Court Opinion

ID: 3065026
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:28:21.695776+00
Date Added: 2024-06-11T11:18:11.548635
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

THOMAS R. DREILING, a shareholder       
of Infospace, Inc,
                                             No. 08-35095
                 Plaintiff-Appellant,
                 v.                           D.C. No.
                                            CV-05-01339-JLR
AMERICA ONLINE INC; INFOSPACE,
                                               OPINION
INC., a Delaware corporation,
             Defendants-Appellees.
                                        
        Appeal from the United States District Court
           for the Western District of Washington
         James L. Robart, District Judge, Presiding

                  Argued and Submitted
             May 7, 2009—Seattle, Washington

                    Filed August 19, 2009

    Before: Kim McLane Wardlaw, Richard A. Paez and
             N. Randy Smith, Circuit Judges.

                Opinion by Judge N.R. Smith

                            11363
11366           DREILING v. AMERICA ONLINE

                       COUNSEL

Richard E. Spoonemore & Stephen J. Sirianni, Seattle, Wash-
ington, and David M. Simmonds, Redmond, Washington, for
the plaintiff-appellant.

Dane H. Butswinkas, R. Hackney Wiegmann, Marcie R.
Ziegler & Amanda M. McDonald, Washington, DC, and
Michael D. Hunsinger, Seattle, Washington, for the
defendant-appellee.
                  DREILING v. AMERICA ONLINE               11367
                            OPINION

N.R. SMITH, Circuit Judge:

   Thomas R. Dreiling, a former InfoSpace, Inc.
(“InfoSpace”) shareholder, filed a derivative shareholder
action against America Online, Inc. (“AOL”), seeking disgor-
gement of AOL’s profits derived from the sale of its Info-
Space stock. Dreiling based his theory of liability on
allegations that Naveen Jain, InfoSpace’s CEO, formed a ben-
eficial stock ownership group (in his personal capacity) with
AOL, through two AOL executives (in their official capaci-
ties). Dreiling argues that AOL and Jain operated collectively
to acquire, hold, and sell InfoSpace securities, making them
beneficial owners of each other’s stock. Dreiling argues that
AOL was therefore an InfoSpace insider and its short-swing
profits may be disgorged under Section 16(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.
§ 78p(b). Dreiling asks us to accept this novel theory of liabil-
ity, reverse the district court, and thereby expand Section
16(b) beyond its previously-established boundaries. We
decline to do so, and hold that the relationship between AOL
and InfoSpace did not create a beneficial stock ownership sit-
uation such that AOL was an InfoSpace insider. Accordingly,
we affirm the district court’s grant of summary judgment to
AOL.

                       I.   BACKGROUND

   InfoSpace (an online telephone directory) contacted AOL
(an internet service provider) in late 1997 or early 1998 in an
effort to harness AOL’s vast subscriber base to “drive more
traffic to InfoSpace.” In August 1998, AOL and InfoSpace
reached an agreement (the “Agreement”) to “promote and dis-
tribute an interactive [web]site” on AOL called the “AOL
White Pages.” The Agreement was scheduled to run for three
years, with a one-year extension option.
11368             DREILING v. AMERICA ONLINE
   AOL employees negotiated the Agreement on AOL’s
behalf. AOL also consulted its outside auditor, Ernst &
Young, concerning accounting issues that arose during the
negotiations. InfoSpace CEO Naveen Jain and General Coun-
sel Ellen Alben represented InfoSpace in the negotiations.
InfoSpace also consulted outside counsel and its outside audi-
tor, Deloitte & Touche, throughout the negotiations.

   AOL and InfoSpace entered the Agreement to combine
AOL’s membership with InfoSpace’s directory assistance and
resource library to “jointly operate the AOL White Pages.”
AOL would promote and distribute the AOL White Pages
website to its members. In return, InfoSpace would produce
and manage the AOL White Pages on an ongoing basis.
Essentially, InfoSpace created a product and AOL attempted
to sell that product to its members. InfoSpace agreed to com-
pensate AOL in three ways: by (1) granting AOL conditional
warrants to purchase up to 5% of InfoSpace stock, (2) making
quarterly cash payments to AOL, and (3) sharing advertising
revenue generated by the AOL Whitepages.

