Roth v. Jennings, No. 06-0784 (2d Cir. 2007)

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06-0784 Roth v. Jennings 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 - - - - - - 4 August Term, 2006 5 (Argued: February 21, 2007 Decided: June 6, 2007) 6 7 8 9 10 Docket No. 06-0784-cv _________________________________________________________ ANDREW E. ROTH, derivatively MANAGEMENT, INC., 11 on behalf of METAL Plaintiff-Appellant, 12 - v. - 13 14 T. BENJAMIN JENNINGS, EUROPEAN METAL RECYCLING, LTD., and METAL MANAGEMENT, INC., 15 16 Defendants-Appellees. _________________________________________________________ 17 Before: KEARSE, CABRANES, and KATZMANN, Circuit Judges. 18 Appeal from a judgment entered pursuant to Fed. R. Civ. P. 19 12(b)(6) in the United States District Court for the Southern 20 District 21 derivative action brought under § 16(b) of the Securities Exchange 22 Act of 1934, 15 U.S.C. § 78p(b), for disgorgement of short-swing 23 profits from stock sales made by one defendant as part of an alleged 24 "group" within the meaning of the Act. 25 26 27 28 29 of New York, Deborah A. Batts, Judge, dismissing a Affirmed in part; vacated and remanded in part. PAUL D. WEXLER, New York, New York (Bragar Wexler & Eagel, New York, New York, Ostrager Chong Flaherty & Broitman, New York, New York, on the brief),for Plaintiff-Appellant. 1 2 3 4 5 6 ALLAN T. SLAGEL, Chicago, Illinois (Heather A. Jackson, Shefsky & Froelich, Chicago, Illinois, John J. Clarke, Jr., DLA Piper Rudnick Gray Cary, New York, New York, on the brief), for DefendantAppellee Jennings. 7 8 9 10 THOMAS E. LYNCH, New York, New York (Steven C. Bennett, Jones Day, New York, New York, on the brief), for DefendantAppellee European Metal Recycling, Ltd. 11 KEARSE, Circuit Judge: 12 Plaintiff Andrew E. Roth, suing derivatively on behalf of 13 nominal 14 Management"), for disgorgement to MMI of "short-swing profits" under 15 § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or 16 "Act"), 15 U.S.C. § 78p(b), appeals from a final judgment of the 17 United States District Court for the Southern District of New York, 18 Deborah A. Batts, Judge, granting motions by defendants T. Benjamin 19 Jennings and European Metal Recycling, Ltd. ("EMR") (collectively 20 "defendants"), to dismiss the complaint for failure to state a claim 21 on which relief can be granted. The complaint alleged that Jennings 22 and EMR as a "group," within the meaning of the Act, owned more than 23 10 percent of MMI's outstanding stock; that within a period of less 24 than six months, Jennings purchased and sold MMI stock at a profit 25 of some $4.25 million; and that § 16(b) required the disgorgement of 26 that profit to MMI. 27 motions to dismiss on the ground that the complaint was insufficient 28 to plead that defendants acted as a group, given the disclaimers of 29 group status in documents filed by defendants with the Securities defendant Metal Management, Inc. ("MMI" or "Metal The district court granted both defendants' - 2- 1 and Exchange Commission ("SEC"). 2 against EMR was also dismissable on the ground that the complaint 3 did not allege that EMR itself had engaged in any short-swing 4 transactions or received any pecuniary profit from the MMI stock 5 transactions by Jennings. 6 the dismissal of the claim against EMR, but we vacate the dismissal 7 of the claim against Jennings and remand for further proceedings. 8 For the reasons that follow, we affirm I. 9 The court ruled that the claim BACKGROUND For purposes of reviewing the dismissal of a complaint for 10 failure 11 allegations, and all reasonable inferences that can be drawn from 12 those allegations in the plaintiff's favor, as true. 13 Leatherman v. Tarrant County Narcotics Intelligence & Coordination 14 Unit, 507 U.S. 163, 164 (1993); Overton v. Todman & Co., 478 F.3d 15 479, 483 (2d Cir. 2007). 16 allegations in the complaint and from documents referred to in the 17 complaint which were filed by EMR or Jennings with the SEC pursuant 18 to SEC Rule 13d-1 and Schedule 13D, 17 C.F.R. §§ 240.13d-1(a), 19 240.13d-101 ("Schedule 13D" filings). 20 A. 21 to state a claim, we accept the complaint's factual See, e.g., The following description is taken from The Parties and the Transactions in MMI Stock Metal Management (or "the Company"), which describes 22 itself as one of the nation's largest full-service scrap metal 23 recyclers, is a publicly owned Delaware corporation headquartered in - 3- 1 Chicago, Illinois. 2 company headquartered in the United Kingdom. 3 resident, is a former chairman and chief executive officer of MMI. 4 On May 15 and May 21, 2003, EMR purchased a total of 5 1,503,100 shares of MMI common stock in open-market transactions. 6 These 7 outstanding common stock. 8 filed by EMR with respect to those transactions stated that shares EMR is a privately owned scrap metal processing represented approximately Jennings, an Illinois 14.8 percent (See Complaint ¶ 13.) of MMI's The Schedule 13D 9 10 11 12 13 14 15 16 17 18 19 20 21 EMR has taken certain actions that indicate that EMR may 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. 22 (EMR Schedule 13D dated June 2, 2003, at 4 (emphases added).) 23 On May 29 and 30, 2003, Jennings, in open-market 24 transactions, purchased a total of 842,000 shares of MMI common 25 stock. (See Complaint ¶ 9.) These shares constituted approximately 26 8.3 percent of MMI's outstanding stock. 27 dated June 9, 2003, at 2.) 28 to $11.55, for a total purchase price of $9,517,350; Jennings paid 29 for the shares by obtaining a $10 million loan from EMR. 30 Complaint ¶¶ 8, 9, 14.) 31 loan agreement, the loan was unsecured; the interest rate was 32 4 percent per annum. 33 Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I.) (See Jennings Schedule 13D The per-share prices ranged from $10.95 (See According to the terms of the EMR-Jennings (See Jennings Schedule 13D dated June 9, 2003, - 4- 1 Roth's complaint alleged that "[t]he loan was made for the 2 specific purpose of buying MMI securities in furtherance of EMR's 3 and Jennings [sic] agreement to work together to effect a change of 4 control or similar transaction involving MMI" (Complaint ¶ 8), and 5 that Jennings and EMR therefore constituted a "group" within the 6 meaning of § 13(d) of the Act for purposes of determining each 7 entity's beneficial ownership of MMI stock under § 16 of the Act 8 (e.g., id. ¶¶ 6, 7, 11). 9 "each member of [the] Group is liable to pay to the issuer all 10 profits earned by that Group member in stock transactions effected 11 within a six-month period during which time the Group owned a 12 greater than 10% beneficial interest in the issuer's stock." 13 ¶ 12.) 14 The complaint alleged that under § 16(b), (Id. On July 14 and 15, 2003, Jennings sold 16,000 of his MMI 15 shares, at prices ranging from $18.6483 to $19.06 per share. 16 Complaint ¶ 15.) 17 an additional 602,900 shares, at prices ranging from $18 to $18.59 18 per share. 19 relevant times during the period while Jennings purchased and sold 20 MMI common stock, the Group owned in excess of 10% of MMI's 21 outstanding common stock." 22 sales, which occurred less than six months after his purchases, 23 resulted in profits totaling at least $4,249,408.80, and that 24 Jennings and EMR are each "liable to the extent of its [sic] 25 pecuniary [interest] in the . . . disgorgeable profits." 26 see id. ¶ 20.) (See From August 19 through September 9, 2003, he sold (See id. ¶ 16.) The complaint alleged that "[a]t all (Id. ¶ 13.) - 5- It alleged that Jennings's (Id. ¶ 18; 1 2 B. The Motions To Dismiss and the District Court's Decision Jennings and EMR moved for dismissal pursuant to Fed. R. 3 Civ. P. 12(b)(6) for failure to state a claim under § 16(b). 