Roth v. Jennings

06-0784
Roth v. Jennings
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
- - - - - - 3
August Term, 2006 4
(Argued: February 21, 2007 Decided: June 6, 2007) 5
6
Docket No. 06-0784-cv 7
_________________________________________________________ 8
ANDREW E. ROTH, derivatively on behalf of METAL 9
MANAGEMENT, INC., 10
Plaintiff-Appellant, 11
- v. - 12
T. BENJAMIN JENNINGS, EUROPEAN METAL RECYCLING, LTD., 13
and METAL MANAGEMENT, INC., 14
Defendants-Appellees. 15
_________________________________________________________ 16
Before: KEARSE, CABRANES, and KATZMANN, Circuit Judges. 17
Appeal from a judgment entered pursuant to Fed. R. Civ. P. 18
12(b)(6) in the United States District Court for the Southern 19
District of New York, Deborah A. Batts, Judge, dismissing a 20
derivative action brought under § 16(b) of the Securities Exchange 21
Act of 1934, 15 U.S.C. § 78p(b), for disgorgement of short-swing 22
profits from stock sales made by one defendant as part of an alleged 23
"group" within the meaning of the Act. 24
Affirmed in part; vacated and remanded in part. 25
PAUL D. WEXLER, New York, New York (Bragar Wexler & 26
Eagel, New York, New York, Ostrager Chong Flaherty & 27
Broitman, New York, New York, on the brief),for 28
Plaintiff-Appellant. 29

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ALLAN T. SLAGEL, Chicago, Illinois 1
(Heather A. Jackson, Shefsky & Froelich, 2
Chicago, Illinois, John J. Clarke, Jr., 3
DLA Piper Rudnick Gray Cary, New York, New 4
York, on the brief), for Defendant- 5
Appellee Jennings. 6
THOMAS E. LYNCH, New York, New York 7
(Steven C. Bennett, Jones Day, New York, 8
New York, on the brief), for Defendant- 9
Appellee European Metal Recycling, Ltd. 10
KEARSE, Circuit Judge: 11
Plaintiff Andrew E. Roth, suing derivatively on behalf of 12
nominal defendant Metal Management, Inc. ("MMI" or "Metal 13
Management"), for disgorgement to MMI of "short-swing profits" under 14
§ 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or 15
"Act"), 15 U.S.C. § 78p(b), appeals from a final judgment of the 16
United States District Court for the Southern District of New York, 17
Deborah A. Batts, Judge, granting motions by defendants T. Benjamin 18
Jennings and European Metal Recycling, Ltd. ("EMR") (collectively 19
"defendants"), to dismiss the complaint for failure to state a claim 20
on which relief can be granted. The complaint alleged that Jennings 21
and EMR as a "group," within the meaning of the Act, owned more than 22
10 percent of MMI's outstanding stock; that within a period of less 23
than six months, Jennings purchased and sold MMI stock at a profit 24
of some $4.25 million; and that § 16(b) required the disgorgement of 25
that profit to MMI. The district court granted both defendants' 26
motions to dismiss on the ground that the complaint was insufficient 27
to plead that defendants acted as a group, given the disclaimers of 28
group status in documents filed by defendants with the Securities 29

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and Exchange Commission ("SEC"). The court ruled that the claim 1
against EMR was also dismissable on the ground that the complaint 2
did not allege that EMR itself had engaged in any short-swing 3
transactions or received any pecuniary profit from the MMI stock 4
transactions by Jennings. For the reasons that follow, we affirm 5
the dismissal of the claim against EMR, but we vacate the dismissal 6
of the claim against Jennings and remand for further proceedings. 7
I. BACKGROUND 8
For purposes of reviewing the dismissal of a complaint for 9
failure to state a claim, we accept the complaint's factual 10
allegations, and all reasonable inferences that can be drawn from 11
those allegations in the plaintiff's favor, as true. See, e.g., 12
Leatherman v. Tarrant County Narcotics Intelligence & Coordination 13
Unit, 507 U.S. 163, 164 (1993); Overton v. Todman & Co., 478 F.3d 14
479, 483 (2d Cir. 2007). The following description is taken from 15
allegations in the complaint and from documents referred to in the 16
complaint which were filed by EMR or Jennings with the SEC pursuant 17
to SEC Rule 13d-1 and Schedule 13D, 17 C.F.R. §§ 240.13d-1(a), 18
240.13d-101 ("Schedule 13D" filings). 19
A. The Parties and the Transactions in MMI Stock 20
Metal Management (or "the Company"), which describes 21
itself as one of the nation's largest full-service scrap metal 22
recyclers, is a publicly owned Delaware corporation headquartered in 23

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Chicago, Illinois. EMR is a privately owned scrap metal processing 1
company headquartered in the United Kingdom. Jennings, an Illinois 2
resident, is a former chairman and chief executive officer of MMI. 3
On May 15 and May 21, 2003, EMR purchased a total of 4
1,503,100 shares of MMI common stock in open-market transactions. 5
These shares represented approximately 14.8 percent of MMI's 6
outstanding common stock. (See Complaint ¶ 13.) The Schedule 13D 7
filed by EMR with respect to those transactions stated that 8
EMR has taken certain actions that indicate that EMR 9
may be deemed to have the current intent to seek to 10
change or influence control of the Company, although 11
it has not formulated any specific plan or proposal 12
in this regard. . . . Any such plan or proposal 13
that may be formulated could involve, among other 14
things, entering into one or more privately 15
negotiated acquisitions of additional Company 16
securities, open-market purchases, proposing a 17
business combination transaction with the Company, 18
making a tender offer for some or all of the Shares 19
or waging a proxy contest for control of the 20
Company. 21
(EMR Schedule 13D dated June 2, 2003, at 4 (emphases added).) 22
On May 29 and 30, 2003, Jennings, in open-market 23
transactions, purchased a total of 842,000 shares of MMI common 24
stock. (See Complaint ¶ 9.) These shares constituted approximately 25
8.3 percent of MMI's outstanding stock. (See Jennings Schedule 13D 26
dated June 9, 2003, at 2.) The per-share prices ranged from $10.95 27
to $11.55, for a total purchase price of $9,517,350; Jennings paid 28
for the shares by obtaining a $10 million loan from EMR. (See 29
Complaint ¶¶ 8, 9, 14.) According to the terms of the EMR-Jennings 30
loan agreement, the loan was unsecured; the interest rate was 31
4 percent per annum. (See Jennings Schedule 13D dated June 9, 2003, 32
Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I.) 33

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Roth's complaint alleged that "[t]he loan was made for the 1
specific purpose of buying MMI securities in furtherance of EMR's 2
and Jennings [sic] agreement to work together to effect a change of 3
control or similar transaction involving MMI" (Complaint ¶ 8), and 4
that Jennings and EMR therefore constituted a "group" within the 5
meaning of § 13(d) of the Act for purposes of determining each 6
entity's beneficial ownership of MMI stock under § 16 of the Act 7
(e.g., id. ¶¶ 6, 7, 11). The complaint alleged that under § 16(b), 8
"each member of [the] Group is liable to pay to the issuer all 9
profits earned by that Group member in stock transactions effected 10
within a six-month period during which time the Group owned a 11
greater than 10% beneficial interest in the issuer's stock." (Id. 12
¶ 12.) 13
On July 14 and 15, 2003, Jennings sold 16,000 of his MMI 14
shares, at prices ranging from $18.6483 to $19.06 per share. (See 15
Complaint ¶ 15.) From August 19 through September 9, 2003, he sold 16
an additional 602,900 shares, at prices ranging from $18 to $18.59 17
per share. (See id. ¶ 16.) The complaint alleged that "[a]t all 18
relevant times during the period while Jennings purchased and sold 19
MMI common stock, the Group owned in excess of 10% of MMI's 20
outstanding common stock." (Id. ¶ 13.) It alleged that Jennings's 21
sales, which occurred less than six months after his purchases, 22
resulted in profits totaling at least $4,249,408.80, and that 23
Jennings and EMR are each "liable to the extent of its [sic] 24
pecuniary [interest] in the . . . disgorgeable profits." (Id. ¶ 18; 25
see id. ¶ 20.) 26

