1 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

1 

## In the 1 

# United States Court of Appeals 2 

## For the Second Circuit 3 4 5 August Term 201 9 6 7 No. 19

- 560

- cv 8 9 10 A ARON R UBENSTEIN , 11 Plaintiff

- Appellant , 12 13

v. 14 15 I NTERNATIONAL V ALUE A DVISERS , LLC, C HARLES DE V AULX , C HARLES DE 16 L ARDEMELLE , 17 Defendant s

- Appell ee s , 18 19 A DTALEM G LOBAL E DUCATION S ERVICES ( F / K / A D E V RY E DUCATION G ROUP , I NC

. ) , 20 Nominal Defendant

21 Appellee , 22 23 J OHN D OE , AN UNIDENTIFIED IVA CLIENT , 24 Defendant

. † 25 26 27 28 Appeal from the United States District Court 29 for the Southern District of New York 30 No. 18

- cv
- 81, 31 Paul A. Engelmayer, District Judge, Presiding. 32 (Argued October 23 , 2019 ; Decided May 2 0 , 2020) 33 34

† The Clerk of Court is directed to modify the caption to conform to the above.1 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

2 1 2 Before: KEARSE , PARKER, and SULLIVAN , Circuit Judges

. 3 4 Plaintiff

- Appellant Aaron Rubenstein appeals from an order of the United 5 States District Court for the Southern District of New York (Engelmayer, J. ) 6 dismissing his complaint under Section 16 (b) of the Securities Exchange Act for 7 failure to state a claim. We hold that a n investment management agreement 8 delegating discretionary investment authority to an investment advisor is not an 9 agreement to trade in the securities of an issuer and, therefore, is not a 10 standalone basis for membe rship in an insider group. Moreover, we hold that 11 such a n investment advisor’s client does not become an insider group member 12 simply because the advisor has filed a Schedule 13D or deputized a director on 13 an issuer’s board. Consequently, clients who have not entered an issuer

- specific 14 trading agreement are not liable for disgorgement of short

- swing profits solely 15 by virtue of their investment advi sor’s insider status. 16 17 AFFIRMED. 18 19 M IRIAM T AUBER ( David Lopez, Law 20 Office of David Lopez, Southampton , 21 NY, on the brief ), Miriam Tauber Law 22 PLLC , New York, NY, for Plaintiff

23 Appell ant

. 24 25 D ENNIS H ENRY T RACEY , III (Robin Muir, 26 on the brief ), Hogan Lovells US LLP, 27 New York, NY, for Defendants

- Appellees

. 28 29 S USAN S ALTZSTEIN , Skadden, Arps, 30 Slate, Meagher & Flom LLP, New York, 31 NY, for Nominal Defendant

- Appellee

. 32 331 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

3 BARRINGTON D. PARKER, Circuit Judge : 1

Plaintiff

- Appellant Aaron Rubenstein appeals f rom an order of the United 2

States District Court for the Southern District of New York (Engelmayer, J. ) 3
dismissing , under Rule 12(b) ( 6 ) , his complaint alleging violations of Section 16 (b) 4
of the Securities Exchange Act of 1934 (the “‘34 Act”)

. The issue presented is 5

whether a client of an investment advisor bec a me a member of a Section 13 (d) 6

group with his investment advisor and the advisor’s other clients merely because 7

he and the other clients had delegat ed discretionary investment authority to the 8

advisor and the advisor had purchased for the client’s account shares of the same 9

issuer that was the subject of the advisor’s Schedule 13D filing. We agree with 10

the court below that the client did not thereby become a member of a group and 11
that the client was not obliged to disgorge his short

- swing profits. A ccordingly, 12

we affirm the order of the district court

. 13

T o prevent insiders of a securities issuer from trading on material non

14
public information, Section 16 (b) of the Securities Exchange Act of 1934 imposes 15
strict liability on certain insiders of an issuer , requiring them to disgorge to the 16
issuer any profits they realize from short

- swing trading in the issuer’s securities. 17
As defined by Section 16(b), short

- swing trading is “any purchase and sale, or 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