4 attached to their respective motions several documents they had 5 filed with the SEC--some of which were referred to in the complaint- 6 -which described, inter alia, the loan agreement between EMR and 7 Jennings, certain of their transactions in MMI stock, and their 8 respective MMI holdings. 9 9, 2003 letter from EMR to Jennings, signed as "[a]ccepted and 10 agreed to" by Jennings ("Loan Agreement") stated--in the version 11 attached to the Schedule 13D filed by EMR--as follows: They The loan agreement, in the form of a June 12 13 This letter will evidence our legally binding agreements effective as of June 2, 2003: 14 15 16 17 (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"). 18 19 20 21 22 (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. 23 24 25 26 27 28 29 30 31 32 33 34 35 (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. 36 (EMR Schedule 13D dated June 9, 2003, Exhibit I; see also Jennings 37 Schedule 13D dated June 9, 2003, Exhibit A (with slight linguistic - 6- 1 differences from EMR's Exhibit I).) 2 the complaint failed sufficiently to allege that they were a group 3 within the meaning of the pertinent securities laws and that the 4 Loan Agreement and their other SEC filings showed that they had 5 disclaimed group status. Jennings and EMR argued that 6 In a Memorandum and Order dated February 1, 2006, the 7 district court agreed, granting both defendants' motions to dismiss. 8 See 2006 WL 278135 (Feb. 2, 2006) ("District Court Opinion"). 9 court found principally that defendants' SEC filings disclaimed 10 group 11 allegations 12 The controlling. 13 status, The and of it the court held that complaint, began its notwithstanding defendants' discussion by the contrary disclaimers noting that were in 14 considering a motion to dismiss pursuant to Rule 12(b)(6), the court 15 is required to accept as true the factual allegations in the 16 complaint, draw all reasonable inferences in favor of the plaintiff, 17 and refrain from assessing the weight of the evidence that might be 18 offered in support of the complaint. 19 motion should be granted "'only if, after viewing plaintiff's 20 allegations in this favorable light, "it appears beyond doubt that 21 the plaintiff can prove no set of facts in support of his claim 22 which would entitle him to relief."'" 23 WL 278135, at *3 (quoting Walker v. City of New York, 974 F.2d 293, 24 298 (2d Cir. 1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 25 (1957)), cert. denied, 507 U.S. 961 (1993)). 26 that 27 The court noted that such a District Court Opinion, 2006 The court also stated consideration of a Rule 12(b)(6) motion is limited - 7- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 to the factual allegations in the complaint, documents attached to the complaint as exhibits or incorporated in it by reference, to matters of which judicial notice might be taken, or to documents either in plaintiff's possession or of which plaintiffs had knowledge and relied on in bringing suit. District Court Opinion, 2006 WL 278135, at *3. It added that the Second Circuit has held that "when a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC," as these are documents that should be noticed by the Court. Cortec Indus., Inc.[ v. Sum Holding L.P.], 949 F.2d [42, 47 (2d Cir. 1991)] (referencing Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991)). District Court Opinion, 2006 WL 278135, at *3. 20 As to the merits of the motions, the court noted that, in 21 order to show that Jennings's purchases, amounting to 8.3 percent of 22 MMI's shares, were subject to § 16(b), Roth was required to show 23 that EMR and Jennings constituted a "group" within the meaning of 24 the Act, that is, that they "'combined in furtherance of a common 25 objective.'" District Court Opinion, 2006 WL 278135, at *4 (quoting 26 Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982), cert. 27 denied, 460 U.S. 1069 (1983)). 28 plead group activity sufficiently, Plaintiff is not required to 29 allege that a common objective of actual corporate control existed 30 among the defendants, but simply that the defendants acted together 31 in furtherance of a common objective with regard to acquiring, 32 holding, voting or disposing of securities of the issuer," although 33 "the concerted action of the group's members need not be expressly 34 memorialized in writing." The court stated that "[i]n order to District Court Opinion, 2006 WL 278135, - 8- 1 at *4 (internal quotation marks and brackets omitted). 2 The court ruled, however, that Roth's complaint "d[id] not 3 sufficiently allege such an agreed-upon common purpose" between EMR 4 and Jennings. 5 Jennings, respectively, the court observed that the Schedule 13D 6 filed by Jennings in June 2003, which disclosed Jennings's purchases 7 of MMI shares and the loan from EMR, stated (a) that "'[t]here are 8 no arrangements or understandings between EMR and [Jennings] as to 9 how [Jennings] would utilize the proceeds of the [L]oan,'" and (b) 10 that Jennings "'does not have any definite plans regarding an 11 extraordinary 12 reorganization or liquidation involving [MMI] or a sale or transfer 13 of 14 subsidiaries.'" 15 (quoting Jennings Schedule 13D dated June 9, 2003, at 3) (emphasis 16 ours). 17 loan to Jennings stated that 18 19 20 21 22 23 24 25 a Id. at *5. material Citing Schedule 13D filings by EMR and corporate amount transaction, of assets of such [MMI] as or a any merger, of its District Court Opinion, 2006 WL 278135, at *1-*2 The court noted also that EMR's Schedule 13D disclosing its [EMR] has no contract, arrangement[] or understanding of any kind with Mr. Jennings with respect to the Common Stock [of MMI] owned by [EMR] or by Mr. Jennings; . . . expressly disclaims any direct or indirect beneficial ownership in the Common Stock [of MMI] owned by Mr. Jennings; and further disclaims any "group" status with Mr. Jennings. 26 District Court Opinion, 2006 WL 278135, at *2 (quoting EMR Schedule 27 13D dated June 9, 2003, at 3) (other internal quotation marks 28 omitted) (emphasis ours). 29 30 31 32 And the court noted that [t]he loan agreement signed by both Jennings and EMR's managing director expressly states that Jennings and EMR are in no way, either by the loan of June 9, 2003 or at any time in the future, to be - 9- 1 2 3 4 5 considered a "group" or part of any group that might include more than the Defendants. . . . EMR filed an amended 13D schedule after loaning money to Jennings, which further declared that the loan did not constitute group activity. 6 District Court Opinion, 2006 WL 278135, at *5 (emphases added). The 7 court 8 statements 9 constitute group activity"; that their disclaimers conflicted with 10 the allegations of the complaint; and that the complaint did not 11 "explain the documents [that EMR and Jennings had] filed with the 12 SEC." Id. 13 id. stated that with the defendants SEC, had asserting thus that "filed three their actions separate do The court accepted defendants' disclaimers as true. not See 14 The district court rejected Roth's contention that, in 15 ruling on the Rule 12(b)(6) motions, the court should not rely on 16 defendants' disclaimers: 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Plaintiff contends that the disclaimer of group status in the loan agreement and the subsequent amended 13D schedules by both Defendants was meant to circumvent liability even though the two were acting in concert. However, "unadorned allegations" based on "unmitigated speculation" that defendants are acting as a group are inadequate to sustain a Section 13(d) claim.[] Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972). In the instant case, Defendants have filed three separate statements with the SEC, asserting that their actions do not constitute group activity. The express disclaimer of group status conflicts with Plaintiff's allegations. Even interpreting the pleadings in a light most favorable to the Plaintiff, the Defendants' statements, which have been submitted to a government agency and made public, should not be contradicted or taken as perjurious simply because the Plaintiff, without evidence, says they are. See Matusovsky v. Merrill Lynch, 186 F.Supp.2d 397, 400 [(S.D.N.Y. 2002)] (stating that if a plaintiff's allegations are contradicted by a document considered in determining a Rule 12(b)(6) motion, those allegations are insufficient to defeat the motion); Rap[o]port v. Asia Elecs., 88 F.Supp.2d - 10- 1 2 3 4 5 6 179, 184 (S.D.N.Y. 2000) (stating that when documents contain statements that contradict the allegations in the complaint, the documents control and the court need not accept as true the allegations contained in the complaint). District Court Opinion, 2006 WL 278135, at *5 (emphases added). 7 In addition, the district court ruled that the complaint 8 would be dismissable "[e]ven were this Court not to accept the truth 9 of Defendants' statements in their SEC filings." Id. The court 10 concluded that § 16(b) was inapplicable because other evidence 11 submitted by defendants indicated that EMR and Jennings could not be 12 considered to have been a group at the time of Jennings's sales. 13 Citing the language in § 16(b) that "[t]his subsection shall not be 14 construed to cover any transaction where such beneficial owner was 15 not such both at the time of the purchase and sale, or the sale and 16 purchase, of the security . . . involved," 15 U.S.C. § 78p(b), the 17 court concluded that "for traders to constitute a 'group', the 18 Exchange Act requires that their coordinated activity persist during 19 the time of purchase and during the time of sale of the securities," 20 District 21 original). 22 by defendants, EMR had offered in August 2003 to buy Jennings's 23 shares at a below-market price and that Jennings had declined that 24 offer and sold shares on the open market. 25 Schedule 13D dated August 12, 2003, Exhibit 1 (EMR letter offering 26 to pay Jennings $13.50 per share)). 27 28 29 30 31 Court Opinion, 2006 WL 278135, at *6 (emphasis in The court noted that, according to documents submitted See id. at *5 (citing EMR The court found that [s]uch transactions do not reflect two group members acting in concert to effectuate a common objective with regard to acquiring, holding, voting or disposing of securities of the issuer. . . . Had Defendants held a common purpose, Jennings likely - 11- 1 2 3 4 5 6 7 8 would have accepted EMR's offer. While group members need not march in lock step to qualify as a "group", . . . marching in opposite directions certainly counsels against concluding that Jennings acted with EMR as a "group". Jennings' refusal of EMR's offer contradicted precisely what one would have expected of him had he been acting in concert with EMR. 9 District Court Opinion, 2006 WL 278135, at *5 (internal quotation 10 marks and brackets omitted) (emphases added); see id. ("[t]his 11 evidence does not in any way approximate an instance of group 12 activity, and belies allegations of any common objective shared by 13 the Defendants" (emphasis added)); id. at *6 (in selling his shares 14 on the open market, "Jennings did not act in concert with EMR at the 15 time of sale; he did the opposite"). The court concluded that, 16 17 18 19 20 [a]ccordingly, EMR's shares cannot be aggregated with Jennings' to constitute the more than ten percent ownership required to warrant Section 16(b) liability. Neither EMR nor Jennings may be considered part of a "group." 21 22 23 24 25 26 27 28 Because the Complaint does not sufficiently aver that Defendants acted as a group at the time Jennings sold his MMI shares, because public SEC filings indicate that Defendants never intended to act as a group, and because Jennings alone did not own ten percent of a class of MMI's equity securit[ies], Jennings' Motion to Dismiss Plaintiff's Complaint is hereby GRANTED. 29 Id. (emphases added). 30 The court ruled that the claim against EMR should be 31 dismissed on the additional ground that the complaint did not allege 32 that EMR had made any sales of its own shares or had any direct or 33 indirect pecuniary interest in the shares sold by Jennings. 34 35 Judgment was entered dismissing the complaint, and this appeal followed. - 12- 1 II. DISCUSSION 2 On appeal, Roth contends principally that the district 3 court erred in concluding that the complaint failed to state a claim 4 on which relief can be granted against Jennings, arguing that the 5 complaint sufficiently pleaded that EMR and Jennings acted as a 6 group for the purpose of Jennings's acquisition of MMI shares, that 7 defendants' disclaimers of group activity were not entitled to 8 evidentiary weight in the consideration of Rule 12(b)(6) motions, 9 and that Jennings's sales of his shares were not a basis for 10 concluding that the "group" provisions no longer applied. 11 reasons that follow, we agree. 12 A. For the Section 16(b) 13 Section 16 of the Exchange Act, with respect to any 14 company whose securities are registered on a national securities 15 exchange, 16 company's officers, directors, and "[e]very person who is directly 17 or indirectly the beneficial owner of more than 10 percent of any 18 class of any equity security (other than an exempted security)," 19 15 U.S.C. § 78p(a)(1). "[D]efining directors, officers, and [such] 20 beneficial those 21 information," Foremost-McKesson, Inc. v. Provident Securities Co., 22 423 U.S. 232, 243 (1976) ("Foremost-McKesson"), Congress enacted 23 § 16(b) of the Act, which provides, in pertinent part, as follows: 24 25 26 imposes owners certain as obligations presumed and to restrictions have access to on inside (b) Profits from purchase and sale of security within six months. For the purpose of preventing the unfair use of information which may have been - 13- the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) . . . 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 such beneficial owner, director, or officer in entering into such transaction of holding the security . . . purchased or of not repurchasing the security . . . sold for a period exceeding six months. . . . This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security . . . . 15 U.S.C. § 78p(b). 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 The general purpose of Congress in enacting § 16(b) is well known. See Kern County Land Co.[ v. Occidental Petroleum Corp., 411 U.S. 582, 591-92 (1973)]; Reliance Electric Co. [v. Emerson Electric Co., 404 U.S. 418, 422 (1972)], and the authorities cited therein. Congress recognized that insiders may have access to information about their corporations not available to the rest of the investing public. By trading on this information, these persons could reap profits at the expense of less well informed investors. In § 16(b) Congress sought to "curb the evils of insider trading [by] . . . taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great." Reliance Electric Co., supra, at 422. Foremost-McKesson, 423 U.S. at 243 (emphasis added). 36 Profits resulting from purchase-and-sale, or sale-and- 37 repurchase, transactions within a period of less than six months are 38 commonly known as "short-swing" transactions, see, e.g., id. at 234; 39 SEC Rule 16a-1(a)(3), 17 C.F.R. § 240.16a-1(a)(3). 