Opinion
No. 03-CV-7760 (DAB).
February 1, 2004
MEMORANDUM AND ORDER
Plaintiff Andrew E. Roth brings this derivative action on behalf of nominal defendant Metal Management, Inc. ("MMI") pursuant to Section 16(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78p(b) for disgorgement of profits from short-swing sales allegedly made by Defendants in violation of the Exchange Act. Defendants T. Benjamin Jennings and European Metal Recycling, Ltd. ("EMR") each move separately to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons stated below, Defendants' motions are GRANTED.
I. BACKGROUND
Plaintiff Roth, a New York resident, is the owner of common stock of MMI. (Compl. ¶ 1.) Defendant Jennings, a California resident (Compl. ¶ 4), is a former Chairman and CEO of MMI. (Compl. ¶ 8). Defendant EMR is a corporation organized under the laws of the United Kingdom with its principal place of business in Westbrook Warrington, United Kingdom. (Compl. ¶ 3.)
On May 29 and 30, 2003, Defendant Jennings purchased 842,000 shares of MMI common stock at prices ranging from $10.95 to $11.55 per share, for a total purchase price of $9,517,350. (Compl. ¶¶ 9, 14; Def. Jennings' Notice of Mot., App. A at 4.) Jennings paid for the shares with an unsecured $10 million loan provided by EMR. (Compl. ¶ 8.) The loan agreement between EMR and Jennings was memorialized in a letter agreement, dated June 9, 2003, which stated that:
EMR hereby acknowledges 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.
(Def. EMR's Notice of Mot., Ex. 3; Def. Jennings' Notice of Mot. App. A at 5.) Jennings' purchased shares represented approximately 8.3% of the total outstanding MMI common stock. (Jennings' Notice of Mot., Ex. A at 2.)
Throughout the relevant period, from May to September 2003, EMR owned 1,503,100 shares of MMI, accounting for approximately 14% of outstanding common stock. (Compl. ¶ 13.) EMR neither bought nor sold any shares between May and September 2003. (Id. ¶ 10.) EMR filed a Schedule 13D report on May 21, 2003 indicating the company's intent to seek to change or influence control of MMI, though it had not formulated a specific plan for doing so at the time of filing. (Lynch Decl., Ex. 2 at 4.)
On June 2 and 9, 2003, respectively, EMR and Jennings each filed an amended Schedule 13D with the SEC in which they reported both the loan and Jennings' purchase of the MMI shares. (See Jennings' Notice of Mot. To Dismiss Exs. A, B.) Defendant Jennings' Schedule 13D filing, item 3, states "[t]here are no arrangements or understandings between EMR and the Filing Person as to how the Filing Person would utilize the proceeds of the loan." (Def. Jennings' Notice of Mot., Ex. A.)
The filing Person has acquired the shares of Common Stock for investment purposes only and does not have any definite plans regarding an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving the Issuer or a sale or transfer of a material amount of assets of the Issuer or any of its subsidiaries. The Filing Person reserves the right to acquire additional shares of the Issuer's capital stock, to dispose of shares of the Issuer's capital stock or to formulate other purposes, plans or proposals deemed advisable regarding the Issuer.(Id.) EMR's amended 13D schedule, item 6, detailing "Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer", states that:
On June 2, 2003, the Filing Person [EMR] loaned funds, on an unsecured basis, to Mr. Benjamin Jennings, and Mr. Jennings has advised the Filing Person that he used those funds to make open-market purchases of Common Stock. Mr. Jennings has consulted with the Filing Person on its investment in the company and other United States investment opportunities, generally, but the Filing Person has no contract, arrangement or understanding of any kind with Mr. Jennings with respect to the Common Stock owned by the Filing Person or by Mr. Jennings; expressly disclaims any affiliate or associate status with Mr. Jennings; expressly disclaims any direct or indirect beneficial ownership in the Common Stock owned by Mr. Jennings; and further disclaims any "group" status with Mr. Jennings.
(Id. at Ex. B)
On July 14 and 15, 2003, Jennings sold 16,000 MMI shares at prices ranging from $18.6483 to $19.06 per share. (Compl. ¶ 15; Wexler Decl., Ex. 1 at 3.)
