Simmonds v. Credit Suisse Securities: Applying Delaware’s Demand Requirement to Section 16(b)

I. INTRODUCTION When the share price of Linkedln's initial public ofFering (IPO) jumped 109% in the first day of trading,1 some wondered whether the event was the start of another tech bubble2 or "hot issue" market where a series of IPOs witness dramatic price increases in the first month of trading.3 Since the 1950s, there have been four hot issue markets,4 including the most recent during the late- 1990s tech boom, where almost 200 IPOs doubled on the first day of trading.5 The same question has accompanied each of these hot issue markets: in light of the seemingly exorbitant fees paid to sophisticated investment banks for an optimal IPO price,6 were the underwriting banks really unable to even closely predict the market price of the IPOs, or were issuers intentionally leaving vast amounts of capital on the table?7 Almost inevitably, some investors have suspected foul play and have alleged fraud under Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act).8 In Simmonds v. Credit Suisse Securities, however, the plaintiff alleged a new theory of liability and sued the underwriting banks under Section 16(b) of the Exchange Act to recover profits on behalf of the issuers.9 In denying the plaintiffs standing to make a Section 16(b) claim, the Ninth Circuit used Delaware corporate law to conclude that the plaintiffs pre-suit demand was insufficient, or in other words, that the plaintiff failed to adequately request issuer action before filing her own suit on the issuer's behalf.10 This Note argues that due to the conflicting purposes of Delaware's demand requirement and Section 16(b), the Ninth Circuit should not have dismissed the suit using Delaware demand law. More broadly, this Note argues that before courts fill the gaps of federal securities law with state corporate law, they should consider the fit between the two types of law. Doing so will prevent state law from impeding federal policy and otherwise valid securities claims and will prevent unnecessary displacement of well-functioning state law. II. FACTS AND PROCEDURAL HISTORY In the most recent hot issue market of the late 1990s and early 2000, plaintiff Vanessa Simmonds, like many others, felt that the drastic first-day IPO price changes were not due to market forces but instead were the result of a scheme between the underwriters and insiders of the issuing companies to capture exponential gains from underpriced IPOs.11 Instead of filing a traditional Rule 10b-5 claim alleging a fraudulent scheme,12 however, Ms. Simmonds filed a novel derivative Section 16(b) claim, alleging that the underwriting banks of fifty-four issuing companies were liable for "short-swing profits . . . made in violation of Section 16(b)."13 Specifically, Ms. Simmonds alleged the underwriters had engaged in "spinning,"14 a controversial practice during the 1998-2000 hot issue market.15 Section 16(b) requires statutory insiders16 to disgorge any profits made in connection with the purchase and sale of company stock occurring within a six-month period.17 Although Section 16(b) requires recovered profits to be paid directly to the issuer, Section 16(b) claims can be brought in federal court by either the issuer itself or any shareholder.18 Importantly, however, shareholders may only bring a Section 16(b) claim if the issuer "shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same."19 Thus, as a shareholder, Ms. Simmonds only had standing when the issuing companies themselves refused or failed to bring their own Section 16(b) claims. To comply with this requirement, Ms. Simmonds sent demand letters to the issuers' board of directors, asking them to bring Section 16(b) claims against the underwriters.20 When the respective boards failed to take action, Ms. Simmonds filed a Section 16(b) claim in federal court to recover profits on behalf of the issuers.21 At the district court, both the issuers and underwriters filed motions to dismiss the suit. …