40 the "irrespective of any intention" clause in § 16(b), that section 41 is 42 short-swing a strict-liability trader to provision; disgorge - 14- all it As indicated by "requires profits the realized inside, on all 1 'purchases' and 'sales' within the [six-month] period, without proof 2 of actual abuse of insider information, and without proof of intent 3 to profit on the basis of such information," Kern County Land Co. v. 4 Occidental Petroleum Corp., 411 U.S. 582, 595 (1973) (emphasis 5 added); see, e.g., Foremost-McKesson, 423 U.S. at 251 ("Section 6 16(b) imposes a strict prophylactic rule with respect to insider, 7 short-swing trading."). 8 The Exchange Act also recognizes that the abuses it 9 targets may be accomplished by persons acting not individually but 10 in combination with others. 11 respect to § 16, SEC Rule 16a-1(a)(1) provides that, "[s]olely for 12 purposes of determining whether a person is a beneficial owner of 13 more than ten percent of any class of equity securities," the term 14 "beneficial owner" means, with exceptions not pertinent here, "any 15 person who is deemed a beneficial owner pursuant to section 13(d) of 16 the Act and the rules thereunder." 17 Section 13(d) of the Act provides, in pertinent part, that 18 19 20 21 22 23 See, e.g., 15 U.S.C. § 78m(d)(3). With 17 C.F.R. § 240.16a-1(a)(1). [w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for the purposes of this subsection. 24 15 U.S.C. § 78m(d)(3) (emphases added). 25 promulgated thereunder provides, with exceptions not pertinent here, 26 that 27 28 29 30 31 32 And SEC Rule 13d-5(b)(1) [w]hen two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of sections 13(d) and (g) of the Act, as of the date of - 15- 1 2 such agreement, of all equity securities of that issuer beneficially owned by any such persons. 3 17 C.F.R. § 240.13d-5(b)(1) (emphases added). 4 § 13(d)(3) and this Rule, if two or more entities agree to act 5 together for any of the listed purposes, a "group" is "thereby" 6 formed. Accordingly, under 7 Thus, "the touchstone of a group within the meaning of 8 Section 13(d) is that the members combined in furtherance of a 9 common objective." Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 10 1982) ("Wellman"), cert. denied, 460 U.S. 1069 (1983). 11 common purpose to acquire control of the issuing company would be an 12 indicium of collective action within the meaning of § 13(d), it is 13 not an essential. 14 15 16 17 18 19 20 21 Although a [T]he agreement required by § 13(d)(3) need not be an agreement to gain corporate control or to influence corporate affairs. . . . The plain language of § 13(d)(3) demands only an agreement "for the purpose of acquiring, holding, or disposing of securities," 15 U.S.C. § 78m(d)(3), and Rule 13d5 is similarly satisfied by that sort of agreement, 17 C.F.R. § 240.13d-5(b)(1). 22 Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 124-25 (2d 23 Cir. 2001). 24 make identical investment decisions" does "not preclude existence of 25 agreement." Further, evidence that group members "might not always Id. at 127 (internal quotation marks omitted). 26 Importantly, for purposes of this case, the actors need 27 not have combined for all of the purposes listed in § 13(d)(3) or 28 Rule 13d-5(b)(1). 29 in the disjunctive. 30 members of the group have combined to further a common objective 31 with regard to one of those activities." Acquiring, holding, and disposing of are listed Hence, "[a]ll that is required is that the - 16- Morales v. Freund, 163 1 F.3d 763, 767 n.5 (2d Cir. 1999) (emphasis added); see, e.g., 2 Morales v. Quintel Entertainment, Inc., 249 F.3d at 124; Wellman, 3 682 F.2d at 363. 4 The questions of (a) whether two or more persons "act[ed]" 5 as a group or agreed to act together, and (b) whether their purpose 6 was the acquisition, holding, or disposition of an issuer's equity 7 securities are questions of fact. 8 Entertainment, Inc., 249 F.3d at 124. 9 agreed to so act, the legal consequences are specified in § 13(d)(3) See, e.g., Morales v. Quintel If they in fact so acted or 10 and Rule 13d-5(b)(1): 11 purpose of purchasing an issuer's shares, a "group" was "thereby" 12 formed, 17 C.F.R. § 240.13d-5(b)(1); if they acted as a "group," 13 they must be treated as a single person, 15 U.S.C. § 78m(d)(3) 14 ("shall be deemed a 'person'"); and each person in the group "shall 15 be deemed" to be the beneficial owner "of all equity securities of 16 that issuer beneficially owned by any" member of the group, 17 17 C.F.R. § 240.13d-5(b)(1). If the persons agreed to act together for the 18 An agreement to act together for the purpose of acquiring, 19 holding, or disposing of shares need not be unconditional in order 20 to support a finding that the actors constituted a group within the 21 meaning of those provisions. 22 Nor need 23 disposition on any specific set of terms." 24 v. Freund, 163 F.3d at 767 n.5. 25 action of the group's members need not be expressly memorialized in 26 writing." 27 "may be the group "be See, e.g., Wellman, 682 F.2d at 363. committed or informal acquisition, holding, or Id.; see, e.g., Morales And, "[o]f course, the concerted Wellman, 682 F.2d at 363. formal to and - 17- The formation of such a group may be proved by direct or 1 circumstantial evidence." 2 249 F.3d at 124; see also id. at 125-26 (sworn statements by 3 defendants, alleged group members, that the members "never 'agreed' 4 among themselves to acquire [the] stock" are insufficient to support 5 the granting of summary judgment in favor of the defendants where 6 there is circumstantial evidence from which "a reasonable trier of 7 fact could discredit the . . . sworn statements and infer instead 8 that" the defendants entered into an agreement with one another, 9 "with an agreed purpose to acquire [the] stock"). 10 B. Morales v. Quintel Entertainment, Inc., Rule 12(b)(6) 11 In considering a motion under Fed. R. Civ. P. 12(b)(6) to 12 dismiss a complaint for failure to state a claim on which relief can 13 be granted, the district court is normally required to look only to 14 the allegations on the face of the complaint. 15 "matters outside the pleading are presented to and not excluded by 16 the court," the court should normally treat the motion as one for 17 summary judgment pursuant to Fed. R. Civ. P. 56. 18 12(b); see, e.g., Global Network Communications, Inc. v. City of New 19 York, 458 F.3d 150, 154-55 (2d Cir. 2006) ("Global"). 20 a ruling on a motion for dismissal pursuant to Rule 12(b)(6) is not 21 an occasion for the court to make findings of fact. 22 Leonard F. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d 23 Cir. 1999). 24 In certain circumstances, the If, on such a motion, court Fed. R. Civ. P. may In any event, See, e.g., permissibly 25 consider documents other than the complaint in ruling on a motion 26 under Rule 12(b)(6). Documents that are attached to the complaint - 18- 1 or incorporated in it by reference are deemed part of the pleading 2 and may be considered. 3 Shield, 152 F.3d 67, 71 (2d Cir. 1998), cert. denied, 525 U.S. 1103 4 (1999). 5 reference, a document "upon which [the complaint] solely relies and 6 which is integral to the complaint" may be considered by the court 7 in ruling on such a motion. 8 L.P., 949 F.2d 42, 47 (2d Cir. 1991) ("Cortec") (emphases added), 9 cert. denied, 503 U.S. 960 (1992); see, e.g., Global, 458 F.3d at 10 11 See, e.g., Pani v. Empire Blue Cross Blue In addition, even if not attached or incorporated by Cortec Industries, Inc. v. Sum Holding 156. This principle has its greatest applicability in cases 12 alleging fraud. 