Rubenstein v. Cosmos Holdings

• Decision Date: 10 July 2020
• Docket Number: 19 Civ. 6976 (KPF)
• Parties: MARK RUBENSTEIN, Plaintiff, v. COSMOS HOLDINGS, INC., Nominal Defendant, -and- GRIGORIOS SIOKAS, Defendant.
• Court: U.S. District Court — Southern District of New York

MARK RUBENSTEIN, Plaintiff, v. COSMOS HOLDINGS, INC., Nominal Defendant,

-and-

GRIGORIOS SIOKAS, Defendant.

19 Civ. 6976 (KPF)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

July 10, 2020

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Plaintiff Mark Rubenstein brings this action pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), 15 U.S.C. § 78p(b), on behalf of nominal defendant Cosmos Holdings, Inc. ("Cosmos"). He alleges that Defendant Grigorios Siokas, an officer, director, and beneficial owner of more than 10% of Cosmos, violated the short-swing profits provision of Section 16(b) when he sold Cosmos common stock within a six-month period of his wife's purchase of Cosmos common stock from an unaffiliated third party. Plaintiff seeks disgorgement of any short-swing profits realized by Siokas, for the benefit of Cosmos. Together, Siokas and Cosmos ("Defendants") move to dismiss the Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), or alternatively, move for a judgment on the pleadings pursuant to Rule 12(c). For the reasons explained below, Defendants' motion to dismiss is denied.

BACKGROUND¹

A. Factual Background

The Court accepts as true the well-pleaded allegations of the Complaint for the purposes of this motion. Plaintiff owns securities in Cosmos, a pharmaceutical company whose common stock is traded on an over-the-counter securities market, the OTCQB market. (Compl. ¶¶ 2-3). Siokas is an officer, director, and beneficial owner of more than 10% of Cosmos common stock. (Id. at ¶ 6). Plaintiff brings this action for the benefit of Cosmos, which is named as a party defendant solely to have all necessary parties before this Court. (Id. at ¶ 5).

At all relevant times, Siokas was married to Ourania Matsouki. (Compl. ¶ 12). The Complaint alleges that on October 2, 2017, Matsouki entered into a purchase agreement (the "Purchase Agreement") with an unrelated third party, Vasileios Mavrogiannis, to buy 100,000 post-split shares of Cosmos common stock (the "Matsouki Purchase"). (Id. at ¶ 10; id., Ex. A). Plaintiff alleges that the purchase price was $2.20 per share, amounting to a total purchase price of $22,000. (Id.).² Before the Purchase Agreement was executed, Matsouki hadpaid Mavrogiannis the purchase price and completed all other obligations and preconditions described in the Agreement. (Id. at ¶ 11).

Within six months of October 2, 2017, Siokas sold 100,000 shares of Cosmos common stock through eight open-market sales (the "Siokas Sales"). (Compl. ¶ 13). Utilizing the "lowest in - highest out within six months" method, Plaintiff estimates that Siokas profited in the amount of $865,839.50 from these sales, after subtracting the total price of the Matsouki Purchase. (Id. at ¶ 14).

On January 14, 2019, Plaintiff made a demand on the Board of Directors of Cosmos for the recovery of any short-swing profits realized by Siokas from the Matsouki Purchase and the Siokas Sales. (Compl. ¶ 15). More than 60 days passed, and Cosmos did not act on Plaintiff's demand. (Id. at ¶ 8). In fact, Cosmos stated that it did not believe a recovery was warranted. (Id.). Then, on May 29, 2019, Matsouki entered into a rescission agreement (the "Rescission Agreement") with Mavrogiannis purporting to nullify the Matsouki Purchase ab initio and nunc pro tunc. (Id. at ¶ 17; id., Ex. B). Siokas provided the Rescission Agreement to Plaintiff on that same day. (Id.). To date, Cosmos has not recovered any of the alleged short-swing profits. (Id. at ¶ 19).

B. Procedural History

Plaintiff filed the Complaint in this action against Defendants on July 25, 2019, seeking to have Siokas account for and pay over the short-swing profits he allegedly realized and retained in violation of Section 16(b). (Dkt. #1). On October 22, 2019, prior to service upon Siokas, Cosmos filed a letter seeking aconference in anticipation of filing a motion to dismiss. (Dkt. #9). On October 25, 2019, Plaintiff responded to Cosmos's pre-motion conference request. (Dkt. #11). The Court held a pre-motion conference on November 26, 2019, and set a briefing schedule. (Dkt. #15 (transcript)). On January 2, 2020, Cosmos filed a letter to confirm that Siokas had been served and would be represented by Cosmos's counsel, and that together, they would move to dismiss this action. (Dkt. #16).

