Andrew E. ROTH, derivatively on behalf of Metal Management, Inc., Plaintiff-Appellant,
v.
T. Benjamin JENNINGS, European Metal Recycling, Ltd., and Metal Management, Inc., Defendants-Appellees.
Docket No. 06-0784-cv.
United States Court of Appeals, Second Circuit.
Argued: February 21, 2007.
Decided: June 6, 2007.
Paul D. Wexler, New York, N.Y. (Bragar Wexler & Eagel, New York, NY, Ostrager Chong Flaherty & Broitman, New York, NY, on the brief), for Plaintiff-Appellant.
Allan T. Slagel, Chicago, IL (Heather A. Jackson, Shefsky & Froelich, Chicago, IL, John J. Clarke, Jr., DLA Piper Rudnick Gray Cary, New York, NY, on the brief), for Defendant-Appellee Jennings.
Thomas E. Lynch, New York, N.Y. (Steven C. Bennett, Jones Day, New York, NY, on the brief), for Defendant-Appellee European Metal Recycling, Ltd.
Before: KEARSE, CABRANES, and KATZMANN, Circuit Judges.
KEARSE, Circuit Judge.
Plaintiff Andrew E. Roth, suing derivatively on behalf of nominal defendant Metal Management, Inc. ("MMI" or "Metal Management"), for disgorgement to MMI of "short-swing profits" under § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or "Act"), 15 U.S.C. § 78p (b), appeals from a final judgment of the United States District Court for the Southern District of New York, Deborah A. Batts, Judge, granting motions by defendants T. Benjamin Jennings and European Metal Recycling, Ltd. ("EMR") (collectively "defendants"), to dismiss the complaint for failure to state a claim on which relief can be granted. The complaint alleged that Jennings and EMR as a "group," within the meaning of the Act, owned more than 10 percent of MMI's outstanding stock; that within a period of less than six months, Jennings purchased and sold MMI stock at a profit of some $4.25 million; and that § 16(b) required the disgorgement of that profit to MMI. The district court granted both defendants' motions to dismiss on the ground that the complaint was insufficient to plead that defendants acted as a group, given the disclaimers of group status in documents filed by defendants with the Securities and Exchange Commission ("SEC"). The court ruled that the claim against EMR was also dismissable on the ground that the complaint did not allege that EMR itself had engaged in any short-swing transactions or received any pecuniary profit from the MMI stock transactions by Jennings. For the reasons that follow, we affirm the dismissal of the claim against EMR, but we vacate the dismissal of the claim against Jennings and remand for further proceedings.
I. BACKGROUND
For purposes of reviewing the dismissal of a complaint for failure to state a claim, we accept the complaint's factual allegations, and all reasonable inferences that can be drawn from those allegations in the plaintiff's favor, as true. See, e.g., Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit,
A. The Parties and the Transactions in MMI Stock
Metal Management (or "the Company"), which describes itself as one of the nation's largest full-service scrap metal recyclers, is a publicly owned Delaware corporation headquartered in Chicago, Illinois. EMR is a privately owned scrap metal processing company headquartered in the United Kingdom. Jennings, an Illinois resident, is a former chairman and chief executive officer of MMI.
On May 15 and May 21, 2003, EMR purchased a total of 1,503,100 shares of MMI common stock in open-market transactions. These shares represented approximately 14.8 percent of MMI's outstanding common stock. (See Complaint ¶ 13.) The Schedule 13D filed by EMR with respect to those transactions stated that
EMR has taken certain actions that indicate that EMR be deemed to have the current intent to seek to change or influence control of the Company, although it has not formulated any specific plan or proposal in this regard. . . . Any such plan or proposal that may be formulated could involve, among other things, entering into one or more privately negotiated acquisitions of additional Company securities, open-market purchases, proposing a business combination transaction with the Company, making a tender offer for some or all of the Shares or waging a proxy contest for control of the Company.
EMR Schedule 13D dated June 2, 2003, at 4 (emphases added).