13 Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) ("Kramer"). 14 a complaint alleges, for example, that a document filed with the SEC 15 failed to disclose certain facts, it is appropriate for the court, 16 in considering a Rule 12(b)(6) motion, to examine the document to 17 see whether or not those facts were disclosed. 18 when the complaint alleges that such a document made a particular 19 representation, the court may properly look at the document to see 20 whether that representation was made. 21 Consideration of such documents filed with the SEC is appropriate 22 with respect to a nondisclosure or misrepresentation claim because 23 "no serious question as to their authenticity can exist," and 24 because the court is to consider them on a Rule 12(b)(6) motion 25 "only to determine what the documents stated," and "not to prove the 26 truth of their contents." Kramer, 937 F.2d at 774 (emphases added). 27 Similarly, where public records that are integral to a See, e.g., Cortec, 949 F.2d at 47-48; Kramer v. - 19- See, e.g., id. When Or See, e.g., id. at 775. 1 fraud complaint are not attached to it, the court, in considering a 2 Rule 12(b)(6) motion, is permitted to take judicial notice of those 3 records. See, e.g., id.; Brass v. American Film Technologies, Inc., 4 987 F.2d 142, 150 (2d Cir. 1993). 5 notice, it does so in order "to determine what statements [they] 6 contained"--but "again not for the truth of the matters asserted." 7 Kramer, 937 F.2d at 774 (emphases added); see, e.g., Liberty Mutual 8 Insurance Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d 9 Cir. 1992). If the court takes judicial 10 A decision that a complaint fails to state a claim on 11 which relief can be granted is a ruling of law, see, e.g., De Jesus 12 v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir.), cert. denied, 519 13 U.S. 1007 (1996); McCall v. Pataki, 232 F.3d 321, 322 (2d Cir. 14 2000), and we review such a decision de novo, see, e.g., Gregory v. 15 Daly, 243 F.3d 687, 691 (2d Cir. 2001). 16 district court, "must accept as true all of the factual allegations 17 set 18 allegations in the light most favorable to plaintiff, and construe 19 the complaint liberally." 20 And whatever documents may properly be considered in connection with 21 the Rule 12(b)(6) motion, the bottom-line principle is that "once a 22 claim has been stated adequately, it may be supported by showing any 23 set of facts consistent with the allegations in the complaint." 24 Bell Atlantic Corp. v. Twombly, 2007 WL 1461066, at *11 (U.S. May 25 21, 2007) ("Twombly"). out in plaintiff's complaint, In our review, we, like the draw inferences from those Id. (internal quotation marks omitted). - 20- 1 2 C. The Claim Against Jennings 1. Sufficiency of the Allegation of "Group" Action 3 Because Jennings apparently owned no MMI stock just prior 4 to the May 2003 purchases he made with the loan from EMR, he was not 5 a statutory insider to whom § 16 applied unless he and EMR--which 6 already owned 14.8 percent--acted as a group for the purpose of 7 Jennings's acquisition, holding, or disposition of MMI shares. 8 district court, in ruling that the complaint did not sufficiently 9 allege that EMR and Jennings had acted as a group, did not properly 10 The apply the above principles. 11 The district court correctly noted that SEC filings may 12 properly be considered in ruling on a Rule 12(b)(6) motion to 13 dismiss a complaint alleging claims of fraud. 14 fraud 15 disgorgement of short-swing profits, for which an insider is to be 16 held strictly liable. Defendants' submissions of their Schedule 13D 17 filings 18 consideration 19 complaint that contained no allegation of a failure to disclose or 20 of a factual misrepresentation. case. thus It is, rather, presented on Rule a material 12(b)(6) § 16(b) that motions was to But this is not a action seeking inappropriate dismiss a § the for 16(b) 21 Further, even if there had been allegations of fraud, 22 defendants' SEC filings could not properly be considered for the 23 truth of their contents. 24 Defendants' statements, which have been submitted to a government 25 agency and made public, should not be contradicted or taken as 26 perjurious simply because the Plaintiff, without evidence, says they 27 are," District Court Opinion, 2006 WL 278135, at *5--although a The district court's view that "the - 21- 1 possible argument to a jury--was not an appropriate rationale for 2 ruling on a motion under Rule 12(b)(6). 3 The cases cited by the district court for the proposition 4 that "if a plaintiff's allegations are contradicted by a document 5 considered in determining a Rule 12(b)(6) motion, those allegations 6 are insufficient to defeat the motion," id. (citing Matusovsky v. 7 Merrill Lynch, 186 F.Supp.2d 397, 400 (S.D.N.Y. 2002)) (emphases 8 ours), i.e., that "when documents contain statements that contradict 9 the allegations in the complaint, the documents control and the 10 court need not accept as true the allegations contained in the 11 complaint," District Court Opinion, 2006 WL 278135, at *5 (citing 12 Rapoport v. Asia Electronics Holding Co., 88 F.Supp.2d 179, 184 13 (S.D.N.Y. 2000)) (emphasis ours), are not applicable to the present 14 case. 15 general release he had signed was without consideration, whereas the 16 signed release itself recited the consideration he received; and the 17 cited discussion in Rapoport concerned a fraud claim alleging that 18 a prospectus failed to disclose certain facts. 19 squarely within the principle that the contents of the document are 20 controlling 21 contains, or does not contain, certain statements. 22 Kramer, however, such documents may properly be considered only for 23 "what" they contain, "not to prove the truth" of their contents. 24 Matusovsky was a case in which the plaintiff claimed that a where a plaintiff has alleged These cases fall that the document As we noted in In the present case, the gravamen of the complaint was 25 simply 26 Jennings's profits on his short-swing transactions as members of a 27 group that owned more than 10 percent of MMI's shares. that defendants were subject - 22- to strict liability for The district 1 court's ruling that the complaint failed to state a claim that EMR 2 and 3 "disclaimer[s] of group status" in their Schedule 13D filings with 4 the SEC, District Court Opinion, 2006 WL 278135, at *5, was flawed 5 for 6 representations in defendants' filings for the truth of their 7 assertions that there were no current agreements or understandings 8 between Jennings and EMR as to how Jennings would vote or dispose of 9 his Jennings several shares constituted reasons. in the a group First, future. it Even because of improperly assuming that defendants' considered those the factual 10 assertions were relevant, they raised issues of fact that should not 11 have been determined at the pleading stage. 12 Second, the court apparently assumed that defendants' 13 representations, which used the present tense as to their current 14 understandings with respect to Jennings's future obligations, also 15 meant that they had had no past understanding, when EMR made the 16 loan to Jennings, that the purpose of the loan was to fund his 17 purchase of MMI shares. 18 actually state that there had not been such an agreement with regard 19 to Jennings's acquisition of the shares. 20 Schedule 13D acknowledged that Jennings had used the loan to fund 21 his May 29-30 purchases of MMI shares and stated that EMR "has" no 22 understanding with respect to the MMI shares "owned" by Jennings. 