Second Circuit Vacates Summary Judgment That Had Required Investment Advisor’s Customer To Disgorge Short-Swing Profits
12/01/2020
On November 23, 2020, the United States Court of Appeals for the Second Circuit vacated a grant of summary judgment to the plaintiff in a derivative action seeking disgorgement of alleged “short-swing profits” in an action under Section 16(b) of the Securities Exchange Act of 1934 against a registered investment advisor, its customer, and the individual defendant who held positions at both entities. Packer v. Raging Cap. Mgmt., LLC, —F.3d—, 2020 WL 6844063 (2d Cir. 2020). Plaintiff alleged that the customer was the “beneficial owner” of more than ten percent of a certain company’s shares and, therefore, was required to return profits it earned from buying and selling the company’s shares within a six-month period. The district court granted summary judgment in plaintiff’s favor, but the Second Circuit vacated the judgment. The Court held that factual issues remained regarding whether the customer was the beneficial owner of the shares in question and therefore remanded the matter for further proceedings.
Second Circuit Affirms Dismissal Of Actions Seeking Disgorgement Of “Short-Swing” Profits From Investment Advisors’ Clients, Holding That Clients’ Delegation Of Discretionary Investment Authority Did Not Render Them Members Of A “Group” With Their Investment Advisors
05/27/2020
On May 20, 2020, the United States Court of Appeals for the Second Circuit issued two decisions affirming, on substantially similar grounds, the dismissal of two actions asserting claims under Section 16(b) of the Securities Exchange Act against clients of investment advisors. Rubenstein v. International Value Advisers, LLC, No. 19-560-cv (2d Cir. May 20, 2020) (“IVA”); Rubenstein v. Rofam Inv. LLC, No. 19‑796‑cv (2d Cir. May 20, 2020). Plaintiff alleged that certain investment advisors’ clients earned improper “short-swing” profits from equity trades because the advisors, who were statutory insiders of the issuers of the stock, bought and sold securities on their clients’ behalf within a six-month period; plaintiff, a shareholder of the issuers in question, thus sought disgorgement of the clients’ profits. Affirming the lower courts’ decisions, the Second Circuit held that plaintiff failed to establish that the clients formed a “group” with their investment advisors such as to impute insider status on the clients, and therefore failed to show that the trades were prohibited under the Exchange Act.
