Atlantic Tele-Network v. Prosser, Civil Action No. 99-236 (SSB) (D. V.I. 12/8/2000)

• Decision Date: 08 December 2000
• Docket Number: Civil Action No. 99-236 (SSB).
• Parties: ATLANTIC TELE-NETWORK, Plaintiff, v. JEFFREY J. PROSSER, Defendant.
• Court: U.S. District Court — Virgin Islands

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ATLANTIC TELE-NETWORK, Plaintiff, v. JEFFREY J. PROSSER, Defendant.

Civil Action No. 99-236 (SSB).

United States District Court, D. Virgin Islands, Division of St. Thomas and St. John.

December 8, 2000.

KARL A. GROSKAUFMANIS, ESQ., DAVID B. WISEMAN, ESQ., Fried, Frank, Harris, Shriver & Jacobson, Washington, DC, Attorneys for Plaintiff.

GEORGE WAILAND, ESQ., JAMES E. ROSENFELD, ESQ., Cahill Gordon & Reindel, New York, NY, Attorneys for Defendant.

OPINION ON MOTION TO DISMISS AND MOTIONS FOR SUMMARY JUDGMENT

STANLEY S. BROTMAN, District Judge.

I. INTRODUCTION

This case arises under § 16(b) of the Securities and Exchange of 1934, which prohibits "short-swing" securities transactions by corporate insiders and allows companies to recoup profits made on such transactions. Plaintiff Atlantic Tele-Network ("ATN") seeks to disgorge profits made by defendant Jeffrey Prosser, a former officer of ATN, on an alleged purchase and subsequent sale of ATN stock in the midst of the company's December 1997 reorganization. Presently before the Court are Prosser's motion to dismiss for failure to state a claim, ATN's motion for summary judgment, and Prosser's cross-motion for summary judgment. For the reasons set forth below, Prosser's motion to dismiss will be granted, leaving no need to consider the motions for summary judgment.

II. FACTUAL AND PROCEDURAL BACKGROUND

Prior to Dec. 30, 1997, ATN was a publicly held corporation that provided telecommunications services in the Virgin Islands and Guyana. It provided these services through ATN-VI, a wholly owned subsidiary, and Guyana Telephone and Telegraph, of which it was an 80 percent owner. Jeffrey Prosser, the defendant, and Cornelius Prior were the principal stockholders and co-chief executive officers of ATN. In order to resolve a management deadlock between Prosser and Prior, the ATN Board of Directors in July 1997 approved a series of transactions that split ATN into two separate publicly held companies, ATN and Emerging Communications, Inc. ("ECI"). ECI, now controlled by Prosser, acquired the Virgin Islands side of the old company; ATN, now controlled by Prior, retained the Guyana business. (Pl.'s Mem. Opp'n. Mot. Dismiss at 3.)

This "split-up" transaction, consummated on Dec. 30, 1997, unfolded as follows: ATN transferred all of its Virgin Islands assets and liabilities to ECI in exchange for all of the capital stock of ECI. ATN then repurchased about one-fourth of the ATN common stock controlled by Prior. Next, ATN created two new classes of stock, Class A and Class B. Prior then exchanged his remaining shares of ATN stock for the same number of shares of the new Class B stock, and Prosser exchanged his remaining 3,325,000 shares for the same number of shares of the new Class A stock. At this point, Mergerco, a newly created subsidiary of ATN with no assets, merged into ATN. Public shares of ATN were converted into the right to receive four-tenths of a share of the new ATN and one share of ECI stock. Prosser's outstanding shares of ATN Class A were converted into the right to receive 5,704,931 shares of ECI stock (a ratio of about 1.71 ECI shares for each ATN share), and Prior's outstanding Class B shares were similarly converted into the right to receive 2,807,040 shares of ATN common stock. (Def.'s Mem. Supp. Mot. Dismiss at 3.) Both Prosser and Prior exercised these rights, giving them control over ECI and ATN, respectively. The terms of all these exchanges were included in the split-up transaction as initially approved. (Pl.'s Mem. Opp'n. Mot. Dismiss at 4.)¹

On Dec. 18, 1997, twelve days prior to the split-up transaction in which he disposed of his ATN stock, Prosser acquired at least 250,000 shares of ATN stock. ATN has identified this transaction as the basis for its claim under § 16(b). There is some confusion as to the details of this acquisition, however, due to documentation that either points to a similar but separate transaction or instead erroneously describes the Dec. 18 transaction.

