Opinion
00-CIV-1173 (KMW)
March 15, 2001
ORDER
Plaintiff brought this action under Section 16(b) of the Securities and Exchange Act of 1934, alleging short swing profits. Defendant Crabbe Huson Group, Inc. moves to dismiss the complaint, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted.
For the reasons set forth below, the Court places the case on the suspense calendar.
I. Background
Richard Morales ("plaintiff") is a shareholder of Auspex Systems, Inc. ("Auspex"). See Complaint at ¶ 2. Crabbe Huson Group, Inc. ("Crabbe Huson") is an investment advisor. See id. at ¶ 3. The complaint alleges that Crabbe Huson and John Does 1-20 (collectively "defendants") collectively beneficially-owned more than 10% of the outstanding common stock of Auspex and therefore are liable for short swing profits in Auspex, pursuant to § 16(d) of the Securities and Exchange Act of 1934. See id. at ¶ 4. Plaintiff seeks to recover the alleged short swing profits on behalf of Auspex.
Defendant has moved to dismiss the action, for failure to state a claim upon which relief can be granted.
II. Discussion
A. Standard for 12(b)(6) Motion to Dismiss
In considering a motion to dismiss for failure to state a claim upon which relief can be granted, the Court must "determine whether the complaint itself is legally sufficient," Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985) (citation omitted), accepting as true its factual allegations, see Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (citation omitted). The Court's function "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980).
The complaint should be dismissed only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Cruz v. Gomez, 202 F.3d 593, 597 (2d Cir. 2000) (internal quotation marks and citation omitted). The Court should draw all inferences in favor of the non-moving party. See id. at 596 (citation omitted).
B. Section 16(b)
Section 16(b) prohibits a beneficial owner of equity security from realizing a profit from the purchase and sale of such securities within a six-month period. 15 U.S.C. § 78p(b). In order to bring an action under this statutory provision, plaintiff must plead:
(1) a purchase of securities,
(2) a sale of securities,
(3) that the purchase and sale were done by a beneficial owner, director, or officer, and
(4) that the purchase and sale took place within a six-month period.
See Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998).
In order to be a beneficial owner under § 16(b), defendant must: (1) be a beneficial owner as defined by § 13(d) of the Act, and (2) have a pecuniary interest in the securities at issue. See 17 C.F.R. § 240.16a-1(a)(1). Section 13(d) further sets forth that if "two or more persons act as a . . . group for the purpose of acquiring, holding, or disposing of securities of an issuer, such . . . group" may constitute a beneficial owner. 15 U.S.C. § 78m(d)(3).
Crabbe Huson argues that the complaint must be dismissed because it fails to allege the requisite elements to establish beneficial ownership. Crabbe Huson asserts that it does not qualify on its own as a beneficial owner because investment advisors are exempt and that it does not qualify as a group because no such group exists.
Because the Court intends to dismiss the motion on the ground that Crabbe Huson is not a beneficial owner and that Crabbe Huson and John Does 1-20 do not constitute a group within the meaning of the statute, the Court does not reach the issue of whether Crabbe Huson has a pecuniary interest.
1. Exemption for Investment Advisors As Crabbe Huson points out, Rule 16a-1(a)(1) explicitly excludes registered investment advisors from the definition of beneficial owners where the securities involved are held for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business. See 17 C.F.R. § 240.16a-1(a)(1)(iv). The complaint itself acknowledges that Crabbe Huson is "an investment advisor registered with the Securities Exchange Commission under Section 203 of the Investment Advisors Act of 1940." Moreover, the complaint makes no allegation that Crabbe Huson holds shares other than for the benefit of third parties or in customer or fiduciary accounts. Therefore, based on the well-established exception for investment advisors, the action can not stand on an allegation that Crabbe Huson, standing alone, was a beneficial owner.
2. Existence of a Group Nonetheless, Crabbe Huson can still be liable under § 16(b) if plaintiff can establish that Crabbe Huson is a member of a group, one or more members of which is not exempt under § 16(b), because the exemption for investment advisors applies only if all the members of the group fall within the exemption. Section 13(d)(3) states that if two or more persons act together to acquire, hold, or dispose of securities of an issuer, then the group formed thereby shall be deemed to have acquired beneficial ownership. See 17 C.F.R. § 240.13d-5(b).
The complaint states only that defendants were members of a "group." See Complaint at ¶ 4. The Court finds that this barebones allegation is insufficient to state a cause of action under § 16(b), because the complaint fails to allege that defendants acted together "for the purpose of acquiring, holding, or disposing of equity securities." See Morales v. Envirosource Inc. et al., 00 Civ. 1420 (CM) (Nov. 28, 2000) (dismissing as "bare-bones" a complaint that stated only that the entities were a "group"); Strauss v. American Holdings, Inc. 902 F. Supp. 475, 479 (S.D.N.Y. 1995) (stating that a "group" characterization, unsupported by specific facts, would constitute the sort of legal conclusion that can not survive a motion to dismiss). Based on this conclusion, the Court is inclined to dismiss the action, with leave to replead.
However, the Court declines to dismiss the action at this point. Following the lead of Judge McMahon, who dealt with a similar case brought by the same plaintiff, in Morales v. Envirosource, the Court places this action on the suspense calendar, to await the decision from the Second Circuit in the case of Morales v. Quintel Entertainment, Inc., 72 F. Supp.2d 344 (S.D.N.Y. 1999), appeal pending. The Court does so because, as explained by Judge McMahon, the Second Circuit's decision may render repleading futile.
In its brief, plaintiff argues that "the theory of case is that the managed accounts of the John Does are liable under Section 16(b) for the profits obtained for them by Crabbe Huson Group, Inc., as is Crabbe Huson itself, in proportion to any pecuniary interest they or it held in those accounts." See Plaintiff's Memorandum of Law in Opposition to Defendant Crabbe Huson Group, Inc.'s Motion to Dismiss, dated June 15, 2000, at p. 3. Plaintiff relies on cases such as Strauss v. Kopp, 1999 WL 787818 at *3 (S.D.N.Y. Sept. 30), to support its argument that these factual allegations suffice. Crabbe Huson argues even these factual allegations do not suffice to support a claim, because plaintiff does not allege any "common control" between the exempt investment advisor and the unidentified, passive investors. See Rosen v. Brookhaven Capital Management, 113 F. Supp.2d 615 (S.D.N.Y. 2000) (holding that a registered investment advisor that holds securities for customers in fiduciary or customer accounts in the ordinary course of business retains § 16a-1 exemption); Morales v. Quintel Entertainment, Inc., 72 F. Supp.2d 344, 347(S.D.N.Y. 1999) (in order to qualify as a group, defendants must have "combined in support of a common objective").
III. Conclusion
The Court places this action on the suspense calendar.
Upon a decision by the Second Circuit in the Quintel case, the parties shall have three weeks to provide the Court with letter briefs, that shall be no longer than five pages, explaining the impact of the holding on the present action.
SO ORDERED.