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B. The Motions To Dismiss and the District Court's Decision 1
Jennings and EMR moved for dismissal pursuant to Fed. R. 2
Civ. P. 12(b)(6) for failure to state a claim under § 16(b). They 3
attached to their respective motions several documents they had 4
filed with the SEC--some of which were referred to in the complaint- 5
-which described, inter alia, the loan agreement between EMR and 6
Jennings, certain of their transactions in MMI stock, and their 7
respective MMI holdings. The loan agreement, in the form of a June 8
9, 2003 letter from EMR to Jennings, signed as "[a]ccepted and 9
agreed to" by Jennings ("Loan Agreement") stated--in the version 10
attached to the Schedule 13D filed by EMR--as follows: 11
This letter will evidence our legally binding 12
agreements effective as of June 2, 2003: 13
(1) European Metal Recycling Ltd. ("EMR") 14
has agreed to provide you with a bridge loan in 15
an aggregate of up to U.S. $10,000,000 (the 16
"Loan"). 17
(2) The Loan shall be unsecured, shall 18
accrue interest at the rate of Four Percent 19
(4%) per annum, and shall be due and payable in 20
full no later than ninety (90) days from the 21
effective date hereof. 22
(3) EMR hereby acknowledges that you have 23
used proceeds of the Loan to purchase shares of 24
Common Stock of Metal Management, Inc. EMR 25
hereby acknowledges and agrees that you 26
currently are not, nor in the future shall you, 27
be under any obligation to vote, retain or 28
dispose of such shares as part of, nor 29
otherwise to participate in any way in any 30
plans or proposals of, any "group" within the 31
meaning of the applicable federal and state 32
securities laws in regard to the securities of 33
Metal Management, Inc., including any "group" 34
that may in the future involve EMR in any way. 35
(EMR Schedule 13D dated June 9, 2003, Exhibit I; see also Jennings 36
Schedule 13D dated June 9, 2003, Exhibit A (with slight linguistic 37

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differences from EMR's Exhibit I).) Jennings and EMR argued that 1
the complaint failed sufficiently to allege that they were a group 2
within the meaning of the pertinent securities laws and that the 3
Loan Agreement and their other SEC filings showed that they had 4
disclaimed group status. 5
In a Memorandum and Order dated February 1, 2006, the 6
district court agreed, granting both defendants' motions to dismiss. 7
See 2006 WL 278135 (Feb. 2, 2006) ("District Court Opinion"). The 8
court found principally that defendants' SEC filings disclaimed 9
group status, and it held that notwithstanding the contrary 10
allegations of the complaint, defendants' disclaimers were 11
controlling. 12
The court began its discussion by noting that in 13
considering a motion to dismiss pursuant to Rule 12(b)(6), the court 14
is required to accept as true the factual allegations in the 15
complaint, draw all reasonable inferences in favor of the plaintiff, 16
and refrain from assessing the weight of the evidence that might be 17
offered in support of the complaint. The court noted that such a 18
motion should be granted "'only if, after viewing plaintiff's 19
allegations in this favorable light, "it appears beyond doubt that 20
the plaintiff can prove no set of facts in support of his claim 21
which would entitle him to relief."'" District Court Opinion, 2006 22
WL 278135, at *3 (quoting Walker v. City of New York, 974 F.2d 293, 23
298 (2d Cir. 1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 24
(1957)), cert. denied, 507 U.S. 961 (1993)). The court also stated 25
that 26
consideration of a Rule 12(b)(6) motion is limited 27

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to the factual allegations in the complaint, 1
documents attached to the complaint as exhibits or 2
incorporated in it by reference, to matters of which 3
judicial notice might be taken, or to documents 4
either in plaintiff's possession or of which 5
plaintiffs had knowledge and relied on in bringing 6
suit. 7
District Court Opinion, 2006 WL 278135, at *3. It added that 8
the Second Circuit has held that "when a district 9
court decides a motion to dismiss a complaint 10
alleging securities fraud, it may review and 11
consider public disclosure documents required by law 12
to be and which actually have been filed with the 13
SEC," as these are documents that should be noticed 14
by the Court. Cortec Indus., Inc.[ v. Sum Holding 15
L.P.], 949 F.2d [42, 47 (2d Cir. 1991)] (referencing 16
Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d 17
Cir. 1991)). 18
District Court Opinion, 2006 WL 278135, at *3. 19
As to the merits of the motions, the court noted that, in 20
order to show that Jennings's purchases, amounting to 8.3 percent of 21
MMI's shares, were subject to § 16(b), Roth was required to show 22
that EMR and Jennings constituted a "group" within the meaning of 23
the Act, that is, that they "'combined in furtherance of a common 24
objective.'" District Court Opinion, 2006 WL 278135, at *4 (quoting 25
Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982), cert. 26
denied, 460 U.S. 1069 (1983)). The court stated that "[i]n order to 27
plead group activity sufficiently, Plaintiff is not required to 28
allege that a common objective of actual corporate control existed 29
among the defendants, but simply that the defendants acted together 30
in furtherance of a common objective with regard to acquiring, 31
holding, voting or disposing of securities of the issuer," although 32
"the concerted action of the group's members need not be expressly 33
memorialized in writing." District Court Opinion, 2006 WL 278135, 34

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at *4 (internal quotation marks and brackets omitted). 1
The court ruled, however, that Roth's complaint "d[id] not 2
sufficiently allege such an agreed-upon common purpose" between EMR 3
and Jennings. Id. at *5. Citing Schedule 13D filings by EMR and 4
Jennings, respectively, the court observed that the Schedule 13D 5
filed by Jennings in June 2003, which disclosed Jennings's purchases 6
of MMI shares and the loan from EMR, stated (a) that "'[t]here are 7
no arrangements or understandings between EMR and [Jennings] as to 8
how [Jennings] would utilize the proceeds of the [L]oan,'" and (b) 9
that Jennings "'does not have any definite plans regarding an 10
extraordinary corporate transaction, such as a merger, 11
reorganization or liquidation involving [MMI] or a sale or transfer 12
of a material amount of assets of [MMI] or any of its 13
subsidiaries.'" District Court Opinion, 2006 WL 278135, at *1-*2 14
(quoting Jennings Schedule 13D dated June 9, 2003, at 3) (emphasis 15
ours). The court noted also that EMR's Schedule 13D disclosing its 16
loan to Jennings stated that 17
[EMR] has no contract, arrangement[] or 18
understanding of any kind with Mr. Jennings with 19
respect to the Common Stock [of MMI] owned by [EMR] 20
or by Mr. Jennings; . . . expressly disclaims any 21
direct or indirect beneficial ownership in the 22
Common Stock [of MMI] owned by Mr. Jennings; and 23
further disclaims any "group" status with Mr. 24
Jennings. 25
District Court Opinion, 2006 WL 278135, at *2 (quoting EMR Schedule 26
13D dated June 9, 2003, at 3) (other internal quotation marks 27
omitted) (emphasis ours). And the court noted that 28
[t]he loan agreement signed by both Jennings and 29
EMR's managing director expressly states that 30
Jennings and EMR are in no way, either by the loan 31
of June 9, 2003 or at any time in the future, to be 32