On May 29 and 30, 2003, Jennings, in open-market transactions, purchased a total of 842,000 shares of MMI common stock. (See Complaint ¶ 9.) These shares constituted approximately 8.3 percent of MMI's outstanding stock. (See Jennings Schedule 13D dated June 9, 2003, at 2.) The per-share prices ranged from $10.95 to $11.55, for a total purchase price of $9,517,350; Jennings paid for the shares by obtaining a $10 million loan from EMR. (See Complaint ¶¶ 8, 9, 14.) According to the terms of the EMR-Jennings loan agreement, the loan was unsecured; the interest rate was 4 percent per annum. (See Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I.)
Roth's complaint alleged that "[t]he loan was made for the specific purpose of buying MMI securities in furtherance of EMR's and Jennings [sic] agreement to work together to effect a change of control or similar transaction involving MMI" (Complaint ¶ 8), and that Jennings and EMR therefore constituted a "group" within the meaning of § 13(d) of the Act for purposes of determining each entity's beneficial ownership of MMI stock under § 16 of the Act (e.g., id. ¶¶ 6, 7, 11). The complaint alleged that under § 16(b), "each member of [the] Group is liable to pay to the issuer all profits earned by that Group member in stock transactions effected within a six-month period during which time the Group owned a greater than 10% beneficial interest in the issuer's stock." (Id. ¶ 12.)
On July 14 and 15, 2003, Jennings sold 16,000 of his MMI shares, at prices ranging from $18.6483 to $19.06 per share. (See Complaint ¶ 15.) From August 19 through September 9, 2003, he sold an additional 602,900 shares, at prices ranging from $18 to $18.59 per share. (See id. ¶ 16.) The complaint alleged that "[a]t all relevant times during the period while Jennings purchased and sold MMI common stock, the Group owned in excess of 10% of MMI's outstanding common stock." (Id. ¶ 13.) It alleged that Jennings's sales, which occurred less than six months after his purchases, resulted in profits totaling at least $4,249,408.80, and that Jennings and EMR are each "liable to the extent of its [sic] pecuniary [interest] in the . . . disgorgeable profits." (Id. ¶ 18; see id. ¶ 20.)
B. The Motions To Dismiss and the District Court's Decision
Jennings and EMR moved for dismissal pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim under § 16(b). They attached to their respective motions several documents they had filed with the SEC — some of which were referred to in the complaint — which described, inter alia, the loan agreement between EMR and Jennings, certain of their transactions in MMI stock, and their respective MMI holdings. The loan agreement, in the form of a June 9, 2003 letter from EMR to Jennings, signed as "[a]ccepted and agreed to" by Jennings ("Loan Agreement") stated — in the version attached to the Schedule 13D filed by EMR-as follows:
This letter will evidence our legally binding agreements effective as of June 2, 2003:
(1) European Metal Recycling Ltd. ("EMR") has agreed to provide you with a bridge loan in an aggregate of up to U.S. $10,000,000 (the "Loan").
(2) The Loan shall be unsecured, shall accrue interest at the rate of Four Percent (4%) per annum, and shall be due and payable in full no later than ninety (90) days from the effective date hereof.
(3) EMR hereby acknowledges that you have used proceeds of the Loan to purchase shares of Common Stock of Metal Management, Inc. EMR hereby acknowledges and agrees that you currently are not, nor in the future shall you, be under any obligation to vote, retain or dispose of such shares as part of, nor otherwise to participate in any way in any plans or proposals of, any "group" within the meaning of the applicable federal and state securities laws in regard to the securities of Metal Management, Inc., including any "group" that may in the future involve EMR in any way.
(EMR Schedule 13D dated June 9, 2003, Exhibit I; see also Jennings Schedule 13D dated June 9, 2003, Exhibit A (with slight linguistic differences from EMR's Exhibit I).) Jennings and EMR argued that the complaint failed sufficiently to allege that they were a group within the meaning of the pertinent securities laws and that the Loan Agreement and their other SEC filings showed that they had disclaimed group status.
In a Memorandum and Order dated February 1, 2006, the district court agreed, granting both defendants' motions to dismiss. See
The court began its discussion by noting that in considering a motion to dismiss pursuant to Rule 12(b)(6), the court is required to accept as true the factual allegations in the complaint, draw all reasonable inferences in favor of the plaintiff, and refrain from assessing the weight of the evidence that might be offered in support of the complaint. The court noted that such a motion should be granted "`only if, after viewing plaintiff's allegations in this favorable light, "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."'" District Court Opinion,
consideration of a Rule 12(b)(6) motion is limited to the factual allegations in the complaint, documents attached to the complaint as exhibits or incorporated in it by reference, to matters of which judicial notice might be taken, or to documents either in plaintiff's possession or of which plaintiffs had knowledge and relied on in bringing suit.
