simple set of facts investment advisors who were controlling insiders under section sixty and required to avoid shorts when trading engaged in shorts from trading as managers of their client accounts although there is an exemption provided for invest advisors who manage client accounts the exemption specifically applies only to passive investment visors who do not trade their accounts for the purpose or with the effect of controlling a company these investment advisors filed thirteen the reports as required announcing their control purpose and acknowledged that their trading of the securities in these managed accounts was not exempt in this situation the profits realized in the client accounts should be dischord there are three reasons for this first the advisors and their clients were members of a thirteen d group the clients were in a group of their advisors because their investment management agreements gave the advisors complete discretionary trading authority over their accounts any time the investment advisor be close to ten percent then everybody every client then is part of a group by virtue of an open ended investment agreement not at all your honor only if there was a control purpose so in the normal course when there is no advisors had the control purpose but as in other cases this court has ruled on even if the advisor has to control purpose and the people who give the authority to the advisor just trust the advisors judgment this court is held back in wellman versus the motives of the parties for entering the agreement was related to an entirely different issue and that was still constituted a group and there are also situations where the court has emphasized that the you cannot have to be specific to a particular transaction for example that the transaction that triggers the reporting and or doesn't have to be specific to a particular control purpose that the  or so respectfully i would suggest that the way that they narrowly construed that phrase is contrary so i think what that means is that when an agreement covers a threshold amount of securities then a issuer specific thirteen days filed i mean thirteen d is always really specifically to one issue or so when the group reporting is triggered under thirteen d which in these cases these cases both defendants so in the normal course again the discretionary accounts of being exempt even if the manager has more than ten percent it's a manager's purpose is passive which the rule provided the exemption contemplates that in the ordinary course of business investment pfizer purpose will be passive and will not be trying to take over a company when the investor announced when the advisor i'm sorry announces that they are being managed with the purpose of taking over the counter to of taking over a company then those securities in the again then you're saying there was an agreement even before they settled on an issue that's correct there was agreement when you gave discretionary investment authority that there is an agreement but you do want to invest in trade there securities that are in the client right so there is a common goal which is the common goal is to trade and vote and or vote all of the securities in the client's account for the benefit of them both if the client's account of the investment in the client's account improved both the advisor and the client section sixteen issues or section thirteen issues because that would be exempt because in the ordinary course investment pfizer act in a passive capacity what the exemption provides is that when an investment dies or not only is an advisor but is also an actual ins have and use it to trade securities including securities in the client accounts there's no reason the best advisor who is not supposed to trade client accounts in violation of the statute should be able to do it as long as they don't make a profit because the profit is the only way that the covered by their investor management agreement right that for the voting and trading of any issue or not account is that the advisor has a right to vote in trade those securities because of the investment management agreement again normally that's exemplars no issues when the advisor adopts the control purpose as i was saying even in this case these advisors say that thirteen d was triggered when they adopted a control purpose because that thirteen d will requires them to file the th deed with respect to this issue or even though the idiom is just discretionary something like that and they normally have no control purpose i mean like normally advisors the rule is correct that in the ordinary course investment funds are typically does not engage in takeover effort so i'm sitting in sun valley  not time to begin with so the advisors account there's no like if we could visors account starts with a fifty dollars balance there's still fifty dollars in the account after the profits are discoursed there's just not picky two dollars there's not the two dollars profit that was made during those six months so the client managed to count as iran or who may be completely unconnected and in this case is completely unconnected to the investment advisor has no idea of what the  is doing can become part of a group and subject to the draconian remedies of section sixteen b by entering into a generic investment advisory agreement you had all these facts here but in addition there's an allegation to complaint that that client a had a conversation with the investment advisor where they discussed investment advisors interest to be in control and this is the issue or that would be different if if they're aware of it it's not just a generic agreement there where they have a conversation about the investment strategies and the investment advisors so if if they were aware of and i agreed to a control purpose with regard to a complaint has to state facts that raise a plausible inference that one or more of the two or more persons agreed to act together and connection with an issue or and if so each of the members of that group are then deemed to beneficially own the securities of quote that issue so the rule is clearly phrased in terms of a specific issue and without any in this case there is no allegation that there was any agreement written or oral with respect to the variety there is no allegation that there was even a communication between the managed account which is an affiliated with view that related in any way to the process and there's no allegation that the managed account was even aware that there were purchases of device stock in his or her account or that there was any control purpose with regard to the fraud and that the courts that have reviewed situations like this have consistently h that the mere fact that that a customer an unaffiliated customer entered into an investment agreement with an investment advisor which didn't relate to any issue or does not thereby become part of a group and the reason for that is is clear it is inconsistent with the words of the statute and the rule implementing it it would create a hugely expanded scope of liability under section sixteen b and as we've said in our brief the supreme court has cautioned that the the terms of section section sixteen b should be implemented literally according t and the court should be reluctant to expand the scope of that liability because it is a no fault to conan remedy and in this case there is no allegation that the managed account became part of a group   no basis for finding that that he or she did become part of a group and on that basis there is no basis for liability to stab makes arguments that i characterize this policy arguments that this is sort of a loophole this would allow investment advisors to trade on inside information with no consequences what's the response to that my response to that is that the congress and the  stated