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considered a "group" or part of any group that might 1
include more than the Defendants. . . . EMR filed 2
an amended 13D schedule after loaning money to 3
Jennings, which further declared that the loan did 4
not constitute group activity. 5
District Court Opinion, 2006 WL 278135, at *5 (emphases added). The 6
court stated that defendants had thus "filed three separate 7
statements with the SEC, asserting that their actions do not 8
constitute group activity"; that their disclaimers conflicted with 9
the allegations of the complaint; and that the complaint did not 10
"explain the documents [that EMR and Jennings had] filed with the 11
SEC." Id. The court accepted defendants' disclaimers as true. See 12
id. 13
The district court rejected Roth's contention that, in 14
ruling on the Rule 12(b)(6) motions, the court should not rely on 15
defendants' disclaimers: 16
Plaintiff contends that the disclaimer of group 17
status in the loan agreement and the subsequent 18
amended 13D schedules by both Defendants was meant 19
to circumvent liability even though the two were 20
acting in concert. However, "unadorned allegations" 21
based on "unmitigated speculation" that defendants 22
are acting as a group are inadequate to sustain a 23
Section 13(d) claim.[] Segal v. Gordon, 467 F.2d 24
602, 608 (2d Cir. 1972). In the instant case, 25
Defendants have filed three separate statements with 26
the SEC, asserting that their actions do not 27
constitute group activity. The express disclaimer 28
of group status conflicts with Plaintiff's 29
allegations. Even interpreting the pleadings in a 30
light most favorable to the Plaintiff, the 31
Defendants' statements, which have been submitted to 32
a government agency and made public, should not be 33
contradicted or taken as perjurious simply because 34
the Plaintiff, without evidence, says they are. See 35
Matusovsky v. Merrill Lynch, 186 F.Supp.2d 397, 400 36
[(S.D.N.Y. 2002)] (stating that if a plaintiff's 37
allegations are contradicted by a document 38
considered in determining a Rule 12(b)(6) motion, 39
those allegations are insufficient to defeat the 40
motion); Rap[o]port v. Asia Elecs., 88 F.Supp.2d 41

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179, 184 (S.D.N.Y. 2000) (stating that when 1
documents contain statements that contradict the 2
allegations in the complaint, the documents control 3
and the court need not accept as true the 4
allegations contained in the complaint). 5
District Court Opinion, 2006 WL 278135, at *5 (emphases added). 6
In addition, the district court ruled that the complaint 7
would be dismissable "[e]ven were this Court not to accept the truth 8
of Defendants' statements in their SEC filings." Id. The court 9
concluded that § 16(b) was inapplicable because other evidence 10
submitted by defendants indicated that EMR and Jennings could not be 11
considered to have been a group at the time of Jennings's sales. 12
Citing the language in § 16(b) that "[t]his subsection shall not be 13
construed to cover any transaction where such beneficial owner was 14
not such both at the time of the purchase and sale, or the sale and 15
purchase, of the security . . . involved," 15 U.S.C. § 78p(b), the 16
court concluded that "for traders to constitute a 'group', the 17
Exchange Act requires that their coordinated activity persist during 18
the time of purchase and during the time of sale of the securities," 19
District Court Opinion, 2006 WL 278135, at *6 (emphasis in 20
original). The court noted that, according to documents submitted 21
by defendants, EMR had offered in August 2003 to buy Jennings's 22
shares at a below-market price and that Jennings had declined that 23
offer and sold shares on the open market. See id. at *5 (citing EMR 24
Schedule 13D dated August 12, 2003, Exhibit 1 (EMR letter offering 25
to pay Jennings $13.50 per share)). The court found that 26
[s]uch transactions do not reflect two group members 27
acting in concert to effectuate a common objective 28
with regard to acquiring, holding, voting or 29
disposing of securities of the issuer. . . . Had 30
Defendants held a common purpose, Jennings likely 31

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would have accepted EMR's offer. While group 1
members need not march in lock step to qualify as a 2
"group", . . . marching in opposite directions 3
certainly counsels against concluding that Jennings 4
acted with EMR as a "group". Jennings' refusal of 5
EMR's offer contradicted precisely what one would 6
have expected of him had he been acting in concert 7
with EMR. 8
District Court Opinion, 2006 WL 278135, at *5 (internal quotation 9
marks and brackets omitted) (emphases added); see id. ("[t]his 10
evidence does not in any way approximate an instance of group 11
activity, and belies allegations of any common objective shared by 12
the Defendants" (emphasis added)); id. at *6 (in selling his shares 13
on the open market, "Jennings did not act in concert with EMR at the 14
time of sale; he did the opposite"). The court concluded that, 15
[a]ccordingly, EMR's shares cannot be aggregated 16
with Jennings' to constitute the more than ten 17
percent ownership required to warrant Section 16(b) 18
liability. Neither EMR nor Jennings may be 19
considered part of a "group." 20
Because the Complaint does not sufficiently 21
aver that Defendants acted as a group at the time 22
Jennings sold his MMI shares, because public SEC 23
filings indicate that Defendants never intended to 24
act as a group, and because Jennings alone did not 25
own ten percent of a class of MMI's equity 26
securit[ies], Jennings' Motion to Dismiss 27
Plaintiff's Complaint is hereby GRANTED. 28
Id. (emphases added). 29
The court ruled that the claim against EMR should be 30
dismissed on the additional ground that the complaint did not allege 31
that EMR had made any sales of its own shares or had any direct or 32
indirect pecuniary interest in the shares sold by Jennings. 33
Judgment was entered dismissing the complaint, and this 34
appeal followed. 35

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II. DISCUSSION 1
On appeal, Roth contends principally that the district 2
court erred in concluding that the complaint failed to state a claim 3
on which relief can be granted against Jennings, arguing that the 4
complaint sufficiently pleaded that EMR and Jennings acted as a 5
group for the purpose of Jennings's acquisition of MMI shares, that 6
defendants' disclaimers of group activity were not entitled to 7
evidentiary weight in the consideration of Rule 12(b)(6) motions, 8
and that Jennings's sales of his shares were not a basis for 9
concluding that the "group" provisions no longer applied. For the 10
reasons that follow, we agree. 11
A. Section 16(b) 12
Section 16 of the Exchange Act, with respect to any 13
company whose securities are registered on a national securities 14
exchange, imposes certain obligations and restrictions on the 15
company's officers, directors, and "[e]very person who is directly 16
or indirectly the beneficial owner of more than 10 percent of any 17
class of any equity security (other than an exempted security)," 18
15 U.S.C. § 78p(a)(1). "[D]efining directors, officers, and [such] 19
beneficial owners as those presumed to have access to inside 20
information," Foremost-McKesson, Inc. v. Provident Securities Co., 21
423 U.S. 232, 243 (1976) ("Foremost-McKesson"), Congress enacted 22
§ 16(b) of the Act, which provides, in pertinent part, as follows: 23
(b) Profits from purchase and sale of security 24
within six months. For the purpose of preventing 25
the unfair use of information which may have been 26