District Court Opinion,
the Second Circuit has held that "when a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC," as these are documents that should be noticed by the Court. Cortec Indus., Inc.[ v. Sum Holding L.P.], 949 F.2d [42, 47 (2d Cir.1991)] (referencing Kramer v. Time Warner, Inc.,
District Court Opinion,
As to the merits of the motions, the court noted that, in order to show that Jennings's purchases, amounting to 8.3 percent of MMI's shares, were subject to § 16(b), Roth was required to show that EMR and Jennings constituted a "group" within the meaning of the Act, that is, that they "`combined in furtherance of a common objective.'" District Court Opinion,
The court ruled, however, that Roth's complaint "d[id] not sufficiently allege such an agreed-upon common purpose" between EMR and Jennings. Id. at *5. Citing Schedule 13D filings by EMR and Jennings, respectively, the court observed that the Schedule 13D filed by Jennings in June 2003, which disclosed Jennings's purchases of MMI shares and the loan from EMR, stated (a) that "`[t]here are no arrangements or understandings between EMR and [Jennings] as to how [Jennings] would utilize the proceeds of the [L]oan,'" and (b) that Jennings "`does not have any definite plans regarding an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving [MMI] or a sale or transfer of a material amount of assets of [MMI] or any of its subsidiaries.'" District Court Opinion,
[EMR] has no contract, arrangement[] or understanding of any kind with Mr. Jennings with respect to the Common Stock [of MMI] owned by [EMR] or by Mr. Jennings; . . . expressly disclaims any direct or indirect beneficial ownership in the Common Stock [of MMI] owned by Mr. Jennings; and further disclaims any "group" status with Mr. Jennings.
District Court Opinion,
[t]he loan agreement signed by both Jennings and EMR's managing director expressly states that Jennings and EMR are in no way, either by the loan of June 9, 2003 or at any time in the future, to be considered a "group" or part of any group that might include more than the Defendants. . . . EMR filed an amended 13D schedule after loaning money to Jennings, which further declared that the loan did not constitute group activity.
District Court Opinion,
The district court rejected Roth's contention that, in ruling on the Rule 12(b)(6) motions, the court should not rely on defendants' disclaimers: Plaintiff contends that the disclaimer of group status in the loan agreement and the subsequent amended 13D schedules by both Defendants was meant to circumvent liability even though the two were acting in concert. However, "unadorned allegations" based on "unmitigated speculation" that defendants are acting as a group are inadequate to sustain a Section 13(d) claim.[] Segal v. Gordon,
District Court Opinion,
In addition, the district court ruled that the complaint would be dismissable "[e]ven were this Court not to accept the truth of Defendants' statements in their SEC filings." Id. The court concluded that § 16(b) was inapplicable because other evidence submitted by defendants indicated that EMR and Jennings could not be considered to have been a group at the time of Jennings's sales. Citing the language in § 16(b) that "[t]his subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security . . . involved," 15 U.S.C. § 78p(b), the court concluded that "for traders to constitute a `group', the Exchange Act requires that their coordinated activity persist during the time of purchase and during the time of sale of the securities," District Court Opinion,
[s]uch transactions do not reflect two group members acting in concert to effectuate a common objective with regard to acquiring, holding, voting or disposing of securities of the issuer. . . . Had Defendants held a common purpose, Jennings likely would have accepted EMR's offer. While group members need not march in lock step to qualify as a "group", . . . marching in opposite directions certainly counsels against concluding that Jennings acted with EMR as a "group". Jennings' refusal of EMR's offer contradicted precisely what one would have expected of him had he been acting in concert with EMR.
District Court Opinion,
[a]ccordingly, EMR's shares cannot be aggregated with Jennings' to constitute the more than ten percent ownership required to warrant Section 16(b) liability. Neither EMR nor Jennings may be considered part of a "group."
