Roth v. Jennings

Decision Date06 June 2007
Docket NumberDocket No. 06-0784-cv.
Citation489 F.3d 499
PartiesAndrew 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.
CourtU.S. Court of Appeals — Second Circuit

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, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993); Overton v. Todman & Co., 478 F.3d 479, 483 (2d Cir.2007). The following description is taken from allegations in the complaint and from documents referred to in the complaint which were filed by EMR or Jennings with the SEC pursuant to SEC Rule 13d-1 and Schedule 13D, 17 C.F.R. §§ 240.13d-1(a), 240.13d-101 ("Schedule 13D" filings).

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 2006 WL 278135 (Feb. 2, 2006) ("District Court Opinion"). The court found principally that defendants' SEC filings disclaimed group status, and it held that notwithstanding the contrary allegations of the complaint, defendants' disclaimers were controlling.

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 ...

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2 books & journal articles
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 46 No. 2, March 2009
    • March 22, 2009
    ...Further, section 16(b) imposes strict liability on any insider who makes a short swing profit. [section] 78p(b); see Roth v. Jennings, 489 F.3d 499, 507 (2d Cir. 2007) (discussing how the statue is a strict-liability provision). The purpose of this ban on short-swing trading is to deter sta......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 45 No. 2, March 2008
    • March 22, 2008
    ...Further, section 16(b) imposes strict liability on any insider who makes a short swing profit. [section] 78p(b); see Roth v. Jennings, 489 F.3d 499, 507 (2d Cir. 2007) (discussing how the statue is a strict-liability provision). The purpose of this ban on short-swing wading, is to deter sta......

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