23 Jennings's June 9 Schedule 13D made similar use of the present 24 tense, stating there "are" no agreements as to how he would use the 25 proceeds of the EMR loan. 26 consider defendants' SEC filings for the truth of their assertions, 27 their representations would not have warranted rulings in their The Schedule 13D filings did not, however, For example, EMR's June 9 Thus, even if it had been appropriate to - 23- 1 favor, for they did not actually assert that EMR had not agreed to 2 make 3 acquisition. the loan to Jennings for the purpose of the MMI stock 4 Third, in disclaiming "group" status, defendants were in 5 effect attempting to disclaim the legal effects of their conduct. 6 The district court's acceptance of and reliance on defendants' 7 "express[] state[ment]s that Jennings and EMR are in no way, either 8 by the loan of June 9, 2003 or at any time in the future, to be 9 considered a 'group,'" as a disclaimer that was "control[ling]," 10 District Court Opinion, 2006 WL 278135, at *5, gave no recognition 11 to the terms of § 13(d)(3) and Rule 13d-5(b)(1). 12 Jennings acted together for the purpose of Jennings's acquiring MMI 13 shares, EMR and Jennings "thereby," under those provisions of law, 14 "formed" a "group," regardless of their attempted disclaimers of the 15 legal effect of such joint action. 16 Finally, looking at the "group" If in fact EMR and allegations in the 17 complaint, i.e., that EMR's loan to Jennings was made for the 18 purpose of allowing him to buy MMI shares in furtherance of an EMR- 19 Jennings agreement "to work together to effect a change of control 20 or similar transaction involving MMI" (Complaint ¶ 8), and at the 21 documents to which the complaint referred, we cannot agree with the 22 district court's view that the "group" allegations were "unmitigated 23 speculation" or "unadorned" allegations made "without evidence," 24 District Court Opinion, 2006 WL 278135, at *5 (internal quotation 25 marks omitted). Leaving aside the principle that "[t]he pleading of 26 additional 27 defendant to respond, "is not only unnecessary, but in contravention evidence," beyond what - 24- is required to enable the 1 of proper pleading procedure," Geisler v. Petrocelli, 616 F.2d 636, 2 640 (2d Cir. 1980); see, e.g., 2A Moore's Federal Practice -- Civil 3 § 4 collaboration between EMR and Jennings was hardly "unadorned" or an 5 "unmitigated speculation." That allegation was accompanied by other 6 allegations, and by references to defendants' respective June 2003 7 Schedule 13D filings, that included the following: 8.04[1][b][5] (3d ed. 2007), the complaint's allegation 8 9 10 11 On May 21, 2003, EMR completed its accumulation of 1,503,100 shares of MMI's stock, or 14.8 percent of the outstanding shares (see Complaint ¶ 13; EMR Schedule 13D dated June 2, 2003, at 2, 5). 12 13 14 15 - In connection with its May 2003 purchases, EMR stated that it might "seek to change or influence control of" MMI by, inter alia, "waging a proxy contest for control of the Company" (EMR Schedule 13D dated June 2, 2003, at 4). 16 17 18 19 20 On May 29 and 30, 2003, Jennings, in open-market purchases, acquired 842,000 shares of MMI's stock (see Complaint ¶ 9), which constituted 8.3 percent of MMI's stock (see Jennings Schedule 13D dated June 9, 2003, at 2). 21 22 Jennings paid for his May 29-30 purchases with a $10 million loan from EMR (see Complaint ¶ 8). 23 24 25 26 27 28 29 The rate of interest on EMR's loan to Jennings, according to the Loan Agreement, was 4 percent per annum (which we judicially notice was below the then-current prime rate, see, e.g., Wall Street Journal, Nov. 8, 2002, at C12 (prime rate 4.25%); id. June 27, 2003, at C11, and June 30, 2003, at C15 (prime rate cut from 4.25% to 4.00% effective June 27, 2003)). 30 31 32 of - EMR's $10 million loan to Jennings was unsecured (see Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I). 33 Although we do not suggest that Roth was required to 34 adduce such evidence at the pleading stage, see, e.g., Twombly, 2007 35 WL 1461066, at *8 ("a complaint attacked by a Rule 12(b)(6) motion 36 to dismiss does not need detailed factual allegations"), we note - 25- 1 that on this record, no rational factfinder would be compelled to 2 believe that EMR and Jennings had had no agreement with respect to 3 Jennings's acquisition of his shares. 4 acquired a 14.8 percent stake in MMI and stated that it might 5 attempt to gain control of MMI, that within days of its acquisition 6 of that 14.8 percent EMR made a cheap and unsecured loan of 7 $10 million to Jennings, that Jennings was MMI's former chairman and 8 CEO, and that Jennings used the EMR loan to acquire 8.3 percent of 9 MMI's stock, a rational factfinder could instead easily infer that 10 EMR and Jennings acted together for the purpose of Jennings's 11 purchase of shares in MMI. 12 Rule 13d-5(b)(1) would require that EMR and Jennings be treated as 13 a group, with each being deemed to own the total of their holdings 14 of MMI stock. Given evidence that EMR And upon such a finding, § 13(d)(3) and 15 In sum, the district court erred in accepting defendants' 16 SEC filings for the truth of their contents, in inferring that those 17 contents were sufficient and controlling, and in concluding that the 18 complaint itself did not allege facts sufficient to show that EMR 19 and Jennings constituted a group, within the meaning of the Exchange 20 Act, for the purpose of having Jennings purchase shares of MMI. 21 2. 22 The Duration of the Group The remaining question is whether the complaint was 23 nonetheless properly dismissed on the ground that § 16(b) was 24 inapplicable because EMR and Jennings were no longer a "group"--on 25 the theory that their interests had diverged--when Jennings sold his 26 shares. The district court answered - 26- this question in the 1 2 3 4 5 affirmative. Because the final sentence of § 16(b) states that [t]his subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security, 6 15 U.S.C. § 78p(b) (the "exemptive provision"), the court reasoned 7 that two or more persons are not to be considered a group unless 8 they pursued a common purpose in selling the issuer's stock, see 9 District Court Opinion, 2006 WL 278135, at *5-*6. In light of the 10 language of § 13(d)(3) and Rule 13d-5(b)(1), and the purpose of 11 § 16(b), we disagree with this interpretation. 12 As discussed in Part II.A. above, the stated purpose of 13 § 16(b) is "preventing the unfair use of information which may have 14 been obtained by [an insider] by reason of his relationship to the 15 issuer," 15 U.S.C. § 78p(b). 16 provision as to who is an insider. 17 is an insider by reason of size of stock ownership are §§ 16(a) and 18 13(d) of the Act and SEC Rules 16a-1(a)(1) and 13d-5(b)(1). 19 § 16(a) of the Act deems insiders to include any person who is 20 directly or indirectly the beneficial owner of more than 10 percent 21 of any class of the issuer's stock. 22 that more-than-10-percent owners include any person who is deemed a 23 beneficial owner of more than 10 percent by reason of § 13(d) of the 24 Act and the rules thereunder. 25 provide that if any two or more persons act together for the purpose 26 of acquiring, holding, or disposing of shares of an issuer, each 27 actor is deemed to be the beneficial owner of the total number of 28 shares owned by all of them. Section 16(b) itself contains no The provisions delineating who Thus, SEC Rule 16a-1(a)(1) provides And § 13(d)(3) and Rule 13d-5(b)(1) - 27- 1 The disgorgement provision of § 16(b) simply dictates the 2 consequences when an insider profits from short-swing transactions. 