Because the Complaint does not sufficiently aver that Defendants acted as a group at the time Jennings sold his MMI shares, because public SEC filings indicate that Defendants never intended to act as a group, and because Jennings alone did not own ten percent of a class of MMI's equity securit[ies], Jennings' Motion to Dismiss Plaintiff's Complaint is hereby GRANTED.
Id. (emphases added).
The court ruled that the claim against EMR should be dismissed on the additional ground that the complaint did not allege that EMR had made any sales of its own shares or had any direct or indirect pecuniary interest in the shares sold by Jennings.
Judgment was entered dismissing the complaint, and this appeal followed.
II. DISCUSSION
On appeal, Roth contends principally that the district court erred in concluding that the complaint failed to state a claim on which relief can be granted against Jennings, arguing that the complaint sufficiently pleaded that EMR and Jennings acted as a group for the purpose of Jennings's acquisition of MMI shares, that defendants' disclaimers of group activity were not entitled to evidentiary weight in the consideration of Rule 12(b)(6) motions, and that Jennings's sales of his shares were not a basis for concluding that the "group" provisions no longer applied. For the reasons that follow, we agree.
A. Section 16(b)
Section 16 of the Exchange Act, with respect to any company whose securities are registered on a national securities exchange, imposes certain obligations and restrictions on the company's officers, directors, and "[e]very person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security)," 15 U.S.C. § 78p(a)(1). "[D]efining directors, officers, and [such] beneficial owners as those presumed to have access to inside information," Foremost-McKesson, Inc. v. Provident Securities Co.,
(b) Profits from purchase and sale of security within six months. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) . . . within any period of less than six months, . . . shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security . . . purchased or of not repurchasing the security . . . sold for a period exceeding six months. . . . This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security . . . .
15 U.S.C. § 78p(b).
The general purpose of Congress in enacting § 16(b) is well known. See Kern County Land Co.[ v. Occidental Petroleum Corp.,
Foremost-McKesson,
Profits resulting from purchase-and-sale, or sale-and-repurchase, transactions within a period of less than six months are commonly known as "short-swing" transactions, see, e.g., id. at 234,
The Exchange Act also recognizes that the abuses it targets may be accomplished by persons acting not individually but in combination with others. See, e.g., 15 U.S.C. § 78m (d)(3). With respect to § 16, SEC Rule 16a-1(a)(1) provides that, "[s]olely for purposes of determining whether a person is a beneficial owner of more than ten percent of any class of equity securities," the term "beneficial owner" means, with exceptions not pertinent here, "any person who is deemed a beneficial owner pursuant to section 13(d) of the Act and the rules thereunder." 17 C.F.R. § 240.16a-1(a)(1). Section 13(d) of the Act provides, in pertinent part, that
[w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for the purposes of this subsection.
15 U.S.C. § 78m(d)(3) (emphases added). And SEC Rule 13d-5 (b)(1) promulgated thereunder provides, with exceptions not pertinent here, that
[w]hen two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of sections 13(d) and (g) of the Act, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such persons.
17 C.F.R. § 240.13d-5(b)(1) (emphases added). Accordingly, under § 13(d)(3) and this Rule, if two or more entities agree to act together for any of the listed purposes, a "group" is "thereby" formed.
Thus, "the touchstone of a group within the meaning of Section 13(d) is that the members combined in furtherance of a common objective." Wellman v. Dickinson,
[T]he agreement required by § 13(d)(3) need not be an agreement to gain corporate control or to influence corporate affairs. . . . The plain language of § 13(d)(3) demands only an agreement "for the purpose of acquiring, holding, or disposing of securities," 15 U.S.C. § 78m(d)(3), and Rule 13d-5 is similarly satisfied by that sort of agreement, 17 C.F.R. § 240.13d-5 (b)(1).
