Under Section 16(b), the “owner of any security of the issuer” may bring a lawsuit “in the name Case 1:14-cv-04872-GHW Document 25 Filed 11/10/14 Page 22 of 25 -18- and in behalf of the issuer” only if the company refuses or fails to bring suit within 60 days after a demand to do so is made, or the company otherwise “fail[s] diligently to prosecute.” 15 U.S.C. § 78p(b). The sufficiency of a demand is governed by the law of the issuer’s state of incorporation, Simmonds v. Credit Suisse Sec.

“[I]f the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter.” 15 USCS § 78p (2014). Plaintiff gave JPMC every opportunity to recover the short-swing profits alleged in the Complaint, and JPMC refused.

In addition, any alleged purchase and sale must be non-exempt and yield a profit. See 15 U.S.C. § 78p(b) (“any profit realized [ ] from any purchase and sale, or sale and purchase, of any equity security of such issuer . . . shall inure to and be recoverable by the issuer . . . . [However, Section 16(b)] shall not be construed to cover . . . any transaction or transactions which the [SEC] by rules and regulations may exempt.” (emphasis added)).

22 Here, Plaintiff’s entire Complaint arises from Defendants’ redemption of the Fund’s auction rate preferred securities, which allegedly harmed the Fund’s common shareholders.23 Because the Fund is a registered investment company under the ICA, both the common and 20 See 28 U.S.C. § 1332(d)(9)(A) (referencing section 16(f)(3) of the Securities Act of 1933 (“1933 Act”) (15 U.S.C. § 78p(f)(3)) and Section 28(f)(5)(E) of the 1934 Act (15 U.S.C. § 78bb(f)(5)(E)). The reference to 15 U.S.C. § 78p(f)(3) likely is a drafting error in the statute. The statutory reference probably should have been to 15 U.S.C. § 77p(f)(3), which is substantially identical to 15 U.S.C. § 78bb(f)(5)(E).

22 Here, Plaintiff’s entire Complaint arises from Defendants’ redemption of the Fund’s auction rate preferred securities, which allegedly harmed the Fund’s common shareholders.23 Because the Fund is a registered investment company under the ICA, both the common and 20 See 28 U.S.C. § 1332(d)(9)(A) (referencing section 16(f)(3) of the Securities Act of 1933 (“1933 Act”) (15 U.S.C. § 78p(f)(3)) and Section 28(f)(5)(E) of the 1934 Act (15 U.S.C. § 78bb(f)(5)(E)). The reference to 15 U.S.C. § 78p(f)(3) likely is a drafting error in the statute. The statutory reference probably should have been to 15 U.S.C. § 77p(f)(3), which is substantially identical to 15 U.S.C. § 78bb(f)(5)(E).

Section 16(b) expressly grants the SEC power to exempt transactions it finds to be outside the purposes of the statute. 15 U.S.C. § 78p(b) (“This subsection shall not be construed to cover any … transaction or transactions which the [SEC] by rules and regulations may exempt as not comprehended within the purpose of this subsection.”) Consistent with Chevron, U.S.A., Inc. v. Natural Res.

THE SECTION 16(b) CLAIM Section 16(b) is a statutory right intended to “prevent[ ] the unfair use of information which may have been obtained by [a] beneficial owner, director, or officer by reason of his relationship to the issuer. . . .” 15 U.S.C. § 78p(b) (2016). Liability exists where there was “(1) a purchase and (2) a sale of securities (3) by . . . a shareholder who owns more than ten percent of any one class of the issuer’s securities (4) within a six-month period.” Simmonds v. Credit Case 3:16-cv-01313-RS Document 33 Filed 08/26/16 Page 11 of 29 6 Memorandum of Law in Opposition to BVF Defendants’ Motion to Dismiss Plaintiff’s Complaint - 3:16-cv-01313-RS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Suisse Secs. (USA) LLC, No. 09-35262, 2011 U.S. App. LEXIS 974, at *13 (9th Cir. Jan. 18, 2011) (quoting Gwozdzinsky ex rel. Revco D.S. v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998)).

Plaintiff made the Demand on December 11, 2015, making him free to institute his action 60 days later or by February 9, 2016 if the Company or the Board declined to institute the action. See 15 U.S.C. § 78p(b) (2016). Had the Company followed the procedures required by Rule 414 of obtaining shareholder approval, the Reorganization could not have been effected prior to that date because the Company had not obtained a shareholder vote approving the Reorganization as required by Rule 414(c).

Plaintiff Has Alleged a Legally Sufficient Theory For Calculation Of the Premium For the Put Options A defendant violating Section 16(b) must disgorge “any profit realized by him.” 15 U.S.C. § 78p(b) (1970).

The plain terms of the statute permit a securityholder to sue on the issuer's behalf "if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter." 15 U.S.C. § 78p(b) (emphasis added). The issuer's execution ofa settlement agreement cannot preclude follow-on litigation unless the court presiding over it concludes that the settlement agreement amounted to "diligent[] ... prosecut[ion]" of the claim.