4 any sale and purchase, of any equity security of such issuer . . . within any period 1
of less than six months . . . irrespective of any inten tion on the part of [the 2
insider].” 15 U.S.C. § 78p(b). Among the insiders subject to the rule are directors 3
and officers of the issuer, as well as “[e]very person who is directly or indirectly 4
the beneficial owner of more than 10 percent of any class of a ny equity security” 5

of the issuer. Id. 1 Section 16(b) is known as the “short

- swing profit rule.” 6

In addition to requiring individual statutory insiders to disgorge short

7
swing profits , the ’34 Act provides for “group” liability. Section 1 3(d)(3) provides 8

that “[w]hen two or more persons act as a

. . . group for the purpose of acquiring, 9
holding, or disposing of securities of an issuer , ” the group shall be deemed a 10

1 The definition of “beneficial owner” under the statute is somewhat involved. First, Section 13(d) defines a “beneficial owner” as “any person who . . . has or shares: (1) Voting power which includes the power to vote, or to direct the voting of, [a] secur ity; and/or, (2) Investment power which includes the power to dispose, or to direct the disposition of, [a] security.” 17 C.F.R. § 240.13d

- 3(a). With certain exceptions, this definition is employed to determine who qualifies as a statutory insider subject to the short

- swing profit rule. Id. § 240.16a

- 1(a)(1). Next, Section 16(b) narrows the class of transactions subject to the rule by defining “beneficial owner” as “any person who, directly or indirectly . . . has or shares a direct or indirect pecuniary in terest in the equity securities.” Id. § 240.16a

- 1(a)(2). A pecuniary interest is an “opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities,” id. § 240.16a

- 1(a)(2)(i), and may include a “p erformance

- related fee, other than an asset

- based fee, received by . . . [an] investment manager,” id. § 240.16a

1(a)(2)(ii) (C).1 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

5 ”person ” subject to Section 16 (b). Id. § 78m(d)(3 ). 2 A group is formed “[w]hen 1
two or more persons agree to act together for the purpose of acquiring, holding, 2
voting or disposing of equity securities of an issuer.” 17 C.F.R. § 2 40.13d

- 5(b)(1). 3
The group is then “deemed to have acquired beneficial ownership . . . of all 4
equity securities of that issuer beneficially owned by any [group members].” Id. 5
Consequently, if members of a group collectively hold more than 10% of any 6
class of equity securities of an issuer, each member of the group is subject to the 7

sho rt

- swing profit rule. See id. § 240.16a

- 1(a)(3). The dispositive issue on this 8
appeal is whether John Doe, an anonymous defendant , became a member of such 9

a group. 10

Defendant International Value Advisers (“IVA”) is an investment advisor 11
registered under Section 203 of the Investment Advis er s Act of 1940. Defendants 12
Charles de Vaulx and Charles de Lardemelle are the managing members of IVA , 13

as well as portfolio managers for IVA

- managed funds a nd separately managed 14

client accounts. Rubenstein holds shares in Ad Talem Global Education Services , 15
formerly known as DeVry Education Group ( “ DeVry ”)

. The “John Doe” 16

defendant is the owner of a brokerage trading account managed by IVA , and 17

2 S ee also 17 C.F.R. § 240.16a

- 1(a)(1) (applying the preceding definition, drawn from Section 13(d), for purposes of Section 16(b) liability).1 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

6 IVA exercises dis cretionary authority over t hat a ccount . That a cco unt holds 1
shares of DeVry selected and purchased for it by IVA acting as its investment 2

manager

. Although that account does not hold more than 10% of DeVry shares, 3
John Doe, the IVA defendants, and IVA’s other clients collectively owned 19.5% 4
of DeVry ’s outstanding common stock. 5

Between June and December 2016, the IVA defendants reported on 6
ownership reports filed un der Section 13 (d) and Section 16 (a) of the ’34 Act that 7
they beneficially owned , through their voting and investment power over their 8

advisee

- clients , more than 10% of DeVry’s outstanding common stock

. 9
Specifically, at various times in 2016, the IVA defendants filed Schedule 13D s 10

with the SEC indicating that, in accumulating their position in DeVry, they had 11
formed a “control purpose” with respect to DeVry and that they sought the 12
appointment of IVA’s managing partner to the DeVry board to represent t he 13

in vestment interest s of IVA and its clients who held DeVry shares. 14
No one disputes that , at this po int , the IVA defendants were subject to 15

Section 16 (b)’s short

- swing profit rule

. In July 2016 , IVA , as i nvestment m anage r 16

for John Doe’s a ccount , purchased 31,84 7 shares of DeVry and within six months 17
sold DeVry shares at a profit. If John Doe w ere a member of a group with the 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