what the rule is and if the congress and the f c c view this as a loophole they can change the statute or they can or the f c c can change the regulation but today the congress and the c have stated that unless you agree to act together on a common objective you cannot be part of a group i suppose it wouldn't absolve you from criminal prosecution for insider trading if that's what was going on absolutely right we're just talking about discouragement we're just talking about this gorge when it's a it's a statutory remedy that applies and strictly defined circumstances and it doesn't apply here thank you may it please the court mark highland for the birch defendants your honor you raise the hypothetical of a manager having a conversation with a customer about a particular security and whether that is  fact that could bring this into the realm of the manage the count being in a group i would say that is not a close question it would not be it would not be the agreements that at hand here are managed to count agreements separately negotiated with each to manage account member or discretion is given entirely to the investment advisors when that hypothetical which we don't have here anyway i just want to be clear the  w would be no you need much more than that you would need an actual agreement by each group member really to work towards a common purpose control for example with respect to a particular issue  so i think you need a lot more and i think the celli case of course iran is very familiar with that and i think that would have it that would be closer to a a group theory being recognized  the case we have here in the case we have here i don't think this is this is even close in my case the birch defendants are independent separately negotiated managed accounts investment advisors not even defend the case that's been visors that was that was dismissed out of this case and there is no allegation none whatsoever that there was any sort of active activity on the part of  that counts soley by reason of the investment agreement the manager count agreement the argument is that they became group members when the investment advisor identified a possible control purpose getting there i think that the it it's clear that there is no support in the rule for that but i do want to address the newly advanced agency theory of the plant that has raised that appeal well there's an agency theory what you're doing here is you're ceding to an agent authority to act on your behalf and therefore you should become part of a group a common law agency theory and no way can trump an actual rule promulgated by the f c c the industry's primary regulator and that rule says that rule was what you have to be as an agent i would say so that rule says no you have to have an agreement to pursue a common objective of a particular issue or any cases say particular issue or and that is that and that is the law no and your honor to your question on whether or not this would create a loophole for ten five indeed it wouldn't an investment advisor is always subject to rule ten b five violations civil or criminal what they're the evil of the section sixteen a suggestion of that here  of course not of course not the the evil that the rule is designed to address is make sure that investment advisor discloses when he's got ten percent or more than ten percent that he is has voting power over that investment advisor has to file a thirteen the and disclose that ok so now the evil is is because been eradicated there's disclosure this person's out there he's made this closer and now he could become you know sort of a target right that's the purpose of ten b five still applies but because he files us or she files a section thirteen d stating we have voting power of more than ten percent that goes to the investment advisors issue not the group you need an agreement by the group and keep in mind we're not dealing with a fund here that presents a much more thorny issue some of those other cases have an investment advisor who is a general partner of a limited partnership where the limited partners are the investors there you're dealing with one entity one single entity so you're trading your own securities that's a much closer question that's not before this court before this court is whether or not you've got a group where you've got passive investors out there as judge parker i thought a very persuasively noted in his hypothetical who could  retirees sitting on the beach subject to this type of discouragement liability which could be pretty draconian and that's not the purpose of the ruling if it was the f c c would be all over it they'd be all over it and they'd never taken that position in terms strict liability and in cases like this a mechanical literal reading of the rule is required ice respectfully submit you cannot read a policy argument minutes your honor my adversaries aren't mentioned the fact that their investment advisor exemption specifically exams security is only on these conditions and so the fact that the investment advisor exists in my view shows that without the investment visor all of the best advisors securities are treated by the advisor would be subject to the statute and generally for policy reasons when an insider is subject to section sixteen that applies to all the shares traded by the insider for the simple reason again that an insider shouldn't be able to do for other people what the insider can do for himself so the insiders trading on those people are also insiders and that's how that's the nd sixteen rule incorporates group principles in the st place to make sure that when an insider is working together with others that the others are not excluded from discouragement that it's not just a narrow focus on the insider specific  area interest but there's two criteria but official ownership that are taken into consideration which is are you sharing investment control and voting control and in this case the clients are sharing invested in voting in trial with their advisor by agreement that's procreates the group and then if so every person sharing voting investment control is independently required to discourse epicurean trust in the profits and that's how the the sort of broad they're calling it a blunt instrument but the policy is that even without insider knowledge even without showing that you have a you've done for me share that you did something wrong just for the purpose of keeping the markets honest insiders who have presumptive funds that are access which the clients have through the managers well if i mean i think it's not that that insane when you think about for example martha stewart or someplace like this where you have somebody who tell somebody in this case they're going to tell anybody because the agent has sixteen but actually it's our knowledge they decide to have insider access that agent the advisor has access because such authority there are ten percent owner they also as he disclosed are actively engaged in discussions with the board one of his advisors has an actual board appointee  they have insider access on equivocally and if they're trading their clients securities those clients are impugned with insider access because they're benefiting from edge the same extent as the advisors could be  that's correct but you also don't have to do anything to avoid liability all that has to happen is that your advisor has to know that they they're an insider with actual control they don't trade their managed accounts in a short spring period and if this court makes that rule clear they won't do it anymore and  won't be an issue because it's very easy to compose this watching trading room you put blackout periods on the stock and you don't when you buy you don't sell for six months when you sell you don't buy for six months there's no it's not complicated it's not like you can risk