Defendants filed their motion to dismiss Plaintiff's Complaint and supporting memorandum on February 27, 2020. (Dkt. #21-22). Plaintiff filed its first memorandum of law in opposition to Defendants' motion on March 5, 2020. (Dkt. #26). On March 6, 2020, Plaintiff requested leave to file an amended opposition brief. (Dkt. #27). The Court granted Plaintiff's request on March 11, 2020. (Dkt. #28). That same day, Plaintiff filed its amended opposition to the motion to dismiss. (Dkt. #29). The motion became fully briefed and ripe for review when Defendants filed their reply brief on April 16, 2020. (Dkt. #37).

DISCUSSION

Plaintiff's Complaint is styled as presenting three claims for relief. First, Plaintiff alleges that the Matsouki Purchase and the Siokas Sales gave rise to short-swing profits in violation of Section 16(b) that are recoverable by Plaintiff on behalf of Cosmos. Second, Plaintiff alleges that the purported rescission of the Matsouki Purchase does not extinguish Siokas's Section 16(b) liability. Third, Plaintiff alleges that profits are recoverable from any additional matchingtransactions of Cosmos equity securities or equity security equivalents made by Siokas during periods not barred by the statute of limitations and within periods of less than six months of each other. Defendants move to dismiss the Complaint in its entirety, arguing that because the Rescission Agreement voided the Purchase Agreement: (i) there was no matching sale and purchase of Cosmos stock and (ii) Siokas did not realize a profit that could be disgorged to Cosmos.³

A. Applicable Law

1. Motions to Dismiss Under Rule 12(b)(6)⁴

When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court must "draw all reasonable inferences in Plaintiff'sfavor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief." Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In addition to the text of the complaint, the Court may consider documents attached as exhibits, incorporated by reference, or that are "integral" to the complaint. DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010).

A plaintiff is entitled to relief if he alleges "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) ("While Twombly does not require heightened fact pleading of specifics, it does require enough facts to nudge plaintiff's claims across the line from conceivable to plausible." (internal quotation marks omitted) (citing Twombly, 550 U.S. at 570)).

However, a court is not bound to accept "conclusory allegations or legal conclusions masquerading as factual conclusions." Rolon v. Henneman, 517 F.3d 140, 149 (2d Cir. 2008) (internal quotation marks omitted); see also Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) ("[A]lthough a court must accept as true all of the allegations contained in a complaint, that tenet isinapplicable to legal conclusions, and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." (internal quotation marks omitted) (quoting Iqbal, 556 U.S. at 678)). Moreover, "[w]here a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557).

2. Violations of Section 16(b)

Section 16(b) of the 1934 Act is an insider-trading statute that requires statutorily defined corporate insiders to disgorge short-swing profits obtained by trading in the securities of the corporation. Olagues v. Perceptive Advisors LLC, 902 F.3d 121, 125 (2d Cir. 2018). It states in relevant part:

For the purpose of preventing the unfair use of information which may have been obtained by [a corporate insider] by reason of his relationship to the issuer, any profit realized by [the insider] 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 [the insider].

15 U.S.C. § 78p(b). The Second Circuit has made plain that Section 16(b), "a vital component of the Exchange Act, [] was designed to prevent an issuer's directors, officers, and principal stockholders from engaging in speculative transactions on the basis of information not available to others." Donoghue v. Bulldog Inv'rs Gen. P'ship, 696 F.3d 170, 173-74 (2d Cir. 2012) (internal quotation marks omitted).

As indicated by the "irrespective of any intention" clause, that section is a strict-liability provision; it "requires the inside, short-swing trader to disgorge all profits realized on all 'purchases' and 'sales' within the [six-month] period, without proof of actual abuse of insider information, and without proof of intent to profit on the basis of such information." Roth v. Jennings, 489 F.3d 499, 507 (2d Cir. 2007) (quoting Kern Cty. Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 595 (1973)); see, e.g., Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S....