7 IVA defendants and their other clients, he would have been a statutory insider 1
subject to the short

- swing profit rule because the IVA defendants were insiders 2

and their clients co llectively owned more than 10% of DeVry common stock . If 3
not, he would not have been subject to the rule. Accordingly, w hat the parties 4

contest is whether John Doe was a member of an insider group with IVA and its 5

clients and consequently obligated to return the short

- swing profits. 6

Rubenstein sued , alleging that John Doe was a member of a group with the 7

IVA defendants and IVA’s other clients

. He contended that John Doe’s 8
investment management agreement with IVA qualified as an agreement to trade 9

in the securities of an issuer under S ection 13(d). He further theorized that the 10

IVA defendants ’ filing of a Schedule 13D automatically caused John Doe to 11

become a member of a group by “ silent acquiescence

. ” In other words, 12

Rubenstein alleged that the filing of the Schedule 13D put an owner of DeVry 13

shares in a managed account (such as John Doe) on notice of the IVA defendants ’ 14
control purpose and that the owner thereby “agreed” to become part of the 15
group by failing to terminate the IVA defendants ’ control of the m anaged 16

a ccount. 171 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

8 Defendants moved to dismiss the complaint and the district court granted 1

the motion . The court observed that the touchstone of a group under Section 2

13 (d) is that its members combined in furtherance of a common objective

. The 3
court held that the complaint did not plausibly allege a common objective 4

between the IVA defendants, who had a control purpose , and J o hn Doe , whose 5
DeVry shares had been purchased for his account on a discretionary basis by his 6
investment manager. In other words, the court held that Rubenstein had not 7
plausibly pled the existence of a Section 13(d) agreement

. Rubenstein v. Int’l Value 8

Advisers, LLC , 363 F. Supp. 3d 379, 394

- 95 (S.D.N.Y. 2019). 9

The court further concluded that the applicable Section 1 3 (d) r ule , in 10
addition to requiring an agreement , required its members to have acted together 11
for the purpose of acquiring not just any security but the securities of “an issuer , ” 12
meaning a particular issuer

. Because the complaint did not plausibly allege that 13

this had occurred , the court determined that John Doe did not become a member 14
of a 13(d) g roup and could not be required to return his De Vry profits

. Id. at 392. 15
This appeal followed. “ We review a district court’s grant of a motion to 16
dismiss under Rule 12(b)(6) de novo .” Edwards v. Sequoia Fund, Inc. , 938 F.3d 8, 12 171 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

9 ( 2d Cir. 2019) ; s ee also Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. 1
Twombly , 550 U.S. 544 , 555

- 56 (2007 )

. 2

DISCUSSION 3
Resolution of this appeal turns on whether John Doe was a member of an 4
insider group. We hold that he was not. Our holding follows from the text and 5
structure of the ’34 Act and its implementing regulations, as well as the 6
legislative purpose behind the short

- swing profit rule. Moreover, we are 7
unmoved by Rubenstein’s arguments to the contrary, whi ch are based either on a 8
misunderstanding of certain regulatory exemptions or on erroneous legal 9
positions. 10

I. 11

A Section 13 (d) g roup is formed “[w]hen two or more persons agree to act 12
together for the purpose of acquiring, holding, voting or disposing of e quity 13

securities of an issuer.” 17 C.F.R. § 2 40.13d

- 5(b)(1). The group is then deemed to 14
have acq uired beneficial ownership of all equity securities of that is suer 15
beneficially owned by any group member s. If the group’s collective holdings 16

exceed 10% of any class of the issuer’s outstanding equity securities , then each 17

group member is subject to the short

- swing profit rule. Se e id. § 240.16a

- 1(a)(3). 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

10 Rubenstein does not allege that any defendants are liable fo r short

- swing 1
profits except John Doe, who realized the profits in an account managed for him 2
by IVA. It is not disputed that the other defendants were statutory insiders who 3
would have been obligated to return short

- swing profits had the y realized them

. 4
They were required to file, and did file, Schedule 13D s

. 5
Rubenstein relies principally on the theory that IVA ’s clients became 6
members of a group with their investment advisor and its other clients when 7
they signed investment management agr eements delegating discretionary 8
trading authority to IVA

. We do not agree. Rubenstein’s theory is incompatible 9

with the text of the ’34 Act and its implementing regulations. Both provide that a 10
group is formed when multiple individuals agree to act together “ for the 11
purpose of acquiring, holding, or disposing of securities of an issuer