Morales v. Quintel Entertainment, Inc.,
Importantly, for purposes of this case, the actors need not have combined for all of the purposes listed in § 13(d)(3) or Rule 13d-5(b)(1). Acquiring, holding, and disposing of are listed in the disjunctive. Hence, "[a]ll that is required is that the members of the group have combined to further a common objective with regard to one of those activities." Morales v. Freund,
The questions of (a) whether two or more persons "act[ed]" as a group or agreed to act together, and (b) whether their purpose was the acquisition, holding, or disposition of an issuer's equity securities are questions of fact. See, e.g., Morales v. Quintel Entertainment, Inc.,
An agreement to act together for the purpose of acquiring, holding, or disposing of shares need not be unconditional in order to support a finding that the actors constituted a group within the meaning of those provisions. See, e.g., Wellman,
B. Rule 12(b)(6)
In considering a motion under Fed. R.Civ.P. 12(b)(6) to dismiss a complaint for failure to state a claim on which relief can be granted, the district court is normally required to look only to the allegations on the face of the complaint. If, on such a motion, "matters outside the pleading are presented to and not excluded by the court," the court should normally treat the motion as one for summary judgment pursuant to Fed.R.Civ.P. 56. Fed.R.Civ.P. 12(b); see, e.g., Global Network Communications, Inc. v. City of New York,
In certain circumstances, the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered. See, e.g., Pani v. Empire Blue Cross Blue Shield,
This principle has its greatest applicability in cases alleging fraud. See, e.g., Cortec,
Similarly, where public records that are integral to a fraud complaint are not attached to it, the court, in considering a Rule 12(b)(6) motion, is permitted to take judicial notice of those records. See, e.g., id.; Brass v. American Film Technologies, Inc.,
A decision that a complaint fails to state a claim on which relief can be granted is a ruling of law, see, e.g., De Jesus v. Sears, Roebuck & Co.,
C. The Claim Against Jennings
1. Sufficiency of the Allegation of "Group" Action
Because Jennings apparently owned no MMI stock just prior to the May 2003 purchases he made with the loan from EMR, he was not a statutory insider to whom § 16 applied unless he and EMR — which already owned 14.8 percent — acted as a group for the purpose of Jennings's acquisition, holding, or disposition of MMI shares. The district court, in ruling that the complaint did not sufficiently allege that EMR and Jennings had acted as a group, did not properly apply the above principles.
The district court correctly noted that SEC filings may properly be considered in ruling on a Rule 12(b)(6) motion to dismiss a complaint alleging claims of fraud. But this is not a fraud case. It is, rather, a § 16(b) action seeking the disgorgement of short-swing profits, for which an insider is to be held strictly liable. Defendants' submissions of their Schedule 13D filings thus presented material that was inappropriate for consideration on Rule 12(b)(6) motions to dismiss a § 16(b) complaint that contained no allegation of a failure to disclose or of a factual misrepresentation.
Further, even if there had been allegations of fraud, defendants' SEC filings could not properly be considered for the truth of their contents. The district court's view that "the Defendants' statements, which have been submitted to a government agency and made public, should not be contradicted or taken as perjurious simply because the Plaintiff, without evidence, says they are," District Court Opinion,
The cases cited by the district court for the proposition that "if a plaintiff's allegations are contradicted by a document considered in determining a Rule 12(b)(6) motion, those allegations are insufficient to defeat the motion," id. (citing Matusovsky v. Merrill Lynch,
In the present case, the gravamen of the complaint was simply that defendants were subject to strict liability for Jennings's profits on his short-swing transactions as members of a group that owned more than 10 percent of MMI's shares. The district court's ruling that the complaint failed to state a claim that EMR and Jennings constituted a group because of defendants' "disclaimer[s] of group status" in their Schedule 13D filings with the SEC, District Court Opinion,
Second, the court apparently assumed that defendants' representations, which used the present tense as to their current understandings with respect to Jennings's future obligations, also meant that they had had no past understanding, when EMR made the loan to Jennings, that the purpose of the loan was to fund his purchase of MMI shares. The Schedule 13D filings did not, however, actually state that there had not been such an agreement with regard to Jennings's acquisition of the shares. For example, EMR's June 9 Schedule 13D acknowledged that Jennings had used the loan to fund his May 29-30 purchases of MMI shares and stated that EMR "has" no understanding with respect to the MMI shares "owned" by Jennings. Jennings's June 9 Schedule 13D made similar use of the present tense, stating there "are" no agreements as to how he would use the proceeds of the EMR loan. Thus, even if it had been appropriate to consider defendants' SEC filings for the truth of their assertions, their representations would not have warranted rulings in their favor, for they did not actually assert that EMR had not agreed to make the loan to Jennings for the purpose of the MMI stock acquisition.
