Packer ex rel. 1-800-Flowers.com, Inc. v. Raging Capital Mgmt., LLC

• Citation: 242 F.Supp.3d 141
• Decision Date: 10 March 2017
• Docket Number: CV 15–5933 (GRB)
• Parties: Brad PACKER, Derivatively ON BEHALF OF 1–800–FLOWERS.COM, INC., Plaintiff, v. RAGING CAPITAL MANAGEMENT, LLC, Raging Capital Master Fund, Ltd., William C. Martin and 1–800–flowers.com, Inc., Defendants.
• Court: U.S. District Court — Eastern District of New York

242 F.Supp.3d 141

Brad PACKER, Derivatively ON BEHALF OF 1–800–FLOWERS.COM, INC., Plaintiff,

v.RAGING CAPITAL MANAGEMENT, LLC, Raging Capital Master Fund, Ltd., William C. Martin and 1–800–flowers.com, Inc., Defendants.

CV 15–5933 (GRB)

United States District Court, E.D. New York.

Signed March 10, 2017

Glenn Frederick Ostrager, Roberto Legaspi Gomez, Ostrager Chong Flaherty & Broitman P.C., Paul D. Wexler, New York, NY, for Plaintiff.

Kyle J. Kolb, Thomas J. Fleming, Renee Michele Zaytsev, Olshan Frome Wolosky, LLP, Thomas J. Kavaler, Cahill Gordon & Reindel LLP, New York, NY, for Defendants.

MEMORANDUM OF DECISION AND ORDER

GARY R. BROWN, United States Magistrate Judge:

"The pre-trial deposition-discovery mechanism established by Rules 26 to 37 is one of the most significant innovations of the Federal Rules of Civil Procedure.... Thus civil trials in the federal courts no longer need be carried on in the dark. The way is now clear, consistent with recognized privileges, for the parties to obtain the fullest possible knowledge of the issues and facts before trial."

- Hickman v. Taylor , 329 U.S. 495, 500–01, 67 S.Ct. 385, 91 L.Ed. 451 (1947)

Pending before the Court is a motion to dismiss, or in the alternative, for summary judgment, brought by defendants RAGING CAPITAL MANAGEMENT, LLC, RAGING CAPITAL MASTER FUND, LTD. and WILLIAM C. MARTIN (the "Raging Capital defendants") in this shareholder derivative action seeking disgorgement of short-swing profits from the Raging Capital defendants under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The central questions presented are whether the Raging Capital defendants fall within the registered investment adviser exemption contained in Section 16, and whether this determination can be made at this juncture. As discussed in greater detail below, the exemption is an affirmative defense not subject to resolution on a motion to dismiss. Moreover, in absence of discovery, which was stayed at defendants' request pending the outcome of this motion, summary judgment is equally inappropriate here. Thus, the motions are DENIED.

PROCEDURAL HISTORY

Plaintiff BRAD PACKER ("Packer"), derivatively on behalf of nominal defendant 1–800–FLOWERS.COM, INC. ("Flowers"),¹ commenced this action by the filing of a complaint on October 15, 2015. Flowers filed an answer on December 22, 2015, DE 14, while the Raging Capital defendants filed the instant motion in lieu of an answer. Following a preliminary conference, on January 25, 2016 the Court entered a discovery schedule. DE 20. In early April 2016, all parties consented to the jurisdiction of the undersigned for all purposes; those consent stipulations were "so ordered" by the Honorable Leonard D. Wexler. DE 27, 28.

Via a letter motion dated April 12, 2016, counsel for the Raging Capital defendants sought a stay of discovery, predicated on the notion that "[g]ood cause exists to stay discovery pending the Court's decision on the Raging Capital Defendants' Motion to Dismiss." DE 29 at 2. While counsel mentioned the defendants' anticipated summary judgment motion in a footnote, the application was firmly predicated upon a scheduled, though then as-yet-unfiled motion to dismiss. Id. After consideration, the undersigned granted a stay of discovery pending resolution of the motion. Electronic Order dated April 19, 2016.

On June 7, 2016, the parties filed the motion papers relating to the Raging Capital defendants' motions to dismiss and for summary judgment. DE 34–36. On February 16, 2017, Packer moved via letter application to lift the stay of discovery, which motion remains sub judice. DE 38–39.

FACTS

The Complaint alleges as follows: Packer, a New York resident, holds an undisclosed number of shares of common stock of Flowers, a Delaware corporation maintaining a principal place of business in Carle Place, NY. DE 1 ¶¶ 1–2. Defendant Raging Capital Management, LLC ("RC Management") is described as "a registered investment adviser that provides advisory services to defendant Raging Capital Master Fund, Ltd.," while defendant William C. Martin serves as Chief Investment Officer and Managing Member of RC Management. DE ¶¶ 3, 5. Defendant Raging Capital Master Fund, Ltd. ("Master Fund") is "a private investment limited partnership," headquartered in the Cayman Islands. DE ¶ 4.

