Tuesday, October 2, 2012
The Second Circuit recently rejected a 10% shareholder's constitutional challenge to a suit for disgorgement of short-swing trading profits under section 16(b) of the Securities Exchange Act. The defendant argued that because the trading caused no injury to the corporation, there was no genuine case or controversy, and therefore the plaintiff, suing derivatively on behalf of the corporation, did not have standing. Donoghue v. Bulldog Investors General Partnership (2d Cir. Oct. 1, 2012) (Download Donoghue.100112)
Although it was undisputed that the complaint adequately alleged a section 16(b) claim against the defendant and that the plaintiff, as a shareholder, was a person statutorily authorized to bring the claim, the defendant asserted that the court did not have jurisdiction to hear the claim because it presented no live case or controversy affording plaintiff standing to sue. As the opinion states,
Bulldog argues that plaintiff cannot demonstrate any injury to the issuer from the alleged 16(b) violation because Invesco "was a non-party to the trades at issue, and no issue of 'corporate opportunity,' fiduciary duty, breach of contract or misappropriation is on the table."...Indeed, Bulldog insists that it is a "consummate 'outsider,'" lacking any "fiduciary, contractual or confidential relationship with Invesco."
In affirming the district court's judgment awarding short-swing profits, the Court rejected defendant's argument as without merit, because Congress, in enacting 16(b), established a rule of strict liability that effectively makes 10% beneficial owners fiduciaries to the extent of making their short-swing trading transactions "breaches of trust." Thus, defendant could not argue that it owed no fiduciary duty to the issuer. Moreover, since the statute conferred upon the issuer (and in appropriate circumstances, a shareholder of the issuer) an enforceable legal right to expect the defendant not to engage in any short-swing trading in its stock, the issuer is not a bounty hunter, but a person with a cognizable claim to compensation for the invasion of a legal right.