Rubenstein v. Int'l Value Advisers, LLC

363 F.Supp.3d 379

Aaron RUBENSTEIN, Plaintiff,

v. INTERNATIONAL VALUE ADVISERS, LLC, Charles de Vaulx, Charles de Lardemelle, and John Doe, an Unidentified IVA Client, Defendants,andAdTalem Global Education Services (f/k/a DeVry Education Group, Inc.), Nominal Defendant.

18 Civ. 81 (PAE)

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

Signed February 5, 2019

David Lopez, Law Office of David Lopez, Southampton, NY, Miriam Deborah Tauber, Miriam Tauber Law, New York, NY, for Plaintiff.

Dennis H. Tracey, III, Robin Lacey Muir, Hogan Lovells US LLP, New York, NY, for Defendants.

Susan Leslie Saltzstein, Jeffrey S. Geier, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Nominal Defendant.

OPINION & ORDER

Paul A. Engelmayer, United States District JudgeThe plaintiff in this case, a corporate shareholder, seeks to recoup for the corporation "short-swing" profits that he claims were unlawfully obtained by a corporate insider. Plaintiff Aaron Rubenstein brings this case in the right and for the benefit of nominal defendant AdTalem Global Education Services, f/k/a DeVry Education Group, Inc. ("DeVry") pursuant to § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78p(b). He sues defendants International Value Advisers, LLC ("IVA"), an investment advisor; Charles de Vaulx ("de Vaulx") and Charles de Lardemelle ("de Lardemelle"), who were portfolio managers at IVA; and John Doe, an IVA client in whose account (the "JD Account") there were trades of DeVry stock. Rubenstein alleges that IVA, de Vaulx and de Lardemelle (collectively, the "IVA Defendants"), and John Doe were insiders of DeVry by virtue of their combined beneficial ownership of DeVry, which exceeded 10% during the relevant period. Rubenstein alleges that the IVA Defendants and John Doe constituted a "group" within the meaning of § 13(d) of the Exchange Act, and made short-swing trades in Doe's account that, in light of their "group" status, violated § 16(b). Rubenstein seeks disgorgement by Doe of the profit he¹ made from those trades, and by the IVA Defendants of any benefit they received from those trades under any performance-based fee arrangement with Doe.

The IVA Defendants now move to dismiss. They do not dispute that they constituted a control group with respect to DeVry. But, they argue, on the facts pled, John Doe never became part of such a control "group" with them. All that is pled about Doe, they note, is that he was an IVA client who gave IVA discretion to manage his money. They argue that these allegations do not adequately plead, as would be required for Doe to be a member of a control group, that Doe ever "agreed to act together" with the IVA Defendants to advance their disclosed control purpose regarding DeVry.

For the reasons that follow, the Court agrees, and on this basis grants the motion to dismiss. The Court separately denies as moot, and as belated and uninvited, the parties' respective attempts—made in supplemental letters following briefing on the motion to dismiss—to move for summary judgment.

I. Background²

A. The Parties

Rubenstein is a DeVry shareholder. Dkt. 1 ("Compl.") ¶ 12.

DeVry is a private educational institution that offers both in-person and online degree programs. Id. ¶ 13. DeVry's stock is publicly traded. "This action is brought in the right and for the benefit of DeVry, which is named as Nominal Defendant solely to have all necessary parties before the Court." Id.

IVA is an investment advisor. Id. ¶ 14. IVA was, from at least June 13, 2016 until, it appears, October 3, 2017,³ the beneficial owner of 19.5% of DeVry common stock, inclusive of the DeVry stock in the JD Account. Id. ¶¶ 21, 28; see also Dkt. 16-1 ("Schedule 13D") at 2-3.

John Doe is the owner of the JD Account, for which IVA serves as investment advisor. Id. ¶ 4, 14. As pled, IVA's portfolio managers are "authorized to make investment and voting decisions on behalf of [John Doe]." Id. ¶ 14. This includes acquiring, holding, and disposing of shares. Id. ¶ 4.

De Vaulx and de Lardemelle are portfolio managers at IVA who manage the JD Account. Id. ¶¶ 3, 14.

B. Factual Background

1. The IVA Defendants and DeVry

On June 22, 2016, the IVA Defendants filed a Schedule 13D with the SEC. In it, they disclosed their aggregate beneficial ownership of approximately 19.5% of the outstanding shares of DeVry common stock. Id. ¶ 21. These shares included, in addition to shares owned by the IVA defendants, those "shares of DeVry in the [JD Account] held within IVA's custody and discretionary voting and investment authority by agreement with the unidentified IVA client and the John Doe Defendant." Id. ¶ 22.