. ” 15 U.S.C. § 12
78m(d)(3) (emphasis added); see also 17 C.F.R. § 2 40.13d

- 5(b)(1)

. The regulations 13

then deem the group members “to have acquired beneficial ownership . . . of all 14
equity securities of that issuer beneficially owned by any [group members]

. ” 17 15
C.F.R. § 2 40.13d

- 5(b)(1) (emphasis added)

. 16
We straightforwardly conclude that these provis ions impose liability only 17

when insiders enter an agreement , as defined in 17 C.F.R. § 13d

- 5(b)(1) , to trade 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

11 the securities of a particular issuer

. In American Standard, Inc. v. Crane Co. , we said 1

that because Section 16 (b) “speaks of ‘such issuer’ in the singular , ” there is “no 2
room for a grammatical construction that would convert the singular into a 3
plural.” 510 F.2d 1043, 1058 (2d Cir. 1974); see also Roth v. Jennings , 489 F.3d 499, 4

510

- 12 (2d Cir. 2007); Morales v. Quintel Entm’t, Inc. , 249 F.3d 115, 125

- 26 (2d Cir. 5
2001); Morales v. Freund , 163 F.3d 763, 767 (2d Cir. 1999). 6
Rubenstein does not allege the existence of any such agreement

. He admits 7
that the only agreement between the IVA defendants and John Doe is an 8
investment management agreement under which John Doe gave the IVA 9

defendants discretionary authority to trade securities in his accou nt and agreed 10
to pay the m a fee for the se services. Neither DeVry nor any other issuer was 11

identified as one whose stock IVA might purchase for John Doe’s account. In 12

addition, the investment management agreement did not address whether , or to 13

what extent , the IVA defendants might purchase or sell the same securities for 14

the other accounts they managed ; nor did the investment management 15
agreement touch on the subject of whether the IVA defendants might seek to 16

influence or control an issuer whose shares might be in a n account they 17
managed

. Consequently, Rubenstein is simply wrong w hen he contends that the 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

12 investment management agreement constituted an “agreement” to trade in 1
DeVry securities under Section 13(d) and 17 C.F.R. § 2 40.13d

- 5(b)(1)

. 2
An investment advisory client does not form a group with its investment 3
advisor by merely e nt e ring into an investment advisory relationship. Nor does 4

an invest or become a member of a group solely because his or her advisor caused 5
other (or all) of its client s to invest in securities of the same issuer. And 6
Rubenstein points us to nothing else that might constitute an “agreement” or 7

demonstrate a “common objective” to trade in the securities of “an issuer.” 8

II. 9
In addition to its incompatibility with the text of the statutes and rules , 10
Rubenstein’s interpretation does not serve the purpose of the statute , which is 11
designed to “prevent a group of persons who seek to pool their voting or other 12
interests in the securities of an issuer from evading the provisions of the s tatute 13
because no one individual owns more than 10 percent of the securities.” H.R. 14
Rep. No. 90

- 1711 (1968), as reprinted in 1968 U.S.C.C.A.N. 2811, 281 8 ; see also 15
Quintel , 249 F.3d at 123 (“[T]he purpose of the provision was to prevent evasion 16

of the disc losure requirement.”). Rubenstein has never alleged that IVA ’s clients 17
sought to pool their shares to evade the requirements of the statute. See generally 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

13 Magma Power Co. v. Dow Chem. Co. , 136 F.3d 316, 32 0 (2d Cir. 1998) (holding that 1

courts should evalua te short

- swing transactions pragmatically to determine 2
whether they serve as a “vehicle for the evil which Congress sought to prevent” 3
(quoting Kern Cty. Land Co. v. Occidental Petroleum Corp. , 411 U.S. 582, 594 4
(1973)) ). 5

Nonetheless, Rubenstein offers a v ariety of policy arguments in support of 6
his position , none of which persuades us . For example, he contends that our 7
holding will facilitate illicit insider trading. Section 16 (b) is designed to prevent 8
abuse of inside information by prohibiting a narrow class of trades that Congress 9

viewed as particularly likely to be based on such information. Rubenstein voices 10

the concern that our holding will enable investment managers to ev ade Section 11
16(b) and to abuse inside information by trading in client funds rather than their 12

own funds because client funds may not be subject to disgorgement

. He argues 13
that if clients are not members of a group with their advisor, then their advisor 14

will be able to trade its clients’ shares using inside information and to earn 15
profits from those trades. 16
Because of the strict liability imposed by Section 16(b), the Supreme Court 17

ha s cautioned against exceeding the “narrowly drawn limits” on the class of 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

