Revive Investing LLC v. Armistice Capital Master Fund, Ltd.

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REVIVE INVESTING LLC, and DONNA ANN GABRIELE CHECHELE, Plaintiffs, v. ARMISTICE CAPITAL MASTER FUND, LTD., Defendant, and AYTU BIOSCIENCES, INC. Nominal Defendant.

Civil Action No. 20-cv-02849-CMA-SKC

United States District Court, D. Colorado

August 30, 2023

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

CHRISTINE M. ARGUELLO SENIOR UNITED STATES DISTRICT JUDGE

This matter is before the Court on (1) Plaintiffs Revive Investing LLC and Donna Anna Gabriele Chechele's Motion for Summary Judgment (Doc. # 76); and (2) Defendant Armistice Capital Master Fund, LTD.'s (“Master Fund”) Motion for Summary Judgment (Doc. # 86). For the following reasons the Court grants in part and denies in part Plaintiffs' Motion and denies Defendant Master Fund's Motion.

I. BACKGROUND

This is an insider trading case alleging short-swing trading of securities in violation of Section 16(b) of the Securities Exchange Act of 1934. Unless otherwise indicated, the following material facts are undisputed.

Plaintiffs are stockholders of Aytu BioPharma, Inc, f/k/a Aytu BioSciences, Inc. (“Aytu”), a pharmaceutical company incorporated in Delaware and headquartered in Englewood, Colorado. (Doc. # 77 at 14-39; 432.) Defendant Master Fund, a company based in the Cayman Islands, is a “pooled investment vehicle” with over $1 billion in assets. (Doc. # 77 at 571; Doc. # 86-3 at 3.) Master Fund is affiliated with Armistice Capital, an investment manager registered with, and subject to oversight by, the Securities and Exchange Commission (“SEC”). (Doc. # 86-2 at 3.) Both Master Fund and Armistice Capital were founded in 2012 by Steven Boyd, who serves as the Chief Investment Officer and Managing Member of Armistice Capital. (Id. at 2-3.) Mr. Boyd is also one of three directors on the Master Fund board of directors, along with Kevin Phillip and Gregory Bennett (“Master Fund Board”). (Id. at 3.)

Since Master Fund was founded, it has engaged Armistice Capital to manage Master Fund's investments through an investment management agreement. (Id.) The investment management agreement in effect during the time period relevant to this action was signed in April 2018 (“IMA”). (Doc. # 86-11 at 2.) The IMA provides that Armistice Capital will make “[a]ll investment decisions” regarding the securities held in Master Fund's portfolio. (Id.) The parties dispute whether Armistice Capital possessed exclusive authority to invest the assets of Master Fund and make all decisions concerning those assets, or whether Master Fund also retained such authority. Compare (Doc. # 86 at 6-7), with (Doc. # 102 at 2-3). The parties also dispute whether Master Fund retained voting power over the securities in its portfolio and whether Armistice Capital had the authority to place representatives on boards of directors of certain companies in which Master Fund invested. Compare (Doc. # 86 at 6-7), with (Doc. # 102 at 2-3.)

Master Fund began investing in Aytu in 2017. (Doc. # 86 at 2.) Between August 2017 and October 2018, Master Fund “accumulated a sizable position in Aytu securities,” owning just under 10% of Aytu's stock. (Doc. # 86-2 at 5.) In October 2018, Joshua Disbrow, Aytu's Chief Executive Officer and Chairman of its Board, approached Mr. Boyd about the possibility of joining Aytu's Board of Directors (“Aytu Board”). (Id.) Mr. Boyd was appointed to the Aytu Board on April 15, 2019, and served as a director until August 30, 2021. (Id. at 6.) He informed the Master Fund Board that he had joined the Aytu Board at a quarterly meeting in the spring of 2019. (Id.) The parties vigorously dispute whether Mr. Boyd was appointed to the Aytu Board for the purpose of representing Master Fund's interests, or whether Mr. Boyd was appointed in his individual capacity. Compare (Doc. # 86 at 7-9), with (Doc. # 102 at 3-4).

On October 10, 2019, the Aytu Board voted to approve Master Fund's purchase of 5,000 shares of Aytu's Series F Convertible Preferred Stock (“Convertible Preferred”) and warrants to purchase 5,000,000 shares of Aytu's common stock (“Warrants”) (collectively, “October Acquisitions”). (Doc. # 86 at 11; Doc. # 77 at 170.) On January 24, 2020, Aytu's shareholders voted to approve the convertibility of the Convertible Preferred shares and the exercisability of the Warrants. (Doc. # 86-29.) The average of the high and low price of Aytu's common stock on the date of the special meeting was $0.82 per share. (Doc. # 77 at 664.) In addition to its purchase of the Convertible Preferred and Warrants, Master Fund reported two additional open-market stock purchases on a Form 4 filed on December 23, 2019: 52,788 shares at the price of $0.85, and 26,000 shares at the price of $0.88. (Id. at 253.) Both purchases occurred on December 19, 2019 (“December Purchases”). (Id.) After these acquisitions, Master Fund owned 40% of the outstanding shares of Aytu. (Id. at 346.)