The Schedule 13D document recited the IVA Defendants' "control purpose" with respect to DeVry. As to that, the Schedule 13D document stated:

Consistent with its investment research methods and evaluation criteria, the Reporting Persons [the IVA Defendants] have discussed and may further discuss such matters [referring to, inter alia, DeVry's operations, prospects, business development, management, competition, and corporate strategies] with management or directors of the Issuer [DeVry], other shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other investors. Such factors and discussions may materially affect, and result in, the [IVA Defendants' (sic) ] modifying their ownership of [DeVry's] Shares, exchanging information with [DeVry] pursuant to appropriate confidentiality or similar agreements, proposing changes in [DeVry's] operations or board of directors, governance or capitalization, or in proposing one or more of the other actions described in subsections (a) through (j) of Item 4 of Schedule 13D [which refers to and requires disclosure of any plans with "change of control" potential, e.g., board appointments, recapitalizations, and major corporate transactions] ....

The [IVA Defendants] reserve the right to formulate other plans and/or make other proposals, and take such actions with respect to their investment in [DeVry], including any or all of the actions set forth in paragraphs (a) through (j) of Item 4 of Schedule 13D, or acquire additional Shares or dispose of all the Shares beneficially owned by them, in the public market or privately negotiated transactions. The [IVA Defendants] may at any time reconsider and change their plans or proposals relating to the foregoing.

Id. ¶ 21. The Schedule 13D was signed by the IVA defendants but not John Doe. See Schedule 13D at 15.

On June 29, 2016, DeVry and IVA entered into a "Support Agreement" whereby IVA Managing Partner Michael W. Malafronte would be appointed to the DeVry Board of Directors as IVA's representative and "deputy" as long as IVA continued to have a beneficial ownership of more than 10% of the outstanding common DeVry stock. See id. ¶ 27.

On October 3, 2017, DeVry and IVA amended the Support Agreement. The amended Agreement provided that Malafronte would retain his board seat as IVA's deputy "for the purpose of representing the interests and advancing the investment goals adopted by or on behalf of all Defendants, including [John Doe], notwithstanding their collective beneficial ownership of less than 10% of DeVry common stock." Id. ¶ 28.

As of the filing of the Complaint, Malafronte was still on the DeVry Board. Id.

2. The John Doe Account Managed by the IVA Defendants

The Complaint alleges that IVA managed the John Doe Account on Doe's behalf and that IVA had discretion as to the acquisition, holding, voting, and disposition of shares held in that account. See Compl. ¶¶ 4, 14, 15. Otherwise, the Complaint lacks concrete factual allegations as to that account and accountholder. It does not allege when Doe authorized IVA to make investment decisions on behalf of the JD Account, or whether the trading authority given by Doe to the IVA Defendants was general or specific to trades in a specific issuer or issuers such as DeVry. The Complaint conclusorily alleges that Doe "understood, agreed to, and authorized—either affirmatively, or through silence and the continued designation of the IVA Defendants as their agents and discretionary investment managers—the DeVry ‘change of control’ strategy implemented by the IVA Defendants." Id. ¶ 24.

3. Trading of DeVry Stock by Accounts Managed by IVA

On 44 different days spanning June 16, 2016 and December 22, 2016, accounts managed by IVA, including the JD Account, sold a number of shares of DeVry Stock. The Complaint does not specify which accounts made which sales. The Complaint lists the sales as follows:

Date No. Shares Sold Price/share
June 16, 2016         11,096              $17.33
July 18, 2016         24,578              $22.06
August 16, 2016       55,022              $22.12
August 22, 2016       15,511              $24.80
August 22, 2016       20,858              $24.64
August 23, 2016       43,360              $24.55
August 24, 2016       65,985              $23.98
August 25, 2016       52,761              $23.82
October 10, 2016      6,735               $23.51
October 11, 2016      426                 $23.50
October 13, 2016      7,565               $23.52
October 26, 2016      7,791               $23.53
October 27, 2016      19,355              $23.53
October 28, 2016      1,885               $23.51
November 2, 2016      7,867               $23.79
November 3, 2016      18,880              $23.53
November 7, 2016      10,315              $23.62
November 8, 2016      24,014              $23.55
November 9, 2016      229,590             $25.40
November 10, 2016     81,034              $26.54
November 11, 2016     92,305              $27.93
November 14, 2016     35,046              $27.91
November 15, 2016     19,467              $27.84
November 16, 2016     22,053              $28.02
November 17, 2016     84,499              $28.35
November 18, 2016     7,709               $28.27
November 21, 2016     48,164              $28.01
November 23, 2016

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