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obtained by such beneficial owner, director, or 1
officer by reason of his relationship to the issuer, 2
any profit realized by him from any purchase and 3
sale, or any sale and purchase, of any equity 4
security of such issuer (other than an exempted 5
security) . . . within any period of less than six 6
months, . . . shall inure to and be recoverable by 7
the issuer, irrespective of any intention on the 8
part of such beneficial owner, director, or officer 9
in entering into such transaction of holding the 10
security . . . purchased or of not repurchasing the 11
security . . . sold for a period exceeding six 12
months. . . . This subsection shall not be 13
construed to cover any transaction where such 14
beneficial owner was not such both at the time of 15
the purchase and sale, or the sale and purchase, of 16
the security . . . . 17
15 U.S.C. § 78p(b). 18
The general purpose of Congress in enacting 19
§ 16(b) is well known. See Kern County Land Co.[ v. 20
Occidental Petroleum Corp., 411 U.S. 582, 591-92 21
(1973)]; Reliance Electric Co. [v. Emerson Electric 22
Co., 404 U.S. 418, 422 (1972)], and the authorities 23
cited therein. Congress recognized that insiders 24
may have access to information about their 25
corporations not available to the rest of the 26
investing public. By trading on this information, 27
these persons could reap profits at the expense of 28
less well informed investors. In § 16(b) Congress 29
sought to "curb the evils of insider trading [by] . 30
. . taking the profits out of a class of 31
transactions in which the possibility of abuse was 32
believed to be intolerably great." Reliance 33
Electric Co., supra, at 422. 34
Foremost-McKesson, 423 U.S. at 243 (emphasis added). 35
Profits resulting from purchase-and-sale, or sale-and- 36
repurchase, transactions within a period of less than six months are 37
commonly known as "short-swing" transactions, see, e.g., id. at 234; 38
SEC Rule 16a-1(a)(3), 17 C.F.R. § 240.16a-1(a)(3). As indicated by 39
the "irrespective of any intention" clause in § 16(b), that section 40
is a strict-liability provision; it "requires the inside, 41
short-swing trader to disgorge all profits realized on all 42

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'purchases' and 'sales' within the [six-month] period, without proof 1
of actual abuse of insider information, and without proof of intent 2
to profit on the basis of such information," Kern County Land Co. v. 3
Occidental Petroleum Corp., 411 U.S. 582, 595 (1973) (emphasis 4
added); see, e.g., Foremost-McKesson, 423 U.S. at 251 ("Section 5
16(b) imposes a strict prophylactic rule with respect to insider, 6
short-swing trading."). 7
The Exchange Act also recognizes that the abuses it 8
targets may be accomplished by persons acting not individually but 9
in combination with others. See, e.g., 15 U.S.C. § 78m(d)(3). With 10
respect to § 16, SEC Rule 16a-1(a)(1) provides that, "[s]olely for 11
purposes of determining whether a person is a beneficial owner of 12
more than ten percent of any class of equity securities," the term 13
"beneficial owner" means, with exceptions not pertinent here, "any 14
person who is deemed a beneficial owner pursuant to section 13(d) of 15
the Act and the rules thereunder." 17 C.F.R. § 240.16a-1(a)(1). 16
Section 13(d) of the Act provides, in pertinent part, that 17
[w]hen two or more persons act as a partnership, 18
limited partnership, syndicate, or other group for 19
the purpose of acquiring, holding, or disposing of 20
securities of an issuer, such syndicate or group 21
shall be deemed a "person" for the purposes of this 22
subsection. 23
15 U.S.C. § 78m(d)(3) (emphases added). And SEC Rule 13d-5(b)(1) 24
promulgated thereunder provides, with exceptions not pertinent here, 25
that 26
[w]hen two or more persons agree to act together for 27
the purpose of acquiring, holding, voting or 28
disposing of equity securities of an issuer, the 29
group formed thereby shall be deemed to have 30
acquired beneficial ownership, for purposes of 31
sections 13(d) and (g) of the Act, as of the date of 32

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such agreement, of all equity securities of that 1
issuer beneficially owned by any such persons. 2
17 C.F.R. § 240.13d-5(b)(1) (emphases added). Accordingly, under 3
§ 13(d)(3) and this Rule, if two or more entities agree to act 4
together for any of the listed purposes, a "group" is "thereby" 5
formed. 6
Thus, "the touchstone of a group within the meaning of 7
Section 13(d) is that the members combined in furtherance of a 8
common objective." Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 9
1982) ("Wellman"), cert. denied, 460 U.S. 1069 (1983). Although a 10
common purpose to acquire control of the issuing company would be an 11
indicium of collective action within the meaning of § 13(d), it is 12
not an essential. 13
[T]he agreement required by § 13(d)(3) need not be 14
an agreement to gain corporate control or to 15
influence corporate affairs. . . . The plain 16
language of § 13(d)(3) demands only an agreement 17
"for the purpose of acquiring, holding, or disposing 18
of securities," 15 U.S.C. § 78m(d)(3), and Rule 13d- 19
5 is similarly satisfied by that sort of agreement, 20
17 C.F.R. § 240.13d-5(b)(1). 21
Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 124-25 (2d 22
Cir. 2001). Further, evidence that group members "might not always 23
make identical investment decisions" does "not preclude existence of 24
agreement." Id. at 127 (internal quotation marks omitted). 25
Importantly, for purposes of this case, the actors need 26
not have combined for all of the purposes listed in § 13(d)(3) or 27
Rule 13d-5(b)(1). Acquiring, holding, and disposing of are listed 28
in the disjunctive. Hence, "[a]ll that is required is that the 29
members of the group have combined to further a common objective 30
with regard to one of those activities." Morales v. Freund, 163 31

-- 16 of 36 --

- 17-
F.3d 763, 767 n.5 (2d Cir. 1999) (emphasis added); see, e.g., 1
Morales v. Quintel Entertainment, Inc., 249 F.3d at 124; Wellman, 2
682 F.2d at 363. 3
The questions of (a) whether two or more persons "act[ed]" 4
as a group or agreed to act together, and (b) whether their purpose 5
was the acquisition, holding, or disposition of an issuer's equity 6
securities are questions of fact. See, e.g., Morales v. Quintel 7
Entertainment, Inc., 249 F.3d at 124. If they in fact so acted or 8
agreed to so act, the legal consequences are specified in § 13(d)(3) 9
and Rule 13d-5(b)(1): If the persons agreed to act together for the 10
purpose of purchasing an issuer's shares, a "group" was "thereby" 11
formed, 17 C.F.R. § 240.13d-5(b)(1); if they acted as a "group," 12
they must be treated as a single person, 15 U.S.C. § 78m(d)(3) 13
("shall be deemed a 'person'"); and each person in the group "shall 14
be deemed" to be the beneficial owner "of all equity securities of 15
that issuer beneficially owned by any" member of the group, 17 16
C.F.R. § 240.13d-5(b)(1). 17
An agreement to act together for the purpose of acquiring, 18
holding, or disposing of shares need not be unconditional in order 19
to support a finding that the actors constituted a group within the 20
meaning of those provisions. See, e.g., Wellman, 682 F.2d at 363. 21
Nor need the group "be committed to acquisition, holding, or 22
disposition on any specific set of terms." Id.; see, e.g., Morales 23
v. Freund, 163 F.3d at 767 n.5. And, "[o]f course, the concerted 24
action of the group's members need not be expressly memorialized in 25
writing." Wellman, 682 F.2d at 363. The formation of such a group 26
"may be formal or informal and may be proved by direct or 27