14 corporate insiders who may be subject to the s tatute

. Gollust v. Mendell , 501 U.S. 1

115 , 122 ( 1991) (quoting Foremost

- McKesson, Inc. v. Provident Sec. Co. , 423 U.S. 232, 2
251 (1976)) ; accord Reliance Elec

. Co

. v. Emerson Elec. Co ., 404 U.S. 418, 427 (1972). 3
Accordingly, we may not expand the boundaries of the statute merely to address 4

Rubenstein’s concerns. 5
In any case , Congress has chosen to address Rubenstein’s concerns in other 6
ways. E xempting certain client profits from Section 16 (b) does not insulate 7

investment advisors from l iability under the more general anti

- fraud provisions 8

of the ‘ 34 A ct: Section 10 (b) and R ule 10b

- 5. If IVA had improperly used inside 9

information to trade in its clients’ accounts, it c ould be subject to Rule 10b

- 5 , 10
regardless of whether its clients were part of an insider group. Section 16 (b) 11
addresses only a narrow class of potential insider trading

. By contrast, Rule 10b

- 5 12
addresses a broader sphere, including the insider trading that Rubenstein asks 13
Section 16(b) to police. Trading that passes muster under Section 16(b) may not 14

do so under Rule 10b

- 5

. Rubenstein’s fear that our hold ing will offer a safe 15
harbor to investment managers engaged in insider trading is consequently 16

unwarranted

. Suffice it to say that his complaint contains no allegations that Rule 171 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

15 10b

- 5 has been violated , and that provision plays no part in our resolution of this 1

case. 2
Rubenstein next complains that our holding will undermine Section 13 (d)’s 3
disclosure requirement

. 3 Section 13 (d) requires persons who are the beneficial 4

owners of more than 5% of a company’s shares to file a disclosure statement with 5
the SEC. 15 U.S.C. § 78m(d). The requirement is designed to alert investors when 6
shareholders acquire potentially controlling interests in corporations. Rubenstein 7
argues that our holding will enab le investment advisors to exercise control over 8
companies without disclosing their interests if they distribute shares among their 9

clients’ accounts such that the advisors ’ own holdings never reach the 5% 10

threshold

. 11

However, this argument overlooks the fac t that investment advisors may 12
qualify as beneficial owners of shares in their clients’ accounts , for purposes of 13
Section 13(d), regardless of whether they form an insider group with their clients. 14
When their clients’ holdings in a security collectively reach the 5% threshold, the 15

advisors may be subject to Section 13(d)’s reporting requirements. This is 16

because Rule 13d

- 3 defines beneficial ownership not by pecuniary interest in a 17

3 The definition of “group” that applies in Section 16(b) cases is drawn from Section 13(d).1 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

16 security but rathe r by reference to the power to vote or dispose of that security. 1
17 C.F.R. § 240.13d

- 3(a). 4 Consequently , investment advisors who trade their 2

clients’ shares are deemed beneficial owners of those shares , and their clients’ 3
holdings count toward their own beneficial ownership of a security , under 4
Section 13(d)

. Advisors who purchase a sufficient quantity of a security in their 5
clients’ managed accounts will become subject to Section 13(d) ’s disclosure 6
requirement even if they do not form an insider grou p with their clients. Indeed, 7
this is one reason why IVA filed a Schedule 13D disclosing its insider status with 8

respect to DeVry. Consequently, Rubenstein’s concern is misplaced , and h is 9
policy arguments do not persuade us that IVA formed an insider group with its 10

clients

. 11

I I I. 12
Seeking to expand the scope of group liability, Rubenstein points us to 13

Rule 16a

- 1 ’s exemption of certain registered investment advisors (“RIA s ”) from 14

the short

- swing profit rule

. 5 This exemption applies to enumerated “institutions 15

4 As discussed above, Section 16(b) adopts a second definition of beneficial ownership to narrow the class of transactions subject to the short

- swing profit rule. The Section 16(b) definition does refer to pecuniary interest in a security, but that definition does not apply to Section 13(d)’s disclosure requirement.

