Gibbons v. Malone

• Decision Date: 07 January 2013
• Docket Number: Docket No. 11–3620–cv.
• Citation: 703 F.3d 595
• Parties: Michael D. GIBBONS, Plaintiff–Appellant, v. John C. MALONE, Defendant–Appellee, and Discovery Communications, Inc., Nominal Defendant–Appellee.
• Court: U.S. Court of Appeals — Second Circuit

703 F.3d 595

Michael D. GIBBONS, Plaintiff–Appellant,

v.John C. MALONE, Defendant–Appellee,andDiscovery Communications, Inc., Nominal Defendant–Appellee.

Docket No. 11–3620–cv.

United States Court of Appeals,Second Circuit.

Argued: Sept. 21, 2012.

Decided: Jan. 7, 2013.

Daniel E. Doherty (Charles J. Hyland, on the brief), Law Offices of Daniel E. Doherty, Overland Park, KS, for Plaintiff–Appellant Michael D. Gibbons.

Alexandra M. Walsh (Seth T. Taube and Melissa Armstrong, on the brief), Baker Botts L.L.P., Washington, DC, and New York, NY, for Defendant–Appellee John C. Malone.

John F. Batter III (Nolan J. Mitchell, on the brief), Wilmer Cutler Pickering Hale and Dorr, Boston, MA, for Nominal Defendant–Appellee Discovery Communications, Inc.

Before: LEVAL, CABRANES, and KATZMANN, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge:

Section 16(b) of the Securities Exchange Act of 1934 (the “1934 Act”) provides for the disgorgement of profits that corporate insiders ¹ realize “from any purchase and sale, or any sale and purchase, of any equity security of [the corporate] issuer ... within any period of less than six months.” 15 U.S.C. § 78p(b). The question presented is whether this so-called “short-swing profit rule” applies when a corporate insider sells shares of one type of stock issued by the insider's company and purchases shares of a different type of stock in that same company. We hold, absent any guidance from the Securities and Exchange Commission (“SEC”), that § 16(b) does not apply to transactions of this sort involving separately traded, nonconvertible stocks with different voting rights.

BACKGROUND

The facts in this case are straightforward and uncontested. Between December 4, 2008 and December 17, 2008, defendant-appellee John Malone—a director and large shareholder of Discovery Communications, Inc. (“Discovery”)—engaged in nine sales of Discovery's “Series C” stock totaling 953,506 shares, and ten purchases of Discovery's “Series A” stock totaling 632,700 shares. Just under two years later, plaintiff-appellant Michael Gibbons brought this shareholder suit,² seeking disgorgement of “profits” that Malone realized from these transactions. Gibbons alleges that Malone obtained “illicit profits in the amount of at least $313,573” from these trades. Complaint ¶ 54.

Discovery's Series A stock and Series C stock are different equity securities, are separately registered, and are traded separately on the NASDAQ stock exchange under the ticker symbols DISCA and DISCK, respectively. The principal difference between the two securities is that Series A stock comes with voting rights—one vote per share—whereas Series C stock does not confer any voting rights. Series A stock and Series C stock are not convertible into each other. On the open market in late 2008 and early 2009, Series A stock generally traded at slightly higher prices than Series C stock, though occasionally not. On the nine relevant dates in question, the closing prices of Series A stock varied from about four-percent to eight-percent higher than the respective closing prices of Series C stock.

Following a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the United States District Court for the Southern District of New York (Barbara S. Jones, Judge ) dismissed Gibbons's complaint for failure to state a viable § 16(b) disgorgement claim. The Court explained that the statute's use of the term “any equity security”—written in the singular—“undermines [Gibbons's] argument, as his theory requires the purchase and sale of any equity securities, rather than of one equity security.” Gibbons v. Malone, 801 F.Supp.2d 243, 247 (S.D.N.Y.2011) (emphasis in original). The Court further pointed out that, unlike other financial instruments that are treated as functionally equivalent under § 16(b), Discovery's Series A stock and Series C stock are not convertible and do not have a fixed value relative to each other. See id. at 247–49. Finally, the Court noted:

[T]he Court is unpersuaded by Plaintiff's policy arguments regarding the likelihood that “[p]ermitting short-swing trading between voting and non-voting common stock would make evasion of Section 16 trivially easy.” (Pl. Br. at 11.) Even if this were true, the Supreme Court has “recognized the arbitrary nature of section 16(b), which is widely recognized as a ‘crude rule of thumb’ ” to curb insider trading. Schaffer v. Dickstein & Co., L.P., 1996 WL 148335[,] at *5 (S.D.N.Y. Apr. 2, 1996) (citing Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972) & Blau v. Lamb, 363 F.2d 507, 515 (2d Cir.1966)). The Supreme Court has also noted that “serving the congressional purpose [of Section 16(b) ] does not require resolving every ambiguity in favor of liability ... [.]” Foremost–McKesson, Inc. v. Provident Securities Co., 423 U.S. 232, 252, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976). Further, Plaintiff's desired result would lead to a blurring of the bright-line rule established by Section 16(b), which was specifically “designed [by Congress] for easy application”.... Cummings v. C.I.R., 506 F.2d 449, 453 (2d Cir.1974).

Id. at 249. This appeal followed, raising the same question—namely, whether § 16(b) applies when an insider buys and sells shares of different types of stock in the same company, where those securities are separately traded, nonconvertible, and come with different voting rights.

DISCUSSION

We review de novo a district court's dismissal under Rule 12(b)(6), “construing the complaint liberally, accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor.” Chase Grp. Alliance LLC v. City of N.Y. Dep't of Fin., 620 F.3d 146, 150 (2d Cir.2010) (internal quotation marks omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

A.

The issue presented in this appeal is one of statutory interpretation, so we begin by examining the statutory text. See Schindler Elevator Corp. v. United States ex rel. Kirk, ––– U.S. ––––, 131 S.Ct. 1885, 1891, 179 L.Ed.2d 825 (2011). Section 16(b) of the 1934 Act provides, in relevant part:

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 ... 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.... This subsection shall not be construed to cover ... any transaction or transactions which the [SEC] by rules and regulations may exempt as not comprehended within the purpose of this subsection.

15 U.S.C. § 78p(b). Notably, although § 16(b) is designed to curb the use of nonpublic knowledge by corporate “insiders,” see note 1, ante, the provision offers merely the “prophylactic” remedy of disgorgement, Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962), and “operates mechanically, with no required showing of intent” to profit from the use of inside information, At Home Corp. v. Cox Commc'ns, Inc., 446 F.3d 403, 407 (2d Cir.2006). The statute, in other words, “imposes a form of strict liability.” Credit Suisse Sec. (USA) LLC v. Simmonds, ––– U.S. ––––, 132 S.Ct. 1414, 1417, 182 L.Ed.2d 446 (2012) (internal quotation marks omitted).

As we have previously explained, “if the conversion can be paired with another ‘sale’ or ‘purchase,’ and the paired transactions occur within a six month period, the paired transactions are ... the type of insider activity that Section 16(b) was designed to prevent,” Blau v. Lamb, 363 F.2d 507, 517 (2d Cir.1966), but transactions of securities that cannot be “paired” are not within the scope of § 16(b). Cf. Foremost–McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 243–44, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976) (short-swing profit rule applies to profits realized from “a pair” of securities transactions). The question presented is whether a sale of one security and a purchase of a different security issued by the same company can be “paired” under § 16(b).

Congress's use of the singular term “any equity security” supports an inference that transactions involving different equity securities cannot be paired under § 16(b). See At Home Corp., 446 F.3d at 408–09. As the District Court explained, correctly in our view:

The text limits liability to profits realized from “the purchase and sale, or sale and purchase, of any equity security of the issuer.” The drafters specifically chose to group “purchase and sale” and “sale and purchase” into single compounded units. This indicates that, to incur Section 16(b) liability, an insider's “purchase and sale” or “sale and purchase” must both be directed at the same prepositional object—i.e. the same equity security.

Gibbons, 801 F.Supp.2d at 247;cf. Am. Standard, Inc. v. Crane Co., 510 F.2d 1043, 1058 (2d Cir.1974) (“The statute speaks of ‘such issuer’ in the singular. There is no room for a grammatical construction that would convert the singular into a plural.”). The regulations promulgated by the SEC implicitly support this understanding of § 16(b) by noting that that the statute covers the purchase and sale, or sale and purchase, of “a security,” and by providing for an exception when the purchase and sale of “such security” meets...