-- 17 of 36 --

- 18-
circumstantial evidence." Morales v. Quintel Entertainment, Inc., 1
249 F.3d at 124; see also id. at 125-26 (sworn statements by 2
defendants, alleged group members, that the members "never 'agreed' 3
among themselves to acquire [the] stock" are insufficient to support 4
the granting of summary judgment in favor of the defendants where 5
there is circumstantial evidence from which "a reasonable trier of 6
fact could discredit the . . . sworn statements and infer instead 7
that" the defendants entered into an agreement with one another, 8
"with an agreed purpose to acquire [the] stock"). 9
B. Rule 12(b)(6) 10
In considering a motion under Fed. R. Civ. P. 12(b)(6) to 11
dismiss a complaint for failure to state a claim on which relief can 12
be granted, the district court is normally required to look only to 13
the allegations on the face of the complaint. If, on such a motion, 14
"matters outside the pleading are presented to and not excluded by 15
the court," the court should normally treat the motion as one for 16
summary judgment pursuant to Fed. R. Civ. P. 56. Fed. R. Civ. P. 17
12(b); see, e.g., Global Network Communications, Inc. v. City of New 18
York, 458 F.3d 150, 154-55 (2d Cir. 2006) ("Global"). In any event, 19
a ruling on a motion for dismissal pursuant to Rule 12(b)(6) is not 20
an occasion for the court to make findings of fact. See, e.g., 21
Leonard F. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d 22
Cir. 1999). 23
In certain circumstances, the court may permissibly 24
consider documents other than the complaint in ruling on a motion 25
under Rule 12(b)(6). Documents that are attached to the complaint 26

-- 18 of 36 --

- 19-
or incorporated in it by reference are deemed part of the pleading 1
and may be considered. See, e.g., Pani v. Empire Blue Cross Blue 2
Shield, 152 F.3d 67, 71 (2d Cir. 1998), cert. denied, 525 U.S. 1103 3
(1999). In addition, even if not attached or incorporated by 4
reference, a document "upon which [the complaint] solely relies and 5
which is integral to the complaint" may be considered by the court 6
in ruling on such a motion. Cortec Industries, Inc. v. Sum Holding 7
L.P., 949 F.2d 42, 47 (2d Cir. 1991) ("Cortec") (emphases added), 8
cert. denied, 503 U.S. 960 (1992); see, e.g., Global, 458 F.3d at 9
156. 10
This principle has its greatest applicability in cases 11
alleging fraud. See, e.g., Cortec, 949 F.2d at 47-48; Kramer v. 12
Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) ("Kramer"). When 13
a complaint alleges, for example, that a document filed with the SEC 14
failed to disclose certain facts, it is appropriate for the court, 15
in considering a Rule 12(b)(6) motion, to examine the document to 16
see whether or not those facts were disclosed. See, e.g., id. Or 17
when the complaint alleges that such a document made a particular 18
representation, the court may properly look at the document to see 19
whether that representation was made. See, e.g., id. at 775. 20
Consideration of such documents filed with the SEC is appropriate 21
with respect to a nondisclosure or misrepresentation claim because 22
"no serious question as to their authenticity can exist," and 23
because the court is to consider them on a Rule 12(b)(6) motion 24
"only to determine what the documents stated," and "not to prove the 25
truth of their contents." Kramer, 937 F.2d at 774 (emphases added). 26
Similarly, where public records that are integral to a 27

-- 19 of 36 --

- 20-
fraud complaint are not attached to it, the court, in considering a 1
Rule 12(b)(6) motion, is permitted to take judicial notice of those 2
records. See, e.g., id.; Brass v. American Film Technologies, Inc., 3
987 F.2d 142, 150 (2d Cir. 1993). If the court takes judicial 4
notice, it does so in order "to determine what statements [they] 5
contained"--but "again not for the truth of the matters asserted." 6
Kramer, 937 F.2d at 774 (emphases added); see, e.g., Liberty Mutual 7
Insurance Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d 8
Cir. 1992). 9
A decision that a complaint fails to state a claim on 10
which relief can be granted is a ruling of law, see, e.g., De Jesus 11
v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir.), cert. denied, 519 12
U.S. 1007 (1996); McCall v. Pataki, 232 F.3d 321, 322 (2d Cir. 13
2000), and we review such a decision de novo, see, e.g., Gregory v. 14
Daly, 243 F.3d 687, 691 (2d Cir. 2001). In our review, we, like the 15
district court, "must accept as true all of the factual allegations 16
set out in plaintiff's complaint, draw inferences from those 17
allegations in the light most favorable to plaintiff, and construe 18
the complaint liberally." Id. (internal quotation marks omitted). 19
And whatever documents may properly be considered in connection with 20
the Rule 12(b)(6) motion, the bottom-line principle is that "once a 21
claim has been stated adequately, it may be supported by showing any 22
set of facts consistent with the allegations in the complaint." 23
Bell Atlantic Corp. v. Twombly, 2007 WL 1461066, at *11 (U.S. May 24
21, 2007) ("Twombly"). 25

-- 20 of 36 --

- 21-
C. The Claim Against Jennings 1
1. Sufficiency of the Allegation of "Group" Action 2
Because Jennings apparently owned no MMI stock just prior 3
to the May 2003 purchases he made with the loan from EMR, he was not 4
a statutory insider to whom § 16 applied unless he and EMR--which 5
already owned 14.8 percent--acted as a group for the purpose of 6
Jennings's acquisition, holding, or disposition of MMI shares. The 7
district court, in ruling that the complaint did not sufficiently 8
allege that EMR and Jennings had acted as a group, did not properly 9
apply the above principles. 10
The district court correctly noted that SEC filings may 11
properly be considered in ruling on a Rule 12(b)(6) motion to 12
dismiss a complaint alleging claims of fraud. But this is not a 13
fraud case. It is, rather, a § 16(b) action seeking the 14
disgorgement of short-swing profits, for which an insider is to be 15
held strictly liable. Defendants' submissions of their Schedule 13D 16
filings thus presented material that was inappropriate for 17
consideration on Rule 12(b)(6) motions to dismiss a § 16(b) 18
complaint that contained no allegation of a failure to disclose or 19
of a factual misrepresentation. 20
Further, even if there had been allegations of fraud, 21
defendants' SEC filings could not properly be considered for the 22
truth of their contents. The district court's view that "the 23
Defendants' statements, which have been submitted to a government 24
agency and made public, should not be contradicted or taken as 25
perjurious simply because the Plaintiff, without evidence, says they 26
are," District Court Opinion, 2006 WL 278135, at *5--although a 27

-- 21 of 36 --

- 22-
possible argument to a jury--was not an appropriate rationale for 1
ruling on a motion under Rule 12(b)(6). 2
The cases cited by the district court for the proposition 3
that "if a plaintiff's allegations are contradicted by a document 4
considered in determining a Rule 12(b)(6) motion, those allegations 5
are insufficient to defeat the motion," id. (citing Matusovsky v. 6
Merrill Lynch, 186 F.Supp.2d 397, 400 (S.D.N.Y. 2002)) (emphases 7
ours), i.e., that "when documents contain statements that contradict 8
the allegations in the complaint, the documents control and the 9
court need not accept as true the allegations contained in the 10
complaint," District Court Opinion, 2006 WL 278135, at *5 (citing 11
Rapoport v. Asia Electronics Holding Co., 88 F.Supp.2d 179, 184 12
(S.D.N.Y. 2000)) (emphasis ours), are not applicable to the present 13
case. Matusovsky was a case in which the plaintiff claimed that a 14
general release he had signed was without consideration, whereas the 15
signed release itself recited the consideration he received; and the 16
cited discussion in Rapoport concerned a fraud claim alleging that 17
a prospectus failed to disclose certain facts. These cases fall 18
squarely within the principle that the contents of the document are 19
controlling where a plaintiff has alleged that the document 20
contains, or does not contain, certain statements. As we noted in 21
Kramer, however, such documents may properly be considered only for 22
"what" they contain, "not to prove the truth" of their contents. 23
In the present case, the gravamen of the complaint was 24
simply that defendants were subject to strict liability for 25
Jennings's profits on his short-swing transactions as members of a 26
group that owned more than 10 percent of MMI's shares. The district 27