3 However, because § 16(b) "was designed to prevent a corporate 4 director or officer or the beneficial owner of more than 10 per 5 cent[] 6 securities 7 Foremost-McKesson, 423 U.S. at 234 (internal quotation marks and 8 footnote omitted), the exemptive provision was needed to be sure 9 that a person who was an insider solely by reason of his beneficial 10 ownership of more than 10 percent of the issuer's stock would be 11 held strictly liable for short-swing profits only if he was an 12 insider at the time of both his purchase and his sale (or sale and 13 repurchase). 14 is no presumption that he was privy to inside information at both 15 times. 16 purchase-sale sequence, a beneficial owner must account for profits 17 only if he was a beneficial owner [of more than 10 percent] before 18 the purchase," id. at 250 (internal quotation marks omitted); and it 19 means that a sale made after a former beneficial owner of more than 20 10 percent has already reduced his holdings to 10 percent or below 21 is exempted from § 16(b) by the phrase "at the time of . . . sale," 22 Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 419-20 23 (1972). 24 define insider status; it merely says that, for the disgorgement 25 provision to apply, the short-swing trader must have insider status 26 "at the time of" both of his transactions. 27 of a corporation transactions from on profiteering the basis of through inside short-swing information," If he was not an insider at both of those times, there Accordingly, the exemptive provision means that "in a The exemptive provision in § 16(b) does not purport to Under § 13(d)(3) and Rule 13d-5(b)(1), which delineate the - 28- 1 insider status of joint actors, if two or more persons act together 2 for the purpose of acquiring, holding, "or" disposing of shares of 3 an 4 beneficial owner of all the shares beneficially owned by all of the 5 collaborators. Because the statute and the Rule list those purposes 6 in the disjunctive, a group is formed as a matter of law if those 7 persons act for any one of the listed purposes. issuer, they are deemed a group, and each is deemed the 8 The district court thus erred in holding that "for traders 9 to constitute a 'group', the Exchange Act requires that their 10 coordinated activity persist during the time of purchase and during 11 the time of sale of the securities," District Court Opinion, 2006 WL 12 278135, 13 conjunctive reading to provisions that are disjunctive. at *6 (emphasis in original). That ruling gave a 14 In sum, §§ 16 and 13(d) and the rules thereunder mean that 15 where, as alleged here, two persons acted together for the purpose 16 of acquiring the stock of an issuer, and collectively those persons 17 owned more than 10 percent of that stock both before any transaction 18 leading to a short-swing profit and at the time of the matching 19 short-swing transaction, the final sentence of § 16(b) provides them 20 no exemption. 21 deemed to be insiders and are presumed to have access to insider 22 information. All of the joint actors in such circumstances are 23 These provisions appropriately address the Congressional 24 concern that such short-swing sales may have been based on access to 25 inside information. 26 EMR's cheap, unsecured loan of $10 million to Jennings for his 27 purchase of MMI stock, following close on the heels of EMR's own In the present case, for example, evidence of - 29- 1 acquisition of a 14.8 percent stake in MMI, would, as discussed 2 above, permit an inference that EMR and Jennings acted together in 3 order to allow Jennings to purchase his 842,000 shares in MMI, and 4 require the legal conclusion that EMR and Jennings were thereby a 5 group. 6 stock, and Jennings as its collaborator would be presumed to have 7 access to inside information. 8 majority of his shares on the open market could well have been based 9 on inside information. Thus, both EMR itself, which owned 14.8 percent of MMI's Jennings's decision to sell the For example, in May, EMR had purchased its 10 14.8 percent stake in MMI at prices below $11 a share (see EMR 11 Schedule 13D dated June 2, 2003, at 5), and it disclosed that it 12 might seek control of MMI through, inter alia, additional open- 13 market purchases or a tender offer (see id. at 4). 14 market price of MMI shares had risen to more than $19 a share. 15 Jennings Schedule 13D dated July 18, 2003, at 5.) 16 September 8, 2003 EMR and MMI signed a 'standstill agreement,'" 17 District Court Opinion, 2006 WL 278135, at *3, pursuant to which MMI 18 agreed to make certain information available to EMR and EMR agreed 19 that it would, inter alia, neither purchase nor "make any proposal 20 to acquire" any more MMI shares before June 15, 2004 (MMI Form 8-K 21 dated September 9, 2003, Exhibit 10.1, at 4). 22 announcement of this standstill agreement, Jennings sold thousands 23 of his MMI shares. 24 reasoned that the imminent MMI-EMR agreement removing EMR as a 25 potential open-market buyer of, or a potential tender offeror for, 26 MMI shares for the better part of year made it attractive for him to 27 sell shares before the standstill agreement was made known to the By mid-July, the (See However, "[o]n Prior to the public A shareholder in his position could well have - 30- 1 rest of the investing public. 2 advance information is the sort of conduct that Congress sought to 3 deter 4 automatically disgorgeable "without proof of actual abuse of insider 5 information, and without proof of intent to profit on the basis of 6 such information," Kern, 411 U.S. at 595. by enacting § 16(b) That type of trading on the basis of and making short-swing profits 7 Thus, taking the allegations of the present complaint as 8 true, we cannot agree with the district court's ruling that, as a 9 matter of law, § 16(b) permits an insider--here, the owner of 14.8 10 percent of an issuer's stock--to fund the purchase of up to 10 11 percent more of such stock by an ally, and permits the ally to make 12 profits on short-swing sales of those shares and not disgorge those 13 profits to the issuer. We conclude that the district court's ruling 14 is contrary to the language and intent of the Exchange Act. 15 Finally, even if we agreed with the district court's 16 interpretation of § 16(b) as inapplicable unless EMR and Jennings 17 were a "group" both at the time Jennings acquired his MMI shares and 18 at the time he sold, we would nonetheless be constrained to vacate 19 the dismissal of the claim against Jennings because the court, in 20 concluding that defendants were not a group at the time of those 21 sales, impermissibly made findings of fact. 22 suggesting that detailed factual allegations were required at the 23 pleading stage, we note that the present record would easily permit 24 a rational factfinder draw to factual inferences contrary to those 25 drawn by the court. And, again without 26 The district court's rationale for concluding that EMR and 27 Jennings were not a "group" at the time Jennings sold his shares on - 31- 1 the open market was that EMR had offered on August 12, 2003, to buy 2 826,000 3 rejected that offer and instead sold 602,900 shares on the open 4 market. 5 purpose," Jennings "likely" would have accepted EMR's offer to 6 purchase his shares, and that "Jennings' refusal of EMR's offer 7 contradicted precisely what one would have expected of him had he 8 been acting in concert with EMR," District Court Opinion, 2006 WL 9 278135, at *5 (emphases added). shares of MMI stock from Jennings, and that Jennings The court found that if Jennings and EMR "held a common What Jennings's purposes had been, 10 what he was "likely" to have done, and what decisions he "would have 11 [been] expected" to make, are questions of fact as to which the 12 court should not have made findings in making its legal ruling on 13 whether Roth had pleaded a claim that could entitle him to relief. 