Second Circuit Affirms in Part and Vacates in Part District Court's Ruling in Roth v. Jennings

Holding:

An agreement to act together for the purpose of acquiring, holding, or disposing of shares need not be unconditional in order to support a finding that the actors constituted a group within the meaning of federal securities laws; additionally, formation of such a group may be formal or informal and may be proved by direct or circumstantial evidence.

Detailed Summary:

This case is an appeal from the dismissal of a derivative suit filed on behalf of issuer (nominal defendant MMI). Plaintiff sought disgorgement to issuer of “short-swing profits” made by issuer’s former chairman (defendant Jennings) and a private company (defendant EMR), which held 14.8% of issuer’s stock.  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 made in the documents they filed with the Securities and Exchange Commission (“SEC”).

The district court justified its dismissal of the suit as against defendant EMR on the ground that the complaint did not allege that the private company itself had engaged in any short-swing transactions or received any pecuniary profit from the MMI (issuer) stock transactions by defendant Jennings.

In reversing the dismissal of the suit as against Jennings, the Court of Appeals ruled that the plaintiff was able to sufficiently allege in the complaint that issuer’s former chairman (Jennings) and private company (EMR), which made an unsecured loan to Jennings in order to facilitate his purchase of 8.3% of the issuer’s stock, had acted as a “group” for purposes of stating a claim seeking disgorgement of short-swing profits.  The disclaimers of group status in the company’s and former chairman’s Schedule 13D filings with the Securities and Exchange Commission (SEC) were inappropriate for making a decision on a motion to dismiss for failure to state a claim. With respect to the case against EMR, the appellate court ruled that in the absence of any allegation that EMR realized any short-swing profits, it could be said that the plaintiff failed to make a sufficient statement of a claim against EMR in the complaint.

The court also said that “the highly unusual” transaction by which EMR financed Jennings’ trades in the issuer’s stock, followed by a merger offer, did not give rise to a presumption that EMR derived some pecuniary benefit from its former chairman’s purchases and sales.  Therefore, the court affirmed the judgment of dismissal as against EMR, but vacated the one rendered in favor of Jennings.

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