-- 22 of 36 --

- 23-
court's ruling that the complaint failed to state a claim that EMR 1
and Jennings constituted a group because of defendants' 2
"disclaimer[s] of group status" in their Schedule 13D filings with 3
the SEC, District Court Opinion, 2006 WL 278135, at *5, was flawed 4
for several reasons. First, it improperly considered the 5
representations in defendants' filings for the truth of their 6
assertions that there were no current agreements or understandings 7
between Jennings and EMR as to how Jennings would vote or dispose of 8
his shares in the future. Even assuming that those factual 9
assertions were relevant, they raised issues of fact that should not 10
have been determined at the pleading stage. 11
Second, the court apparently assumed that defendants' 12
representations, which used the present tense as to their current 13
understandings with respect to Jennings's future obligations, also 14
meant that they had had no past understanding, when EMR made the 15
loan to Jennings, that the purpose of the loan was to fund his 16
purchase of MMI shares. The Schedule 13D filings did not, however, 17
actually state that there had not been such an agreement with regard 18
to Jennings's acquisition of the shares. For example, EMR's June 9 19
Schedule 13D acknowledged that Jennings had used the loan to fund 20
his May 29-30 purchases of MMI shares and stated that EMR "has" no 21
understanding with respect to the MMI shares "owned" by Jennings. 22
Jennings's June 9 Schedule 13D made similar use of the present 23
tense, stating there "are" no agreements as to how he would use the 24
proceeds of the EMR loan. Thus, even if it had been appropriate to 25
consider defendants' SEC filings for the truth of their assertions, 26
their representations would not have warranted rulings in their 27

-- 23 of 36 --

- 24-
favor, for they did not actually assert that EMR had not agreed to 1
make the loan to Jennings for the purpose of the MMI stock 2
acquisition. 3
Third, in disclaiming "group" status, defendants were in 4
effect attempting to disclaim the legal effects of their conduct. 5
The district court's acceptance of and reliance on defendants' 6
"express[] state[ment]s that Jennings and EMR are in no way, either 7
by the loan of June 9, 2003 or at any time in the future, to be 8
considered a 'group,'" as a disclaimer that was "control[ling]," 9
District Court Opinion, 2006 WL 278135, at *5, gave no recognition 10
to the terms of § 13(d)(3) and Rule 13d-5(b)(1). If in fact EMR and 11
Jennings acted together for the purpose of Jennings's acquiring MMI 12
shares, EMR and Jennings "thereby," under those provisions of law, 13
"formed" a "group," regardless of their attempted disclaimers of the 14
legal effect of such joint action. 15
Finally, looking at the "group" allegations in the 16
complaint, i.e., that EMR's loan to Jennings was made for the 17
purpose of allowing him to buy MMI shares in furtherance of an EMR- 18
Jennings agreement "to work together to effect a change of control 19
or similar transaction involving MMI" (Complaint ¶ 8), and at the 20
documents to which the complaint referred, we cannot agree with the 21
district court's view that the "group" allegations were "unmitigated 22
speculation" or "unadorned" allegations made "without evidence," 23
District Court Opinion, 2006 WL 278135, at *5 (internal quotation 24
marks omitted). Leaving aside the principle that "[t]he pleading of 25
additional evidence," beyond what is required to enable the 26
defendant to respond, "is not only unnecessary, but in contravention 27

-- 24 of 36 --

- 25-
of proper pleading procedure," Geisler v. Petrocelli, 616 F.2d 636, 1
640 (2d Cir. 1980); see, e.g., 2A Moore's Federal Practice -- Civil 2
§ 8.04[1][b][5] (3d ed. 2007), the complaint's allegation of 3
collaboration between EMR and Jennings was hardly "unadorned" or an 4
"unmitigated speculation." That allegation was accompanied by other 5
allegations, and by references to defendants' respective June 2003 6
Schedule 13D filings, that included the following: 7
- On May 21, 2003, EMR completed its accumulation of 8
1,503,100 shares of MMI's stock, or 14.8 percent of the 9
outstanding shares (see Complaint ¶ 13; EMR Schedule 13D 10
dated June 2, 2003, at 2, 5). 11
- In connection with its May 2003 purchases, EMR stated 12
that it might "seek to change or influence control of" MMI 13
by, inter alia, "waging a proxy contest for control of the 14
Company" (EMR Schedule 13D dated June 2, 2003, at 4). 15
- On May 29 and 30, 2003, Jennings, in open-market 16
purchases, acquired 842,000 shares of MMI's stock (see 17
Complaint ¶ 9), which constituted 8.3 percent of MMI's 18
stock (see Jennings Schedule 13D dated June 9, 2003, at 19
2). 20
- Jennings paid for his May 29-30 purchases with a 21
$10 million loan from EMR (see Complaint ¶ 8). 22
- The rate of interest on EMR's loan to Jennings, 23
according to the Loan Agreement, was 4 percent per annum 24
(which we judicially notice was below the then-current 25
prime rate, see, e.g., Wall Street Journal, Nov. 8, 2002, 26
at C12 (prime rate 4.25%); id. June 27, 2003, at C11, and 27
June 30, 2003, at C15 (prime rate cut from 4.25% to 4.00% 28
effective June 27, 2003)). 29
- EMR's $10 million loan to Jennings was unsecured (see 30
Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR 31
Schedule 13D dated June 9, 2003, Exhibit I). 32
Although we do not suggest that Roth was required to 33
adduce such evidence at the pleading stage, see, e.g., Twombly, 2007 34
WL 1461066, at *8 ("a complaint attacked by a Rule 12(b)(6) motion 35
to dismiss does not need detailed factual allegations"), we note 36

-- 25 of 36 --

- 26-
that on this record, no rational factfinder would be compelled to 1
believe that EMR and Jennings had had no agreement with respect to 2
Jennings's acquisition of his shares. Given evidence that EMR 3
acquired a 14.8 percent stake in MMI and stated that it might 4
attempt to gain control of MMI, that within days of its acquisition 5
of that 14.8 percent EMR made a cheap and unsecured loan of 6
$10 million to Jennings, that Jennings was MMI's former chairman and 7
CEO, and that Jennings used the EMR loan to acquire 8.3 percent of 8
MMI's stock, a rational factfinder could instead easily infer that 9
EMR and Jennings acted together for the purpose of Jennings's 10
purchase of shares in MMI. And upon such a finding, § 13(d)(3) and 11
Rule 13d-5(b)(1) would require that EMR and Jennings be treated as 12
a group, with each being deemed to own the total of their holdings 13
of MMI stock. 14
In sum, the district court erred in accepting defendants' 15
SEC filings for the truth of their contents, in inferring that those 16
contents were sufficient and controlling, and in concluding that the 17
complaint itself did not allege facts sufficient to show that EMR 18
and Jennings constituted a group, within the meaning of the Exchange 19
Act, for the purpose of having Jennings purchase shares of MMI. 20
2. The Duration of the Group 21
The remaining question is whether the complaint was 22
nonetheless properly dismissed on the ground that § 16(b) was 23
inapplicable because EMR and Jennings were no longer a "group"--on 24
the theory that their interests had diverged--when Jennings sold his 25
shares. The district court answered this question in the 26