5 The SEC adopted this exemption “to avoid undue interference with the day

- to

day business of banks, b rokers, dealers, investment advisers and other specified1 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

17 or persons” who hold securities “for the benefit of third parties or in customer or 1
fiduciary accounts in the ordinary course of business ,” provided that the shares 2
are acquired “ without the purpose or ef fect of changing or influencing control of 3

the issuer or [evading reporting requirements] .” 17 C.F.R. § 240.16a

- 1(a)(1). 4
When a covered institution or person satisfies these requirements, it does not 5
qualify as the beneficial owner of its customers ’ securi ties for the purpose of the 6

short

- swing profit rule’s 10% ownership threshold (i.e., its customers’ holdings 7
do not count toward its own holdings). 6 8

Ru b enstein argues that because IVA does not qualify for the RIA 9
exemption, given its control purpose with respect to DeVry, its clients must be 10

institutional fiduciaries and custodians.” Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Exchange Act Release No. 27148, 54 Fed. Reg. 35667 (Aug. 29 , 1989).

6 Above, we emphasized that a client’s holdings generally count toward its investment manager’s beneficial ownership of a security for purposes of Section 13(d). Rule 16a

- 1’s RIA exemption applies only to Section 16

— which employs a second definition of bene ficial ownership and does not affect our analysis of Section 13(d). Additionally, the RIA exemption applies “[s]olely for purposes of determining whether a person is a beneficial owner of more than ten percent of any class of equit y securities.” 17 C.F.R. § 240.16a

- 1(a)(1). Once a person is deemed the beneficial owner of more than 10%, then the RIA exemption is no longer relevant. For this reason, an advisor who satisfies the RIA exemption but independently qualifies as a statutory insider (e.g., holds more than 10% of a class of securities in its own account or has deputized a director on an issuer’s board) may be required to disgorge its performance

- related fees. See id. § 240.16a

1(a)(2)(ii)(C).1 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

18 liable as a group

. Through this argument, h e attempts to turn an exemption that 1
may provide advisors a safe harbor into a r ule that advisors must satisfy. In 2
making this attempt, he misses the mark because it is the liability of an IVA 3

client , rather than IVA itself , that is at issue. T he RIA exe m ption excludes certain 4

RIAs f rom the definition of “beneficial owner” ; it does not affect persons who are 5

not RIAs (e.g., their clients) . Even more importantly, the exemption makes no 6
reference to group agreements. W hether IVA satisfied the RIA exemption or was 7

a beneficial owner of the securities in question has no bearing on the question of 8

whether it and its clients entered an agreement that would subject it to group 9
liability. 10
The structure of the statute and rules confirms the independence of the 11
RIA exemptio n from the definition of a group. “Group” is defined in Section 12
13(d) of the ’34 Act, and this definition is applied to Section 16(b) by Rule 16a

- 1. 13
The RIA exemption, however, applies “solely to Section 16 of the Act.” 17 C.F.R. 14
§ 240.16a

- 1. Accordingly, it filters certain persons who are subject to Section 13(d) 15
out of the pool of persons subject to Section 16(b); it does not expand the class of 16
persons treated as group members under Section 13(d). In a group liability case, 17

if a court determines that a S ection 13(d) group has not been formed, the RIA 181 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

19 exemption issue falls by the wayside. In other words, if a group liability 1

defendant has not entered an issuer

- specific trading agreement, a court need not 2
ask whether his investment advisor satisfies the RIA exemption. 3

In pursuit of this argument, Rubenstein directs us to Egghead.com, Inc. v. 4
Brookhaven Capital Management Co. , in which we held that investment advisors 5

are not deemed beneficia l owners of their clients’ shares , for purposes of Section 6

16 (b), when they satisfy the RIA exemption. 340 F.3d 79, 84 (2d Cir. 2003)

. This 7
straightforward rule does not change our result. This cas e turns on the criteria for 8
group agreement, not on whether IVA was a beneficial owner of its clients’ 9

securities. Moreover, Egghead says nothing about liability when an advisor does 10

not meet the RIA exemption. 11
Simply put, the RIA exemption is a separate co mponent of the short

- swing 12
profit rule that is not relevant to this case. When an investment advisor and its 13
clients have not entered an agreement to acquire, hold, vote, or dispose of the 14
securities of a particular issuer, they do not qualify as a n inside r group . This 15
result is not changed by the RIA exemption

