit from any short-swing trading of its stock. Such an injury in fact to Invesco having been satisfactorily alleged in this case, we reject Bulldog‘s standing challenge as without merit.
III. Conclusion
To summarize, we conclude that short-swing trading in an issuer‘s stock by a 10% beneficial owner in violation of Section 16(b) of the Securities Exchange Act causes injury to the issuer sufficient for constitutional standing.
The judgment of the district court is AFFIRMED.
REENA RAGGI
UNITED STATES CIRCUIT JUDGE