-- 26 of 36 --

- 27-
affirmative. Because the final sentence of § 16(b) states that 1
[t]his subsection shall not be construed to cover 2
any transaction where such beneficial owner was not 3
such both at the time of the purchase and sale, or 4
the sale and purchase, of the security, 5
15 U.S.C. § 78p(b) (the "exemptive provision"), the court reasoned 6
that two or more persons are not to be considered a group unless 7
they pursued a common purpose in selling the issuer's stock, see 8
District Court Opinion, 2006 WL 278135, at *5-*6. In light of the 9
language of § 13(d)(3) and Rule 13d-5(b)(1), and the purpose of 10
§ 16(b), we disagree with this interpretation. 11
As discussed in Part II.A. above, the stated purpose of 12
§ 16(b) is "preventing the unfair use of information which may have 13
been obtained by [an insider] by reason of his relationship to the 14
issuer," 15 U.S.C. § 78p(b). Section 16(b) itself contains no 15
provision as to who is an insider. The provisions delineating who 16
is an insider by reason of size of stock ownership are §§ 16(a) and 17
13(d) of the Act and SEC Rules 16a-1(a)(1) and 13d-5(b)(1). Thus, 18
§ 16(a) of the Act deems insiders to include any person who is 19
directly or indirectly the beneficial owner of more than 10 percent 20
of any class of the issuer's stock. SEC Rule 16a-1(a)(1) provides 21
that more-than-10-percent owners include any person who is deemed a 22
beneficial owner of more than 10 percent by reason of § 13(d) of the 23
Act and the rules thereunder. And § 13(d)(3) and Rule 13d-5(b)(1) 24
provide that if any two or more persons act together for the purpose 25
of acquiring, holding, or disposing of shares of an issuer, each 26
actor is deemed to be the beneficial owner of the total number of 27
shares owned by all of them. 28

-- 27 of 36 --

- 28-
The disgorgement provision of § 16(b) simply dictates the 1
consequences when an insider profits from short-swing transactions. 2
However, because § 16(b) "was designed to prevent a corporate 3
director or officer or the beneficial owner of more than 10 per 4
cent[] of a corporation from profiteering through short-swing 5
securities transactions on the basis of inside information," 6
Foremost-McKesson, 423 U.S. at 234 (internal quotation marks and 7
footnote omitted), the exemptive provision was needed to be sure 8
that a person who was an insider solely by reason of his beneficial 9
ownership of more than 10 percent of the issuer's stock would be 10
held strictly liable for short-swing profits only if he was an 11
insider at the time of both his purchase and his sale (or sale and 12
repurchase). If he was not an insider at both of those times, there 13
is no presumption that he was privy to inside information at both 14
times. Accordingly, the exemptive provision means that "in a 15
purchase-sale sequence, a beneficial owner must account for profits 16
only if he was a beneficial owner [of more than 10 percent] before 17
the purchase," id. at 250 (internal quotation marks omitted); and it 18
means that a sale made after a former beneficial owner of more than 19
10 percent has already reduced his holdings to 10 percent or below 20
is exempted from § 16(b) by the phrase "at the time of . . . sale," 21
Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 419-20 22
(1972). The exemptive provision in § 16(b) does not purport to 23
define insider status; it merely says that, for the disgorgement 24
provision to apply, the short-swing trader must have insider status 25
"at the time of" both of his transactions. 26
Under § 13(d)(3) and Rule 13d-5(b)(1), which delineate the 27

-- 28 of 36 --

- 29-
insider status of joint actors, if two or more persons act together 1
for the purpose of acquiring, holding, "or" disposing of shares of 2
an issuer, they are deemed a group, and each is deemed the 3
beneficial owner of all the shares beneficially owned by all of the 4
collaborators. Because the statute and the Rule list those purposes 5
in the disjunctive, a group is formed as a matter of law if those 6
persons act for any one of the listed purposes. 7
The district court thus erred in holding that "for traders 8
to constitute a 'group', the Exchange Act requires that their 9
coordinated activity persist during the time of purchase and during 10
the time of sale of the securities," District Court Opinion, 2006 WL 11
278135, at *6 (emphasis in original). That ruling gave a 12
conjunctive reading to provisions that are disjunctive. 13
In sum, §§ 16 and 13(d) and the rules thereunder mean that 14
where, as alleged here, two persons acted together for the purpose 15
of acquiring the stock of an issuer, and collectively those persons 16
owned more than 10 percent of that stock both before any transaction 17
leading to a short-swing profit and at the time of the matching 18
short-swing transaction, the final sentence of § 16(b) provides them 19
no exemption. All of the joint actors in such circumstances are 20
deemed to be insiders and are presumed to have access to insider 21
information. 22
These provisions appropriately address the Congressional 23
concern that such short-swing sales may have been based on access to 24
inside information. In the present case, for example, evidence of 25
EMR's cheap, unsecured loan of $10 million to Jennings for his 26
purchase of MMI stock, following close on the heels of EMR's own 27

-- 29 of 36 --

- 30-
acquisition of a 14.8 percent stake in MMI, would, as discussed 1
above, permit an inference that EMR and Jennings acted together in 2
order to allow Jennings to purchase his 842,000 shares in MMI, and 3
require the legal conclusion that EMR and Jennings were thereby a 4
group. Thus, both EMR itself, which owned 14.8 percent of MMI's 5
stock, and Jennings as its collaborator would be presumed to have 6
access to inside information. Jennings's decision to sell the 7
majority of his shares on the open market could well have been based 8
on inside information. For example, in May, EMR had purchased its 9
14.8 percent stake in MMI at prices below $11 a share (see EMR 10
Schedule 13D dated June 2, 2003, at 5), and it disclosed that it 11
might seek control of MMI through, inter alia, additional open- 12
market purchases or a tender offer (see id. at 4). By mid-July, the 13
market price of MMI shares had risen to more than $19 a share. (See 14
Jennings Schedule 13D dated July 18, 2003, at 5.) However, "[o]n 15
September 8, 2003 EMR and MMI signed a 'standstill agreement,'" 16
District Court Opinion, 2006 WL 278135, at *3, pursuant to which MMI 17
agreed to make certain information available to EMR and EMR agreed 18
that it would, inter alia, neither purchase nor "make any proposal 19
to acquire" any more MMI shares before June 15, 2004 (MMI Form 8-K 20
dated September 9, 2003, Exhibit 10.1, at 4). Prior to the public 21
announcement of this standstill agreement, Jennings sold thousands 22
of his MMI shares. A shareholder in his position could well have 23
reasoned that the imminent MMI-EMR agreement removing EMR as a 24
potential open-market buyer of, or a potential tender offeror for, 25
MMI shares for the better part of year made it attractive for him to 26
sell shares before the standstill agreement was made known to the 27

-- 30 of 36 --

- 31-
rest of the investing public. That type of trading on the basis of 1
advance information is the sort of conduct that Congress sought to 2
deter by enacting § 16(b) and making short-swing profits 3
automatically disgorgeable "without proof of actual abuse of insider 4
information, and without proof of intent to profit on the basis of 5
such information," Kern, 411 U.S. at 595. 6
Thus, taking the allegations of the present complaint as 7
true, we cannot agree with the district court's ruling that, as a 8
matter of law, § 16(b) permits an insider--here, the owner of 14.8 9
percent of an issuer's stock--to fund the purchase of up to 10 10
percent more of such stock by an ally, and permits the ally to make 11
profits on short-swing sales of those shares and not disgorge those 12
profits to the issuer. We conclude that the district court's ruling 13
is contrary to the language and intent of the Exchange Act. 14
Finally, even if we agreed with the district court's 15
interpretation of § 16(b) as inapplicable unless EMR and Jennings 16
were a "group" both at the time Jennings acquired his MMI shares and 17
at the time he sold, we would nonetheless be constrained to vacate 18
the dismissal of the claim against Jennings because the court, in 19
concluding that defendants were not a group at the time of those 20
sales, impermissibly made findings of fact. And, again without 21
suggesting that detailed factual allegations were required at the 22
pleading stage, we note that the present record would easily permit 23
a rational factfinder draw to factual inferences contrary to those 24
drawn by the court. 25
The district court's rationale for concluding that EMR and 26
Jennings were not a "group" at the time Jennings sold his shares on 27