On August 8, 2003, EMR sent a letter to MMI stating that EMR believed a business combination of the companies would be in the best interests of "Metal Management, its stockholders and EMR" and addressing the increase in the price of MMI Common Stock in the 2 months since EMR's loan to Jennings. (Id., Ex. 4 ex. I.)
We have no intention, at this time, to seek to initiate a public offer that is not supported by the Metal Management Board, and we believe that a transaction can be structured that provides fair value to Metal Management's shareholders. In this regard, any expectation on the part of Metal Management's Board that a potential offer price will reflect a significant premium to today's current trading level, needs to be tempered given the dramatic increase in the trading price of Metal Management's stock since our 13D filing on June 2.
(Id.)
On August 12, 2003, EMR sent a letter to counsel for Jennings stating that Jennings' loan was coming due at the end of August and that EMR would, subject to approval from the board of MMI, like to purchase the 826,000 shares of MMI stock that Jennings owned at $13.50 per share, either as part of the settling of the loan or independent of it. (Jennings' Mot. to Dismiss, Ex. 3 at ex. I.) Counsel for Jennings replied in a letter dated August 14, 2003, which stated that Jennings was aware of his financial obligation to EMR and was not interested in selling his shares of MMI to EMR at the proposed price. (Id., Ex. D at ex. I.) The letter also stated that the date the loan was due was not August 31, 2003, as EMR stated in its letter to Jennings but, as per the loan agreement, ninety days from June 9, 2003, the date of signing. (Id.)
On September 3, 2003, EMR sent a letter to counsel for Defendant Jennings stating the loan:
was due and payable on August 31, 2003 and EMR had consented to payment in full on September 2, 2003. Yesterday, you informed us of Mr. Jennings' request for an extension of the date for repayment. EMR is not prepared to extend the due date for the loan and expects prompt payment in full which will include interest through the date of repayment.
(Id., Ex. E at ex. 1.)
On September 8, 2003 EMR and MMI signed a "standstill agreement," which stipulated that EMR agreed not to buy or sell any shares of MMI common stock until the two parties could explore the possibility of a "mutually agreeable business combination." (Id., Ex. F.) During the period August 19, 2003 to September 9, 2003, Defendant Jennings sold a total of 602,900 shares of MMI common stock at prices ranging from $18 to $18.59 per share. (Compl. ¶ 16; Jennings' Mot., Ex. F.) 504,300 of the shares sold in that time period were sold on September 9, 2003, one day after the "standstill agreement" between EMR and MMI was signed. (Def. Jennings' Notice of Mot., App. F at 4.)
On October 2, 2003, Plaintiff commenced the present action, alleging that (1) Defendants acted as a "group" in the aforementioned purchases and sales of MMI stock, (2) this "group" owned beneficial interest in more than ten percent of MMI's outstanding common stock, and (3) as owners of more than ten percent of MMI common stock, Defendants are liable under Section 16(b) of the Exchange Act for all profits made through Jennings' sale of MMI shares, which allegedly total $4,249,408.80. (Compl. ¶ 18.)
II. DISCUSSION
A. Rule 12(b)(6) Dismissal
"On a motion to dismiss under Rule 12(b)(6), the court must accept as true the factual allegations in the complaint, and draw all reasonable inferences in favor of the plaintiff." Bolt Elec., Inc. v. City of N.Y., 53 F.3d 465, 469 (1995). "The district court should grant such a motion only if, after viewing plaintiff's allegations in this favorable light, `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'"Walker v. City of N.Y., 974 F.2d 293, 298 (2d Cir. 1992) (citing Ricciuti v. New York City Transit Auth., 941 F.2d 119 (2d Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957))), cert. denied, 507 U.S. 961 (1993). Because a Rule 12(b)(6) motion is used to assess the legal feasibility of a complaint, a court should not "assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). Rather, consideration of a Rule 12(b)(6) motion is limited 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. Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992)). Further, 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., 949 F.2d at 47 (referencing Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991)).