The Complaint alleges that the Raging Capital defendants constitute a "group for purposes of determining beneficial ownership under §§ 13(d)(3) and 16(b) of the Exchange Act," meaning that "the shares held by persons in such a group are aggregated to determine whether the group has a greater than 10% beneficial ownership in the issuing corporation." Id. ¶¶ 8–9 (citing SEC Rule 16a–1). In support of this claim, the Complaint alleges that "all purchases and sales for each of the Raging Capital [defendants] were directed by Martin, at all relevant times, a group was formed and operative within the meaning of § 13(d)(3) of the Exchange Act, for the purpose of acquiring, holding and disposing of shares of Common Stock." Id. ¶ 9. To further buttress this claim, the Complaint alleges that "various SEC filings were made collectively on behalf of all group members, Management is the investment adviser to Master Fund and Martin is the sole Manager of Management." Id.

The Complaint then sets forth data taken from various public filings describing transactions demonstrating that, in the aggregate, the Raging Capital defendants held in excess of 10% of the outstanding shares of Flowers. Id. ¶¶ 10–13. Some of these transactions were within the six-month time frame, thus allegedly generating short-swing profits. Id. The Complaint further alleges that the Raging Capital defendants "repeatedly and materially violated the reporting requirements under the Williams Act and under Section 16(a) of the Exchange Act and the standstill provision of SEC Rule 13d-l(f)," and that such "actions were designed to deprive the marketplace of critical information concerning the Raging Capital Group's plans to acquire a substantial stake in the Company as well as to conceal the Raging Capital Group's short-swing profit liability." Id. ¶ 14. Based on these allegations, the Complaint purports to set forth a cause of action seeking disgorgement of these alleged short-swing profits. Id. ¶¶ 15–19.

Additional Facts on Summary Judgment

In support of their alternative motion for summary judgment, the Raging Capital defendants submit a declaration of defendant Martin. In that declaration, he avers—as is conceded—that Management is a registered investment adviser, and that it provides such services to Master Fund, inter alia. DE 34–3 ¶ 2. Martin further states that the relationship is governed by an "Investment Management Agreement" ("IMA"), which provides that (1) Management "makes all investment decisions for the assets held by Raging Master Fund," and (2) "Master Fund has neither voting nor investment power over the shares managed by" Management. Id. ¶ 4. Martin declares that to the extent that he and/or Management owned shares in Flowers, such shares were "solely in our capacity as investment manager, which entitles [Management] to vote and dispose of the securities."Id. ¶ 6. He then avers in a statement unsupported (and perhaps unsupportable) by any documentation, that:

The aforementioned securities were acquired and held in the ordinary course of business. They were not acquired or held for the purpose or effect of changing or influencing control of the issuer or in connection with or as a participant in any transaction having that purpose or effect.

Id. ¶ 7. He further acknowledges that he is a director of Master Fund, though two other independent directors act in the same capacity, and a majority of directors must approve all decisions. DE 34–20 ¶ 3. He also advises that Master Fund manages over $600 million in net assets, and that Martin and members of his family own, directly and indirectly, significant interests in Master Fund. Id. ¶ 4.

Packer's response to the factual material proffered on defendants' summary judgment motion is a declaration of counsel pursuant to Federal Rule of Civil Procedure ("Rule") 56(d) identifying discovery needed for plaintiff to fully respond to the summary judgment motion, including the following subject areas:

a) The validity and scope of a purported delegation of beneficial ownership from Master Fund to Management;

b) Management's entitlement to the investment adviser exemption to beneficial ownership contained in SEC Rule 16a-l(a)(l)(v);

c) Martin's entitlement to the control person exemption to beneficial ownership contained in SEC Rule 16a-l (a)(l)(vii);

d) Martin's control of, and ownership interest and investments in, Master Fund, Management and their affiliate "Feeder Funds", Raging Capital Fund (QP), LP and Raging Capital Offshore Funds, Ltd.;

e) The purchases and sales made by Defendants in Flowers equity securities during the period April 30, 2014 to January 31, 2015;

f) Whether Defendants acted as a group in their trading of Flowers equity securities during the period April 30, 2014 to January 31, 2015;

g) Whether Defendants' arguments in this case conflict with their own sworn SEC filings in which they admitted their beneficial ownership in Flowers equity securities; and

h) The reasons why neither Martin, Management or Master Fund filed Form 3s and/or Form 4s for Flowers equity securities.

DE 34–7 ¶ 8.

DISCUSSION

Standard of Review

Under Rule 12(b)(6), a defendant may move to dismiss the complaint for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). "In considering a motion to dismiss under Rule 12(b)(6), a court must accept as true all factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor." Henry v. Nannys for Grannys Inc. , 86 F.Supp.3d 155, 157 (E.D.N.Y. 2015) (citing Ruotolo v. City of New York , 514 F.3d 184, 188 (2d Cir. 2008) ). However, "the tenet that a court must accept as...