. 161 9

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- cv Rubenstein v. Int’l Value Advisers, LLC

20 I V

. 1

In the absence of any agreement to trade in the securities of an issuer , 2

Rubenstein argues for a theory of implied agreement

. IVA was a statutory 3

insider that filed a Schedule 13D with the SEC disclosing its status. Rubenstein 4
contends that by silently acquiescing in their advisor ’ s trading for their benefit 5

after the advisor filed that form, IV A’s clients implicitly agreed to trade in the 6
securities of DeVry as members of the insider group. 7

We find n o support for this theory in the relevant statute s or regulation s. 8

Rubenstein would have us treat all investors as though they were conscious of 9
the securities held by their advisors’ other clients and would mandate that they 10

tailor their investment decisions to those other clients’ trades. He would further 11
require them to monitor their advisors’ activity on various corporate boards and 12
to assess whether their advisors may have adopted a control purpose with 13

respect to par ticular issuers. Such requirements are impracticable one s that are 14
not contemplated by the securities laws. Section 16 (b) is not designed to threaten 15
liability based on the trades of other investors to whom a defendant’s only 16
connection is sharing an investment advisor. 171 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

21 Rubenstein claims that these difficulties can be avoided if investment 1
advisors adopt compliance procedures that prevent short

- swing trading

. 2

However, Rubenstein seeks to hold advisors’ clients liable, and those clients may 3

have no cont rol over their advisor’s compliance procedures. Rubenstein’s 4
proposed theory of liability would demand that clients, who may be 5
unsophisticated individual investors, adopt procedures for monitoring the 6

investments of their advisors’ other clients. Rubenste in would hold a retiree on 7
the beach in Florida liable when he fails to conduct an ongoing analysis of his 8
IRA manager’s trading in other clients’ accounts

. We decline to go down this 9

road. 10

V. 11
Rubenstein’s final theory of liability , raised for the first time on appeal , is 12

that IVA acted as an agent and director by deputization for its clients. We see no 13

merit in t his theor y. T o be sure, t here is some support in our precedent for the 14
theory that a statutory insider may not escape liability by merely delegating 15

investment responsibility to an agent. See, e.g. , Huppe v. WPCS Int’l Inc. , 670 F.3d 16

214, 221

- 22 (2d Cir. 2012)

. That is, an insider principal cannot shed its insider 17
status by transferring trading authority to a non

- insider agent. For example, the 181 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

22 owner of 10% of the outstanding shares of a security may not delegate authority 1

over 5% to an agent and thereby claim to be a 5% shareholder who is not subject 2
to Section 16(b)

. No authority, however, suggests that a non

- insider principal 3
may unknowingly inherit the insider status of its agent. 4
Rubenstein also points us to a “director by deputization” theory , u nder 5

which an investor becomes a statutory insider when it deputizes an individual to 6

serve as its representative on an issuer’s board of directors. See generally Blau v. 7

Lehman , 368 U.S. 403, 408

- 10 (1962); Roth ex rel. Beacon Power Corp. v. Perseus , 8

L

. L

. C

. , 522 F.3d 242, 246 (2d Cir. 2008 ). IVA argues that , under this theory, IVA’s 9

clients were insiders because they hired IVA as their investment advisor and IVA 10

then appointed a director to DeVry’s board

. Although this appointment may 11
have rendered IVA a statutory insider, it did not render its clients insiders. IVA’s 12

clients d id not deputize anyone as a director. It is unlikely that most of these 13
clients were even aware that their advisor had deputized a director on the DeVry 14

board

. And even if some clients were so aware, there is no indication that they 15
agreed to the deputization. In any event, we conclude that further discussion of 16
these theories is not appropriate because they were not raised in the court below. 171 9

- 560

- cv Rubenstein v. Int’l Value Advisers, LLC

23 In sum , group liab ility under Section s 13(d) and 16 (b) requires that group 1

members “ agree to act together for the purpose of acquiring, holding, voting or 2
disposing of equity securities of an issuer. ” 17 C.F.R. § 2 40.13d

- 5(b)(1) ; see also 15 3
U.S.C. § 78m(d)(3) . Because Rubenstein’s interpretation would read the 4
requirements of agreement and issuer

- specificity out of the statute, we reject it. 5

CONCLUSION 6
For the foregoing reasons, t he order of the district court is AFFIRMED

. 7