Greenfield v. Cadian Capital Mgmt., LP

213 F.Supp.3d 509

Stacey GREENFIELD, Plaintiff,

v.CADIAN CAPITAL MANAGEMENT, LP, Cadian Fund LP, Cadian Master Fund LP, Cadian GP, LLC, Cadian Capital Management GP, LLC, Eric Bannasch, and Infoblox Inc., Defendants.

15 Civ. 4478 (ER)

United States District Court, S.D. New York.

Signed September 30, 2016

Glenn F. Ostrager, Joshua Seth Broitman, Roberto Legaspi Gomez, Ostrager, Chong, Flaherty & Broitman, P.C., Paul D. Wexler, Paul D. Wexler, Attorney at Law, New York, NY, for Plaintiff.

Douglas Adam Rappaport, Jessica Oliff Daly, Akin Gump Strauss Hauer & Feld LLP, Lawrence Elliott Fenster, Bressler, Amery & Ross, PC, New York, NY, Jason Matthew Daniel, Akin Gump Strauss Hauer & Feld LLP, Dallas, TX, for Defendants.

OPINION AND ORDER

Ramos, District Judge.

Stacey Greenfield ("Plaintiff") brings this case under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") to recover on behalf of Infoblox Inc. ("Infoblox") short-swing insider trading profits allegedly earned by Cadian Capital Management, LP, Cadian Fund LP, Cadian Master Fund LP, Cadian GP, LLC, Cadian Capital Management GP, LLC, and Eric Bannasch (collectively "Defendants"¹ or the "Cadian Entities") while statutory insiders of Infoblox. Before the Court is Defendants' motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, Defendants' motion is DENIED.

I. BACKGROUND

A. Statutory Background

Section 16(b) of the Exchange Act imposes liability on statutory insiders who earn short-swing profits from the purchase and sale of securities. See 15 U.S.C. § 78p(b). "The statute aims to deter insiders from taking unfair advantage of confidential company information to realize short-swing profits on trades in the company's stock." Morales v. Quintel Entm't, Inc., 249 F.3d 115, 122 (2d Cir. 2001) (citation omitted).

Short-swing trading is generally defined as the purchase and sale, or the sale and purchase, of a company's stock within a six-month period. Id. at 121. A statutory insider includes not only traditional insiders, such as a company's directors and officers, but also "beneficial owners" of more than ten percent of any class of any equity security of the company. 15 U.S.C. § 78p(a)(1) ; See Facebook, Inc. v. Morgan Stanley & Co. LLC, 986 F.Supp.2d 544, 550 (S.D.N.Y. 2014). For Section 16(b) purposes, a "beneficial owner" is defined under Section 13(d) to include any "person" who, directly or indirectly, has or shares (1) voting or investment power over and (2) a pecuniary interest in a security. 17 C.F.R. § 240.16a–1(a)(1)–(2) ; id. § 240.13d-3(a)(1)-(2).

"Persons" include corporations, partnerships, associations, joint-stock companies, trusts, funds, or "any organized group of persons whether incorporated or not." 15 U.S.C. § 80a–2(a)(8). Under SEC Rule 16a-1(a)(1), 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 persons are deemed to be a "group." 15 U.S.C. § 78m(d)(3) ; 17 C.F.R. § 240.16a–1(a)(1). The shares held by persons in a group are aggregated for the purpose of determining Section 16(b) liability. 17 C.F.R. § 240.16a–1(a)(2). Thus if the aggregate number of shares owned by a group exceeds ten percent, beneficial ownership exceeding ten percent is attributed to each member of the group. Id.; see Rosen v. Brookhaven Capital Mgmt. Co., 113 F.Supp.2d 615, 617 (S.D.N.Y. 2000).

While Section 16 refers initially to the definition in Section 13(d) for the purpose of determining beneficial ownership, the rules further narrow the criteria for beneficial ownership by exempting certain persons and entities. Specifically, Rule 16a-1(a)(1) "circumscribes the scope of beneficial ownership" by "carving out an exclusion consisting of three interrelated shareholder requirements: (1) the person or entity must fall into at least one of the "categories of specifically enumerated institutions or persons" which may invest in an issuer's securities provided for in Rule 16a-1(a)(1)(i)-(ix); (2) the person or entity must maintain the issuer's securities "for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business"; and (3) the person or entity must have acquired the issuer's securities "without the purpose or effect of changing or influencing control of the issuer or engaging in other impermissible arrangements." Rosen, 113 F.Supp.2d at 622 (citing 17 C.F.R. § 240.16a–1(a)(1) ). If a party meets these three criteria, the shares held by that party are not counted "for purposes of determining ten percent holder status" under Section 16(b). Id.