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- 32-
the open market was that EMR had offered on August 12, 2003, to buy 1
826,000 shares of MMI stock from Jennings, and that Jennings 2
rejected that offer and instead sold 602,900 shares on the open 3
market. The court found that if Jennings and EMR "held a common 4
purpose," Jennings "likely" would have accepted EMR's offer to 5
purchase his shares, and that "Jennings' refusal of EMR's offer 6
contradicted precisely what one would have expected of him had he 7
been acting in concert with EMR," District Court Opinion, 2006 WL 8
278135, at *5 (emphases added). What Jennings's purposes had been, 9
what he was "likely" to have done, and what decisions he "would have 10
[been] expected" to make, are questions of fact as to which the 11
court should not have made findings in making its legal ruling on 12
whether Roth had pleaded a claim that could entitle him to relief. 13
Moreover, the district court's assessment of the 14
"likel[ihood]" that Jennings's interests and those of EMR were no 15
longer aligned does not appear to take into account facts indicated 16
by the record, even as it exists at this stage. For example, in 17
inferring that Jennings was no longer interested in the control of 18
MMI, the court does not appear to have taken into account the fact 19
that the Schedule 13D filed by Jennings with respect to his sale of 20
602,900 shares through September 9, 2003, stated that, after those 21
sales, Jennings still owned 423,100 shares of MMI's outstanding 22
stock (see Jennings Schedule 13D dated September 10, 2003, at 3)--a 23
statement forcing the mathematical inference that Jennings had 24
acquired additional shares of MMI after his initial purchase of 25
842,000 shares in May and before his sale of 602,900 shares. 26
Accordingly, the record showed that despite selling most of the 27

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- 33-
shares he had bought in May, Jennings remained the owner of a 1
substantial block of MMI stock--approximately 4 percent. (See id.) 2
Thus, despite the district court's surmise, Roth may well be able to 3
prove that Jennings continued to have a control-seeking interest 4
aligned with that of EMR. 5
Further, although the district court mentioned that the 6
price at which EMR offered to buy "826,000 of the [MMI] shares" then 7
owned by Jennings (EMR Schedule 13D dated August 12, 2003, Exhibit 8
1), was below the then-market price, the court did not quantify the 9
disparity. EMR offered to buy those shares for $13.50 a share. 10
(See id.) However, in the weeks before and after EMR's offer, MMI 11
shares sold on the open market for more than $18 a share. (See 12
Jennings Schedule 13D filings dated July 18, 2003, at 5, and 13
September 10, 2003, at 6.) We cannot uphold the ruling that the 14
complaint was legally insufficient on the basis of the court's 15
theory that, had EMR and Jennings had a common purpose, Jennings 16
would "likely" have sold 826,000 shares to EMR for $13.50 a share, 17
thereby forgoing an additional profit of more than $4.50 per 18
share--a total of more than $3.7 million. 19
Indeed, the fact that EMR's offering price was so much 20
lower than the market price could allow Roth to prove that 21
Jennings's decision to reject EMR's offer and instead make open- 22
market sales bespoke his continued interest, rather than a loss of 23
interest, in achieving control of MMI. Attachments to the Schedule 24
13D filings suggest that Jennings needed to sell at least some of 25
his MMI shares in order to repay the loan given him by EMR. Yet, as 26
a matter of common sense, it seems likely that the more MMI stock 27

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Jennings owned, the greater his chances of sharing in MMI's control. 1
The total price that EMR offered for 826,000 shares, at $13.50 per 2
share, was little more than the gross amount that Jennings received, 3
according to his September 10, 2003 Schedule 13D, for selling just 4
602,900 shares on the open market. Thus, by selling 602,900 shares 5
on the open market, Jennings grossed roughly the same amount of 6
money, but he was able to keep 223,100 shares of MMI stock, or more 7
than 2 percent of its outstanding shares, that he otherwise would 8
have lost. The district court's inference that Jennings's sale of 9
826,000 shares to EMR was "what one would have expected" if Jennings 10
wished to share in the control of MMI was thus questionable and 11
certainly was not a proper basis for a Rule 12(b)(6) dismissal. 12
In sum, even if the disgorgement provision of § 16(b) were 13
inapplicable unless EMR and Jennings had a common purpose at the 14
time Jennings sold his shares, the complaint should not have been 15
dismissed on the premise that Roth could not show such a purpose. 16
D. The Claim Against EMR 17
The district court dismissed Roth's claim against EMR on 18
the alternative ground that the complaint did not allege either that 19
EMR had engaged in any short-swing transactions in MMI securities or 20
that EMR had received, directly or indirectly, any profit from the 21
sale of Jennings's shares. Roth contends that the district court 22
also erred in dismissing his claim against EMR on this ground. We 23
disagree. 24
Section 16(b) requires an insider to disgorge "'any profit 25
realized by him' from short-swing transactions." Blau v. Lehman, 26

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368 U.S. 403, 414 (1962) (quoting § 16(b)) (emphasis in Blau). Roth 1
"concedes that the complaint does not specifically allege that EMR 2
has a pecuniary interest in any of Jennings' profits" (Roth reply 3
brief on appeal at 10); but he argues that the "highly unusual 4
transaction by which EMR financed Jennings' trades in MM[I] stock, 5
followed by a merger offer, certainly gives rise to a presumption 6
that EMR derived some pecuniary benefit from Jennings' purchases and 7
sales" (Roth brief on appeal at 28 (emphasis added)). It may well 8
be that EMR improved its prospects for an eventual merger by funding 9
Jennings's purchases of MMI shares. But what is required for the 10
imposition of strict liability on EMR is that EMR itself have 11
realized profits from short-swing transactions. No such 12
"presumption" (id.) arises from EMR's loan to Jennings; and no such 13
allegation appears in the complaint. The complaint's assertion that 14
"[e]ach member of the Group is liable to the extent of its [sic] 15
pecuniary [interest] in the foregoing disgorgeable profits" 16
(Complaint ¶ 18 (emphasis added)) does not constitute an allegation 17
that EMR in fact realized any such profits. 18
Nor does Roth suggest that he should have been given leave 19
to file an amended complaint in order to allege that EMR shared in 20
Jennings's short-swing profits. Rather, urging that he should have 21
been given an opportunity for discovery (Roth brief on appeal at 22
28), Roth asks, "Is it not possible, maybe even probable, that there 23
was some understanding between Jennings and EMR that was not 24
revealed in the SEC filings?" (Roth reply brief on appeal at 11 25
(emphases added)). This is a far cry from any suggestion that Roth 26
would be able to file a pleading consistent with the Rule 11 27

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requirement that a complaint's factual assertions "have evidentiary 1
support or, if specifically so identified, are likely to have 2
evidentiary support after a reasonable opportunity for further 3
investigation or discovery," Fed. R. Civ. P. 11(b)(3) (emphasis 4
added). 5
"[W]hen the allegations in a complaint, however true, 6
could not raise a claim of entitlement to relief, this basic 7
deficiency should . . . be exposed at the point of minimum 8
expenditure of time and money by the parties and the court." 9
Twombly, 2007 WL 1461066, at *9 (internal quotation marks omitted). 10
The allegations of Roth's complaint, taken as true, show no basis 11
for entitlement to relief against EMR. 12
CONCLUSION 13
We have considered all of the parties' contentions on this 14
appeal and, except as indicated above, have found them to be without 15
merit. So much of the judgment as dismissed the complaint against 16
EMR is affirmed. So much of the judgment as dismissed the complaint 17
against Jennings is vacated, and the matter is remanded for further 18
proceedings with respect to the claim against him. 19

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