14 Moreover, the district court's assessment of the 15 "likel[ihood]" that Jennings's interests and those of EMR were no 16 longer aligned does not appear to take into account facts indicated 17 by the record, even as it exists at this stage. 18 inferring that Jennings was no longer interested in the control of 19 MMI, the court does not appear to have taken into account the fact 20 that the Schedule 13D filed by Jennings with respect to his sale of 21 602,900 shares through September 9, 2003, stated that, after those 22 sales, Jennings still owned 423,100 shares of MMI's outstanding 23 stock (see Jennings Schedule 13D dated September 10, 2003, at 3)--a 24 statement forcing the mathematical inference that Jennings had 25 acquired additional shares of MMI after his initial purchase of 26 842,000 shares in May and before his sale of 602,900 shares. 27 Accordingly, the record showed that despite selling most of the - 32- For example, in 1 shares he had bought in May, Jennings remained the owner of a 2 substantial block of MMI stock--approximately 4 percent. 3 Thus, despite the district court's surmise, Roth may well be able to 4 prove that Jennings continued to have a control-seeking interest 5 aligned with that of EMR. (See id.) 6 Further, although the district court mentioned that the 7 price at which EMR offered to buy "826,000 of the [MMI] shares" then 8 owned by Jennings (EMR Schedule 13D dated August 12, 2003, Exhibit 9 1), was below the then-market price, the court did not quantify the 10 disparity. 11 (See id.) 12 shares sold on the open market for more than $18 a share. 13 Jennings Schedule 13D filings dated July 18, 2003, at 5, and 14 September 10, 2003, at 6.) 15 complaint was legally insufficient on the basis of the court's 16 theory that, had EMR and Jennings had a common purpose, Jennings 17 would "likely" have sold 826,000 shares to EMR for $13.50 a share, 18 thereby 19 share--a total of more than $3.7 million. 20 EMR offered to buy those shares for $13.50 a share. However, in the weeks before and after EMR's offer, MMI forgoing an (See We cannot uphold the ruling that the additional profit of more than $4.50 per Indeed, the fact that EMR's offering price was so much 21 lower 22 Jennings's decision to reject EMR's offer and instead make open- 23 market sales bespoke his continued interest, rather than a loss of 24 interest, in achieving control of MMI. 25 13D filings suggest that Jennings needed to sell at least some of 26 his MMI shares in order to repay the loan given him by EMR. 27 a matter of common sense, it seems likely that the more MMI stock than the market price could - 33- allow Roth to prove that Attachments to the Schedule Yet, as 1 Jennings owned, the greater his chances of sharing in MMI's control. 2 The total price that EMR offered for 826,000 shares, at $13.50 per 3 share, was little more than the gross amount that Jennings received, 4 according to his September 10, 2003 Schedule 13D, for selling just 5 602,900 shares on the open market. 6 on the open market, Jennings grossed roughly the same amount of 7 money, but he was able to keep 223,100 shares of MMI stock, or more 8 than 2 percent of its outstanding shares, that he otherwise would 9 have lost. Thus, by selling 602,900 shares The district court's inference that Jennings's sale of 10 826,000 shares to EMR was "what one would have expected" if Jennings 11 wished to share in the control of MMI was thus questionable and 12 certainly was not a proper basis for a Rule 12(b)(6) dismissal. 13 In sum, even if the disgorgement provision of § 16(b) were 14 inapplicable unless EMR and Jennings had a common purpose at the 15 time Jennings sold his shares, the complaint should not have been 16 dismissed on the premise that Roth could not show such a purpose. 17 D. The Claim Against EMR 18 The district court dismissed Roth's claim against EMR on 19 the alternative ground that the complaint did not allege either that 20 EMR had engaged in any short-swing transactions in MMI securities or 21 that EMR had received, directly or indirectly, any profit from the 22 sale of Jennings's shares. 23 also erred in dismissing his claim against EMR on this ground. 24 disagree. 25 26 Roth contends that the district court We Section 16(b) requires an insider to disgorge "'any profit realized by him' from short-swing transactions." - 34- Blau v. Lehman, 1 368 U.S. 403, 414 (1962) (quoting § 16(b)) (emphasis in Blau). 2 "concedes that the complaint does not specifically allege that EMR 3 has a pecuniary interest in any of Jennings' profits" (Roth reply 4 brief on appeal at 10); but he argues that the "highly unusual 5 transaction by which EMR financed Jennings' trades in MM[I] stock, 6 followed by a merger offer, certainly gives rise to a presumption 7 that EMR derived some pecuniary benefit from Jennings' purchases and 8 sales" (Roth brief on appeal at 28 (emphasis added)). 9 be that EMR improved its prospects for an eventual merger by funding Roth It may well 10 Jennings's purchases of MMI shares. 11 imposition of strict liability on EMR is that EMR itself have 12 realized 13 "presumption" (id.) arises from EMR's loan to Jennings; and no such 14 allegation appears in the complaint. The complaint's assertion that 15 "[e]ach member of the Group is liable to the extent of its [sic] 16 pecuniary 17 (Complaint ¶ 18 (emphasis added)) does not constitute an allegation 18 that EMR in fact realized any such profits. profits from [interest] short-swing in the But what is required for the transactions. foregoing disgorgeable No such profits" 19 Nor does Roth suggest that he should have been given leave 20 to file an amended complaint in order to allege that EMR shared in 21 Jennings's short-swing profits. 22 been given an opportunity for discovery (Roth brief on appeal at 23 28), Roth asks, "Is it not possible, maybe even probable, that there 24 was some 25 revealed in the SEC filings?" (Roth reply brief on appeal at 11 26 (emphases added)). 27 would be able to file a pleading consistent with the Rule 11 understanding Rather, urging that he should have between Jennings and EMR that was not This is a far cry from any suggestion that Roth - 35- 1 requirement that a complaint's factual assertions "have evidentiary 2 support or, if specifically so identified, are likely to have 3 evidentiary support after a reasonable opportunity for further 4 investigation or discovery," Fed. R. Civ. P. 11(b)(3) (emphasis 5 added). 6 "[W]hen the allegations in a complaint, however true, 7 could not raise a claim of entitlement to relief, this basic 8 deficiency 9 expenditure of time and money by the parties and the court." 10 Twombly, 2007 WL 1461066, at *9 (internal quotation marks omitted). 11 The allegations of Roth's complaint, taken as true, show no basis 12 for entitlement to relief against EMR. 13 CONCLUSION should . . . be exposed at the point of minimum 14 We have considered all of the parties' contentions on this 15 appeal and, except as indicated above, have found them to be without 16 merit. 17 EMR is affirmed. 18 against Jennings is vacated, and the matter is remanded for further 19 proceedings with respect to the claim against him. So much of the judgment as dismissed the complaint against So much of the judgment as dismissed the complaint - 36-

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