B. Liability under Section 16(b) of the Exchange Act
Section 16(b) of the Securities Exchange Act of 1934 ("Section 16(b)") seeks to prevent insider traders from exploiting confidential information about a corporation to reap profits from unknowing participants in the securities market. According to 15 U.S.C. § 78p(a), an insider is a "person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of any equity security (other than an exempted security) which is registered pursuant to section 78l of [Title 15], or who is a director or an officer of the issuer of such security. . . ."
Section 16(b) of the Securities Exchange Act of 1934 provides:
"For the purpose of preventing the unfair use of information which may have been 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. Suit to recover such profit may be instituted at law or in equity any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or fail diligently to prosecute thereafter."
Section 16(b) transactions, known as "short-swing" transactions, transpire when a statutory insider purchases and sells an issuer's securities within a six-month period. See 15 U.S.C. § 78p(a)-(b); Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). Section 16(b) subjects insiders to strict liability, and permits either an issuer of securities or a holder of the issuer's securities to bring suit for the disgorgement of profits accrued by the insider trading.Gwozdzinsky, 156 F.3d at 308. For liability to attach under Section 16(b), there must be "(1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than ten percent of any one class of the issuer's securities (4) within a six-month period." Id.
Section 13(d) of the Exchange Act indicates that shareholders who individually own less than ten percent of a class of securities may cooperate to form one virtual shareholder owning more than ten percent of a class of securities. The Exchange Act, along with its accompanying regulations and case law, have dubbed such a virtual shareholder a "group". Section 13(d) of the Act states, in pertinent part, that "when 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." 15 U.S.C. § 78m(d)(3). Similarly, the language of 17 C.F.R. § 240.13d-5(b)(1), promulgated under Section 13(d), states that "when 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 . . . of all equity securities of that issuer beneficially owned by any such persons." Thus, Jennings and EMR, either individually (if not a group) or together (if a group), must have owned more than ten percent of a class of MMI's stock before being subjected to Section 16(b) liability.
1) Defendant Jennings' Motion to Dismiss
Because Jennings alone purchased and sold approximately 8.3 percent of MMI's outstanding stock, Jennings must have acted as part of a "group" with EMR before being subjected to Section 16(b) liability. "[T]he touchstone of a group within the meaning of Section 13(d) is that the members combined in furtherance of a common objective." Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982). In order to plead group activity sufficiently, Plaintiff is not required to allege "that a common objective of actual corporate control existed among the defendants, but simply that the defendants acted together in furtherance of a common objective with regard to acquiring, holding, voting or disposing of securities of [the issuer]." Schaffer v. CC Investments, 153 F. Supp. 2d 484 (S.D.N.Y. 2001). "Of course, the concerted action of the group's members need not be expressly memorialized in writing." Wellman, 682 F.2d at 363. See also Morales v. Quintel Entertainment, Inc., 249 F.3d 115 (2d Cir. 2001);Morales v. Freund, 163 F.3d 763, 767 n. 5 (2d Cir. 1999)
Plaintiff's Complaint does not sufficiently allege such an agreed-upon common purpose among Defendants, nor does it explain the documents filed with the SEC. The 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 considered a "group" or part of any group that might include more than the Defendants. (Def. EMR's Notice of Mot., Ex. 3 at Ex. I.) EMR filed an amended 13D schedule after loaning money to Jennings, which further declared that the loan did not constitute group activity. (Id. At 4.) Jennings subsequently purchased 842,000 shares, and filed a 13D schedule. (Def. Jennings' Notice of Mot., App. A at 3.) Jennings' filing, to which a copy of the loan agreement was attached, states that his purchase of MMI stock was for "investment purposes" only and does not represent any sort of "extraordinary corporate transactions." (Id.) Later, as a proposed form of repayment, EMR offered to buy the shares that Jennings had purchased with the loan, but Jennings refused to sell his shares to EMR. (Id., App. D.) This evidence does not in any way approximate an instance of group activity, and belies allegations of any common objective shared by the Defendants.
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 (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); Rappaport v. Asia Elecs., 88 F. Supp. 2d 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).