In a Mar. 16, 1998, letter to his attorneys (Pl.'s Stmt. Mat. Facts, Ex. C, Annex E), Prosser described the Dec. 18 acquisition as a "purchase" of 250,000 shares at $10.75 per share. In an Apr. 16, 1998, form filed with the Securities and Exchange Commission ("SEC") (Id., Ex. A), Prosser listed 250,000 shares as "securities acquired" on Dec. 18 at a price of $10.75. Meanwhile, another SEC form filed by Prosser on Jan. 9, 1998, identifies what appears to be a second, separate acquisition of 257,000 ATN shares on Dec. 30, 1997 at prices of $11.75 to $11.875 per share. (Pl.'s Stmt. Mat. Facts Ex. B.) Prosser then uses the two blocks of shares interchangeably in his brief opposing ATN's motion for summary judgment. Citing an affidavit of one of his advisors, Prosser states that the 250,000 shares were acquired on Dec. 18 from Cartona, Ltd., a corporation wholly owned and controlled by Prosser. (Def.'s Mem. Opp'n Pl.'s Mot. Summ. J. at 5.) Yet, the affidavit itself states that the Cartona shares are the 257,000 block and is silent about the precise date of acquisition. (Raynor Aff. ¶¶ 3-4.)²

Prosser has now submitted supplemental affidavits averring that previous references to 250,000 shares were in error and that there was only one block of stock: 257,000 shares, transferred from Cartona to John Raynor, Prosser's trustee, on Dec. 18 and from Raynor to Prosser on Dec. 30. (Prosser Aff. of Aug. 18, 2000, ¶¶ 2, 3; Raynor Suppl. Aff. ¶¶ 3-6.)

There is also some dispute as to the prices to be assigned, for purposes of calculating profits, to the various shares at issue. ATN relies upon the acquisition price of $10.75 per share of ATN stock listed in Prosser's Mar. 16, 1998, letter and Apr. 16, 1998, SEC form. It also proffers news reports that the selling price of ECI on its opening day, Dec. 31, was between $8.25 and $8.675. Employing the alleged $10.75 acquisition price for ATN, the alleged $8.675 opening value of ECI, and the 1.71 conversion ratio, ATN calculates Prosser's short-swing profit on the transaction at $1,011,719.20. (Pl.'s Stmt. Mat. Facts ¶ 7.) Prosser, however, now contends that the $10.75 figure for ATN that he reported to his attorneys and the SEC was in error; he submits a newspaper excerpt to show that on Dec. 18 ATN actually traded at between $11.75 and $11.875. (Rosenfeld Aff. Ex. A.) Prosser also disputes that the ECI value should be used to calculate his profits, arguing that the consideration he received in his sale of ATN was ATN Class A, not ECI stock. Finally, if the ECI stock is to be used in calculating his profits, Prosser presents evidence that the actual trading price of ECI on Dec. 31 was between $7.875 and $8.25. (Rosenfeld Aff. Ex. C.)

III. MOTION TO DISMISS

A. Legal Standard

In considering whether a complaint should be dismissed for failure to state a claim upon which relief can be granted, the Court must accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff. ALA v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994); Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994) (citations omitted); Schrob v. Catterson, 948 F.3d 1402, 1405 (3d Cir. 1991) (citations omitted). The Court cannot dismiss plaintiff's complaint for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957) (citations omitted); D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984).

B. Discussion

Section 16(b) of the Securities and Exchange Act of 1934 allows a public company to recover profits made by its directors, its officers and certain shareholders "from any purchase and sale, or sale and purchase, of any equity security of [the company] within any period of less than six months." 15 U.S.C. § 78p(b). Defendant does not dispute that plaintiff states a prima facie case for disgorgement of profits under § 16(b). Instead, Prosser contends that two exemptions apply to his transaction. First, he argues that his sale of shares is exempt because it was a board-approved disposition to the shares' issuer. Second, he argues that the sale is exempt because it was done in connection with a merger. ATN disputes the applicability of both exemptions, arguing that the ATN board's approval of the transaction was not sufficient under § 16(b) and that the disposition cannot be characterized as merger-related. Additionally, ATN contends that the Securities and Exchange Act imposes a requirement that Prosser have relied on a specific exemption at the time of the transaction—a standard Prosser manifestly cannot meet.

1. Exemption for Dispositions to Issuer

SEC Rule 16b-3(e) exempts from § 16(b) liability "[a]ny transaction involving the disposition to the issuer of issuer equity securities, provided that the terms of such disposition are approved in advance" by the issuer's board of directors or stockholders. 17 C.F.R. § 240.16b-3(d), (e). The exemption is based on the premise that transactions between the issuer and its officers and directors generally are not vehicles for the speculative abuse that § 16(b) was intended to prevent: "[T]hese transactions do not appear to present the same opportunities for insider profit on the basis of non-public information as do market transactions by officers and directors." Ownership Reports and Trading by Officers, Exchange Act Release No. 37260, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,810, at 88,059 (May 31, 1996). On its face, the exemption squarely applies to Prosser: he disposed of his 3,325,000 shares to the issuer, ATN, in a transaction that the ATN board had approved as part of the split-up.

Note 3 to the rule, however, explains that the board approval must meet certain requirements in order for the...