Third, in disclaiming "group" status, defendants were in effect attempting to disclaim the legal effects of their conduct. The district court's acceptance of and reliance on defendants' "express[ ] state[ment]s that Jennings and EMR are in no way, either by the loan of June 9, 2003 or at any time in the future, to be considered a `group,'" as a disclaimer that was "control[ling]," District Court Opinion,
Finally, looking at the "group" allegations in the complaint, i.e., that EMR's loan to Jennings was made for the purpose of allowing him to buy MMI shares in furtherance of an EMR-Jennings agreement "to work together to effect a change of control or similar transaction involving MMI" (Complaint ¶ 8), and at the documents to which the complaint referred, we cannot agree with the district court's view that the "group" allegations were "unmitigated speculation" or "unadorned" allegations made "without evidence," District Court Opinion,
— On May 21, 2003, EMR completed its accumulation of 1,503,100 shares of MMI's stock, or 14.8 percent of the outstanding shares (see Complaint ¶ 13; EMR Schedule 13D dated June 2, 2003, at 2, 5).
— In connection with its May 2003 purchases, EMR stated that it might "seek to change or influence control of" MMI by, inter alia, "waging a proxy contest for control of the Company" (EMR Schedule 13D dated June 2, 2003, at 4).
— On May 29 and 30, 2003, Jennings, in open-market purchases, acquired 842,000 shares of MMI's stock (see Complaint ¶ 9), which constituted 8.3 percent of MMI's stock (see Jennings Schedule 13D dated June 9, 2003, at 2).
— Jennings paid for his May 29-30 purchases with a $10 million loan from EMR (see Complaint ¶ 8).
— The rate of interest on EMR's loan to Jennings, according to the Loan Agreement, was 4 percent per annum (which we judicially notice was below the then-current prime rate, see, e.g., Wall Street Journal, Nov. 8, 2002, at C12 (prime rate 4.25%); id. June 27, 2003, at C11, and June 30, 2003, at C15 (prime rate cut from 4.25% to 4.00% effective June 27, 2003)).
— EMR's $10 million loan to Jennings was unsecured (see Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I).
Although we do not suggest that Roth was required to adduce such evidence at the pleading stage, see, e.g., Twombly,
In sum, the district court erred in accepting defendants' SEC filings for the truth of their contents, in inferring that those contents were sufficient and controlling, and in concluding that the complaint itself did not allege facts sufficient to show that EMR and Jennings constituted a group, within the meaning of the Exchange Act, for the purpose of having Jennings purchase shares of MMI.
2. The Duration of the Group
The remaining question is whether the complaint was nonetheless properly dismissed on the ground that § 16(b) was inapplicable because EMR and Jennings were no longer a "group" — on the theory that their interests had diverged — when Jennings sold his shares. The district court answered this question in the affirmative. Because the final sentence of § 16(b) states that
[t]his subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security,
15 U.S.C. § 78p(b) (the "exemptive provision"), the court reasoned that two or more persons are not to be considered a group unless they pursued a common purpose in selling the issuer's stock, see District Court Opinion,
As discussed in Part II.A. above, the stated purpose of § 16(b) is "preventing the unfair use of information which may have been obtained by [an insider] by reason of his relationship to the issuer," 15 U.S.C. § 78p(b). Section 16(b) itself contains no provision as to who is an insider. The provisions delineating who is an insider by reason of size of stock ownership are §§ 16(a) and 13(d) of the Act and SEC Rules 16a-1(a)(1) and 13d-5(b)(1). Thus, § 16(a) of the Act deems insiders to include any person who is directly or indirectly the beneficial owner of more than 10 percent of any class of the issuer's stock. SEC Rule 16a-1(a)(1) provides that more-than-10-percent owners include any person who is deemed a beneficial owner of more than 10 percent by reason of § 13(d) of the Act and the rules thereunder. And § 13(d)(3) and Rule 13d-5(b)(1) provide that if any two or more persons act together for the purpose of acquiring, holding, or disposing of shares of an issuer, each actor is deemed to be the beneficial owner of the total number of shares owned by all of them.