At 8:05 a.m. on March 10, 2020, in the early days of the COVID-19 pandemic, Aytu announced in a press release that it had secured exclusive rights to market in North America a Hong Kong-sourced rapid COVID test. (Id. at 59.) The same day, Master Fund began selling all of its Aytu common stock. See (id. at 5-9.) According to Plaintiffs, Master Fund “largely cashed out of its investment in Aytu, all in a single day” by selling over 20 million shares with proceeds of more than $31 million. (Doc. # 76 at 2.) Specifically, Armistice Capital, on behalf of Master Fund, converted shares of Aytu preferred stock into common stock, exercised certain warrants to purchase Aytu common stock, and sold 22,026,801 shares of Aytu common stock on March 10, 2020. (Doc. # 86-31 at 11-14.)

On a March 12, 2020 Form 4, Master Fund disclosed that it had realized certain putative short-swing profits as a result of these transactions. (Doc. # 86-30 at 4.) The same day that it filed the Form 4, Master Fund and its affiliates entered into a settlement agreement with Aytu (“Settlement Agreement”) pursuant to which Master Fund disgorged $92,879.85 to Aytu. (Doc. # 86-18.) Plaintiffs contend that Master Fund's full profit on its short-swing trades-i.e., the shares it sold within a period of less than six months after purchase-is $11,256,326.42. (Doc. # 76 at 14.) Accordingly, Plaintiffs contend that the amount of illicit profits still subject to disgorgement is $11,163,446.67. (Id. at 15.)

Plaintiffs filed their Complaint as a derivative action on behalf of Aytu on September 21, 2020. (Id. at 8.) The parties completed discovery, and on December 16, 2022, and January 17, 2023, the parties filed the instant cross-motions for summary judgment. (Docs. ## 76, 86.) Both summary judgment motions are fully briefed and ripe for review. (Docs. ## 93, 94, 102, 103, 109.)

II. LEGAL STANDARD

Summary judgment is warranted when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A fact is “material” if it is essential to the proper disposition of the claim under the relevant substantive law. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir. 2001). A dispute is “genuine” if the evidence is such that it might lead a reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, Okla., 119 F.3d 837, 839 (10th Cir. 1997). When reviewing a motion for summary judgment, a court must view the evidence in the light most favorable to the non-moving party. See id. However, conclusory statements based merely on conjecture, speculation, or subjective belief do not constitute summary judgment evidence. Bones v. Honeywell Int'l, Inc., 366 F.3d 869, 875 (10th Cir. 2004).

The moving party bears the initial burden of demonstrating the absence of a genuine dispute of material fact and entitlement to judgment as a matter of law. Id. In attempting to meet this standard, a movant who does not bear the ultimate burden of persuasion at trial does not need to disprove the other party's claim; rather, the movant need simply point out to the Court a lack of evidence for the other party on an essential element of that party's claim. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 671 (10th Cir. 1998) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)).

Once the movant has met its initial burden, the burden shifts to the nonmoving party to “set forth specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). The nonmoving party may not simply rest upon its pleadings to satisfy its burden. Id. Rather, the nonmoving party must “set forth specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant.” Adler, 144 F.3d at 671. Stated differently, the party must provide “significantly probative evidence” that would support a verdict in his favor. Jaramillo v. Adams Cnty. Sch. Dist. 14, 680 F.3d 1267, 1269 (10th Cir. 2012). “To accomplish this, the facts must be identified by reference to affidavits, deposition transcripts, or specific exhibits incorporated therein.” Adler, 144 F.3d at 671.

III. DISCUSSION

Both parties move for summary judgment in their favor on Plaintiffs' claim that Master Fund violated Section 16(b) of the Securities Exchange Act of 1934 (“Section 16(b)”) by engaging in short-swing trading of Aytu's securities. (Doc. # 76 at 4.) The Court will begin by reviewing the applicable law for Section 16(b) claims.

A. SECTION 16(b)

To prevent insiders of a securities issuer from trading on non-public information, Section 16(b) provides that officers directors, and holders of more than 10% of the listed stock of any company are liable to the company for any profits realized “from the purchase and sale, or sale...