Even were this Court not to accept the truth of Defendants' statements in their SEC filings, the facts still indicate that Defendants did not act as a group. When EMR offered to buy Jennings' shares at a below-market price, Jennings declined the offer. (Jennings' Not. Of Motion to Dismiss, Ex. D at Ex. I.) Jennings instead sold his shares to other traders. (Compl. ¶¶ 15, 16.) Such 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]." Schaffer, 153 F. Supp. 2d at 484. Had Defendants held a common purpose, Jennings likely would have accepted EMR's offer. While group members need not march in lock step to qualify as a "group", Morales, 999 F. Supp. at 475, 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.
Indeed, for traders to constitute a "group", the Exchange Act requires that their coordinated activity persist during the time of purchase and during the time of sale of the securities. 15 U.S.C. § 78p(b) ("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 involved. . . ."). But Jennings did not act in concert with EMR at the time of sale; he did the opposite. Accordingly, 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."
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 security, Jennings' Motion to Dismiss Plaintiff's Complaint is hereby GRANTED.
2) Defendant EMR's Motion to Dismiss
Defendant EMR argues that it cannot, as a matter of law, be held liable under Section 16(b) for Defendant Jennings' sale of MMI stock because (1) EMR was not in a group with Jennings, and (2) EMR lacked a pecuniary interest. As discussed in Part II.B(1)supra, EMR and Jennings did not form a group; therefore, EMR cannot be held liable for Jennings' stock sales.
In addition, even had a "group" been formed, Section 16(b) requires that EMR maintain a direct or indirect pecuniary interest in the shares sold by Jennings if it is to be liable for disgorgement of profits. See 15 U.S.C. § 78p(a)-(b). Plaintiff contends that further discovery might uncover a potential pecuniary interest that EMR might have had in Jennings' sales of MMI stocks. (Pl. Mem. Law at 12.)
But allowing this case to proceed to discovery likely would facilitate a "fishing expedition" for allegations that, at the outset, do not have any objective support. Cleveland-Goins v. City of New York, No. 99 Civ. 1109, 1999 WL 673343, at *2 (S.D.N.Y. Aug. 30, 1999). See also Waksman v. Cohen, No. 97 Civ. 7439, 1998 WL 690086, at *4 (S.D.N.Y. Oct. 2, 1998) (declining to permit Plaintiff to hold a fishing expedition without suggestion in allegations that it could be substantiated); Norvel Ltd. V. Ulstein Propeller AS, 161 F. Supp. 2d 190, 208 (S.D.N.Y. 2001) (declining to allow defendant to be subjected to the "burden and expense" of discovery where plaintiff initially failed to make a showing and discovery would "likely result in a fishing expedition"). EMR sold none of its own shares during the period in question, and Plaintiff concedes this. (Pl.'s Mem. Law at 1, 11.) This, along with the direct evidence contradicting the allegations of group activity, see supra, counsels against permitting discovery into the element of pecuniary interest in this case.
Accordingly, EMR's Motion to Dismiss Plaintiff's Complaint is hereby GRANTED.
C. Leave to Amend Would Be Futile
Even when a complaint has been dismissed, permission to amend it "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). "While it is the usual practice upon granting a motion to dismiss to allow leave to replead," Cohen v. Citibank, No. 95 Civ 4826, 1997 WL 883789, at *2 (S.D.N.Y. Feb. 28, 1997), a court may dismiss without leave to amend when amendment would be futile. Oneida Indian Nation of New York v. City of Sherrill, 337 F.3d 139, 168 (2d Cir. 2003) (citing Forman v. Davis, 371 U.S. 178, 182 (1962)). In light of the SEC filings and Defendants' uncoordinated conduct when Jennings sold his MMI shares, Plaintiff cannot allege that Defendants' conduct constituted "group activity" in violation of Section 16(b) of the Exchange Act. Amendment of Plaintiff's complaint would be futile in this instance, and Plaintiff shall not be granted leave to amend the complaint.
III. CONCLUSION
Defendants' Motions to Dismiss are GRANTED because the Compliant's allegations characterizing Defendants as a "group" are insufficient to make out a cause of action under 16(b) of the Exchange Act. The Court denies plaintiff leave to amend thier complaint.The Clerk of Court is directed to close the docket in this case.
SO ORDERED.