The disgorgement provision of § 16(b) simply dictates the consequences when an insider profits from short-swing transactions. However, because § 16(b) "was designed to prevent a corporate director or officer or the beneficial owner of more than 10 per cent[ ] of a corporation from profiteering through short-swing securities transactions on the basis of inside information," Foremost-McKesson,
Under § 13(d)(3) and Rule 13d-5(b)(1), which delineate the insider status of joint actors, if two or more persons act together for the purpose of acquiring, holding, "or" disposing of shares of an issuer, they are deemed a group, and each is deemed the beneficial owner of all the shares beneficially owned by all of the collaborators. Because the statute and the Rule list those purposes in the disjunctive, a group is formed as a matter of law if those persons act for any one of the listed purposes.
The district court thus erred in holding that "for traders to constitute a `group', the Exchange Act requires that their coordinated activity persist during the time of purchase and during the time of sale of the securities," District Court Opinion,
In sum, §§ 16 and 13(d) and the rules thereunder mean that where, as alleged here, two persons acted together for the purpose of acquiring the stock of an issuer, and collectively those persons owned more than 10 percent of that stock both before any transaction leading to a short-swing profit and at the time of the matching short-swing transaction, the final sentence of § 16(b) provides them no exemption. All of the joint actors in such circumstances are deemed to be insiders and are presumed to have access to insider information.
These provisions appropriately address the Congressional concern that such short-swing sales may have been based on access to inside information. In the present case, for example, evidence of EMR's cheap, unsecured loan of $10 million to Jennings for his purchase of MMI stock, following close on the heels of EMR's own acquisition of a 14.8 percent stake in MMI, would, as discussed above, permit an inference that EMR and Jennings acted together in order to allow Jennings to purchase his 842,000 shares in MMI, and require the legal conclusion that EMR and Jennings were thereby a group. Thus, both EMR itself, which owned 14.8 percent of MMI's stock, and Jennings as its collaborator would be presumed to have access to inside information. Jennings's decision to sell the majority of his shares on the open market could well have been based on inside information. For example, in May, EMR had purchased its 14.8 percent stake in MMI at prices below $11 a share (see EMR Schedule 13D dated June 2, 2003, at 5), and it disclosed that it might seek control of MMI through, inter alia, additional open-market purchases or a tender offer (see id. at 4). By mid-July, the market price of MMI shares had risen to more than $19 a share. (See Jennings Schedule 13D dated July 18, 2003, at 5.) However, "[o]n September 8, 2003 EMR and MMI signed a `standstill agreement,'" District Court Opinion,
Thus, taking the allegations of the present complaint as true, we cannot agree with the district court's ruling that, as a matter of law, § 16(b) permits an insider — here, the owner of 14.8 percent of an issuer's stock — to fund the purchase of up to 10 percent more of such stock by an ally, and permits the ally to make profits on short-swing sales of those shares and not disgorge those profits to the issuer. We conclude that the district court's ruling is contrary to the language and intent of the Exchange Act.
Finally, even if we agreed with the district court's interpretation of § 16(b) as inapplicable unless EMR and Jennings were a "group" both at the time Jennings acquired his MMI shares and at the time he sold, we would nonetheless be constrained to vacate the dismissal of the claim against Jennings because the court, in concluding that defendants were not a group at the time of those sales, impermissibly made findings of fact. And, again without suggesting that detailed factual allegations were required at the pleading stage, we note that the present record would easily permit a rational factfinder draw to factual inferences contrary to those drawn by the court.
The district court's rationale for concluding that EMR and Jennings were not a "group" at the time Jennings sold his shares on the open market was that EMR had offered on August 12, 2003, to buy 826,000 shares of MMI stock from Jennings, and that Jennings rejected that offer and instead sold 602,900 shares on the open market. The court found that if Jennings and EMR "held a common purpose," Jennings "likely" would have accepted EMR's offer to purchase his shares, and that "Jennings' refusal of EMR's offer contradicted precisely what one would have expected of him had he been acting in concert with EMR," District Court Opinion,
Moreover, the district court's assessment of the "likel[ihood]" that Jennings's interests and those of EMR were no longer aligned does not appear to take into account facts indicated by the record, even as it exists at this stage. For example, in inferring that Jennings was no longer interested in the control of MMI, the court does not appear to have taken into account the fact that the Schedule 13D filed by Jennings with respect to his sale of 602,900 shares through September 9, 2003, stated that, after those sales, Jennings still owned 423,100 shares of MMI's outstanding stock (see Jennings Schedule 13D dated September 10, 2003, at 3) — a statement forcing the mathematical inference that Jennings had acquired additional shares of MMI after his initial purchase of 842,000 shares in May and before his sale of 602,900 shares. Accordingly, the record showed that despite selling most of the shares he had bought in May, Jennings remained the owner of a substantial block of MMI stock — approximately 4 percent. (See id.) Thus, despite the district court's surmise, Roth may well be able to prove that Jennings continued to have a control-seeking interest aligned with that of EMR.