As to the first requirement, one of the "categories of specifically enumerated institutions or persons" which may invest in an issuer's securities, includes "any person registered as an investment advisor under Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3 ) or under the laws of any state." 17 C.F.R. § 240.16a–1(a)(1)(v). This is referred to as the registered investment advisor exemption ("RIA Exemption"). Thus if a registered investment advisor manages an issuer's securities for the benefit of third parties, the advisor shall not be considered a beneficial owner of those securities under Section 16(b).

Suit to recover short-swing profits realized by a statutory insider may be brought by the issuer of the securities or by another shareholder on behalf of the issuer. 15 U.S.C. § 78p(b). Section 16(b) imposes liability without fault, meaning neither unlawful intent nor actual misuse of inside information is required to compel disgorgement of short-swing profits. See Magma Power Co. v. Dow Chem. Co., 136 F.3d 316, 320 (2d Cir. 1998). For this reason, Section 16(b) has been described as a "blunt instrument," Magma, 136 F.3d at 321, "a flat rule taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great," Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972). The Supreme Court has cautioned that because "Congress has so recognized the need to limit carefully the 'arbitrary and sweeping coverage' of [Section] 16(b), courts should not be quick to determine that, despite an acknowledged ambiguity, Congress intended the section to cover a particular transaction." Foremost–McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 253, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976) (quoting Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970), cert. denied , 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971) ).

B. Factual Background²

The Cadian Entities are made up, in part, by two investment funds: Cadian Fund LP ("Cadian Fund") and Cadian Master Fund LP ("Cadian Master") (collectively, the "Investment Funds"). Amended Complaint ("Compl."), Doc. 28, ¶¶ 4-5. Cadian Fund is a Delaware limited partnership, and Cadian Master is a Cayman Islands exempted limited partnership. Id. The Investment Funds share a general partner, Cadian GP, LLC ("Cadian GP"), of which Eric Bannasch ("Bannasch") is the sole managing member. Id. ¶¶ 6, 8.

Cadian Capital Management, LP ("Cadian Capital"), a Delaware limited partnership, serves as the investment manager of the Investment Funds. Id. ¶ 3. According to Plaintiff, Bannasch is also the "principal owner" of Cadian Capital. Id. ¶ 8. Cadian Capital is an investor in the Funds, owning eleven percent of the capital in Cadian Fund and three percent of the capital in Cadian Master. Id. ¶ 3; Memorandum of Law in Support of Defendants' Motion to Dismiss the Amended Complaint ("Defs. Mem."), Doc. 36, at 21. Cadian Capital, like the Investment Funds, also has a general partner: Cadian Capital Management GP, LLC ("Cadian Capital GP"). Id. ¶ 7. Bannasch is the sole managing member of Cadian Capital GP as well. Id. ¶ 8.

Plaintiff alleges that between October 22, 2014 and December 9, 2014, the Cadian Entities, acting as a group, purchased and sold shares of Infoblox common stock while collectively beneficial owners of more than ten percent of Infoblox securities. Id. ¶ 27. Specifically, Plaintiff alleges that Cadian Fund and Cadian Master purchased up to 237,308 shares during the period from October 22, 2014 through December 9, 2014, and sold 226,522 shares during the period from December 9, 2014 through December 31, 2014. Id. ¶ 28. Forms submitted to the SEC by Cadian Capital, Bannasch, and Cadian Fund indicate that those entities collectively owned 9.7 percent of Infoblox stock on October 22, 2014, 10.4 percent of Infoblox stock on December 9, 2014, and 9.2 percent of Infoblox stock on December 31, 2014.³

According to Plaintiff, the Cadian Entities' are all "inexorably intertwined." Compl. ¶ 16. Plaintiff alleges that Bannasch is the sole decision maker for each of the Cadian Entities and effected all of their trades in Infoblox common stock. Id. ¶ 15. Plaintiff further alleges that the Cadian Entities all bear the Cadian name (with the exception of Bannasch), and operate out of the same office with the same employees. Id. Moreover, the Cadian Entities' SEC filings disclosing their ownership of Infoblox securities were all signed by Bannasch on behalf of Cadian Fund, Cadian Capital, and Cadian GP. Id. Plaintiff's Memorandum of Law In Opposition to Motion to Dismiss the Amended Complaint ("Pl. Memo."), Doc 39, at 11-12 n.8. Thus, Plaintiff claims that the Cadian Entities are liable as a group for violating Section 16(b) of the Exchange Act by engaging in short-swing trading while statutory insiders. Id. ¶ 16.

II. LEGAL STANDARD

Under Rule 12(b)(6), a complaint may be dismissed for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Koch v. Christie's...