Further, although the district court mentioned that the price at which EMR offered to buy "826, 000 of the [MMI] shares" then owned by Jennings (EMR Schedule 13D dated August 12, 2003, Exhibit 1), was below the then-market price, the court did not quantify the disparity. EMR offered to buy those shares for $13.50 a share. (See id.) However, in the weeks before and after EMR's offer, MMI shares sold on the open market for more than $18 a share. (See Jennings Schedule 13D filings dated July 18, 2003, at 5, and September 10, 2003, at 6.) We cannot uphold the ruling that the complaint was legally insufficient on the basis of the court's theory that, had EMR and Jennings had a common purpose, Jennings would "likely" have sold 826,000 shares to EMR for $13.50 a share, thereby forgoing an additional profit of more than $4.50 per share — a total of more than $3.7 million.
Indeed, the fact that EMR's offering price was so much lower than the market price could allow Roth to prove that Jennings's decision to reject EMR's offer and instead make open-market sales bespoke his continued interest, rather than a loss of interest, in achieving control of MMI. Attachments to the Schedule 13D filings suggest that Jennings needed to sell at least some of his MMI shares in order to repay the loan given him by EMR. Yet, as a matter of common sense, it seems likely that the more MMI stock Jennings owned, the greater his chances of sharing in MMI's control. The total price that EMR offered for 826,000 shares, at $13.50 per share, was little more than the gross amount that Jennings received, according to his September 10, 2003 Schedule 13D, for selling just 602,900 shares on the open market. Thus, by selling 602,900 shares on the open market, Jennings grossed roughly the same amount of money, but he was able to keep 223,100 shares of MMI stock, or more than 2 percent of its outstanding shares, that he otherwise would have lost. The district court's inference that Jennings's sale of 826,000 shares to EMR was "what one would have expected" if Jennings wished to share in the control of MMI was thus questionable and certainly was not a proper basis for a Rule 12(b)(6) dismissal.
In sum, even if the disgorgement provision of § 16(b) were inapplicable unless EMR and Jennings had a common purpose at the time Jennings sold his shares, the complaint should not have been dismissed on the premise that Roth could not show such a purpose.
D. The Claim Against EMR
The district court dismissed Roth's claim against EMR on the alternative ground that the complaint did not allege either that EMR had engaged in any short-swing transactions in MMI securities or that EMR had received, directly or indirectly, any profit from the sale of Jennings's shares. Roth contends that the district court also erred in dismissing his claim against EMR on this ground. We disagree.
Section 16(b) requires an insider to disgorge "`any profit realized by him' from short-swing transactions." Blau v. Lehman,
Nor does Roth suggest that he should have been given leave to file an amended complaint in order to allege that EMR shared in Jennings's short-swing profits. Rather, urging that he should have been given an opportunity for discovery (Roth brief on appeal at 28), Roth asks, "Is it not possible, maybe even probable, that there was some understanding between Jennings and EMR that was not revealed in the SEC filings?" (Roth reply brief on appeal at 11 (emphases added)). This is a far cry from any suggestion that Roth would be able to file a pleading consistent with the Rule 11 requirement that a complaint's factual assertions "have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery," Fed.R.Civ.P. 11(b)(3) (emphasis added).
"[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court." Twombly,
CONCLUSION
We have considered all of the parties' contentions on this appeal and, except as indicated above, have found them to be without merit. So much of the judgment as dismissed the complaint against EMR is affirmed. So much of the judgment as dismissed the complaint against Jennings is vacated, and the matter is remanded for further proceedings with respect to the claim against him.