   This compensation scheme employed the same kinds of
incentives between product creator and seller as would a typi-
cal commission scheme. Under the Agreement, conditional
warrants would vest quarterly with AOL, but only if the AOL
White Pages processed twenty-five million searches (the
“Target Number”) in that quarter. If AOL failed to “sell”
enough searches to reach the Target Number in any given
quarter, the warrants would not vest and AOL would forfeit
them. The Agreement also provided that InfoSpace would
make cash payments to AOL each quarter the AOL White
Pages achieved the Target Number. If AOL did not sell
enough searches to reach the Target Number, AOL was
required to “refund to InfoSpace the entire amount of the
quarterly payment for such quarter (paid in advance by Info-
Space to AOL),” and AOL would forever forfeit that quarter’s
payment. The potential quarterly cash payments totaled $4
million in year one, $3 million in year two, $2 million in year
                 DREILING v. AMERICA ONLINE             11369
three, and $1 million in year four. The parties also shared in
advertising revenue generated by the AOL Whitepages in
such a manner that AOL had a strong incentive to drive as
many members there as possible, so as to increase the web-
site’s desirability to potential advertising partners.

   The Agreement further provided that AOL would pay Info-
Space a $2 million penalty if AOL failed to generate a total
of four hundred million searches over the life of the Agree-
ment. Further, if AOL terminated the Agreement prematurely,
AOL was required to pay InfoSpace an additional $500,000
and forfeit all cash payments. AOL and InfoSpace added this
penalty provision late in the negotiations process, after Jain
learned from his accounting team that InfoSpace could only
expense the warrants at the then-current InfoSpace stock
value (before InfoSpace’s initial public securities offering
(“IPO”)) if InfoSpace received a “performance commitment”
from AOL. The necessity of obtaining a “performance com-
mitment” from AOL derived from Deloitte & Touche’s
advice regarding guidance issued by the Financial Accounting
Standards Board (“FASB”). FASB standards, also known as
generally accepted accounting principles (“GAAP”), are rec-
ognized as authoritative by the Securities and Exchange Com-
mission (“SEC”). See, e.g., United States v. Ebbers, 458 F.3d
110, 125 (2d Cir. 2006) (citing Ganino v. Citizens Utilities
Co., 228 F.3d 154, 160 n.4 (2d Cir. 2000) (“The SEC treats
the FASB’s standards as authoritative.”)).

   Under the FASB standards in effect in 1998, all transac-
tions in which a non-employee provides goods or services in
consideration “for issuance of equity instruments shall be
accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued,
whichever is more reliably measurable.” Accounting for Stock
Based Compensation, Statement of Fin. Accounting Standards
No. 123, ¶ 8 (Fin. Accounting Standards Bd. 1995) (hereinaf-
ter “SFAS No. 123”). In order to accurately determine the fair
value of the equity instruments issued (in this case, the war-
11370            DREILING v. AMERICA ONLINE
rants), InfoSpace could use either the “date at which a com-
mitment for performance by [AOL] to earn the equity
instruments is reached,” or the “date at which [AOL’s] perfor-
mance is complete”—meaning each day AOL’s warrants
vested. See Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Con-
junction with Selling, Goods or Services, FASB Emerging
Issues Task Force Issue No. 96-18, at 1-2 (Fin. Accounting
Standards Bd. 1996). “A performance commitment is a com-
mitment under which performance by [AOL] to earn the
equity instruments is probable because of sufficiently large
disincentives for nonperformance.” Id. at 1 n.3. Forfeiture of
the warrants “is not considered a sufficiently large disincen-
tive” when it is the “sole remedy in the event of the [AOL’s]
nonperformance.” Id. Deloitte & Touche therefore recom-
mended that, in order to expense the warrants at the pre-IPO
stock valuation, the Agreement should include a nonperfor-
mance disincentive of a penalty calculated at approximately
10% of the Agreement’s value—$2 million. By agreeing to
this provision, AOL would have committed to performing for
SFAS No. 123 purposes, and the warrants could be valued
and expensed pre-IPO.

   Pre-IPO expensing was a critical deal component for Info-
Space, because the pre-IPO stock was valued at $3.33 per
share. If required to value the warrants as AOL completed
each quarterly performance, InfoSpace would have incurred
nearly $116 million in warrant expenses from 1999-2000. By
valuing the warrants as of August, 1998, and expensing the
charge straight-line over the life of the Agreement, InfoSpace
only reported $1.65 million in warrant expenses over that
period. InfoSpace therefore considered post-IPO warrant
expensing a dealbreaker, because this method of valuation
would cost InfoSpace more than the anticipated revenue from
the AOL deal. Jain communicated Deloitte & Touche’s per-
formance commitment proposal to his negotiation partners at
AOL, who immediately rejected the idea of a penalty provi-
sion. At the time, the draft Agreement contemplated a $2.5
                  DREILING v. AMERICA ONLINE              11371
million payment per year from InfoSpace to AOL. Jain pro-
posed changing that payment structure to a front-loaded struc-
ture much like the one AOL and InfoSpace settled upon in
order to mitigate the effect of the penalty on AOL. AOL
agreed to the proposal.

   The Agreement took effect on August 24, 1998. In late
1999, Jain and AOL agreed in principle to suspend Info-
Space’s revenue-sharing obligations under the Agreement. In
early 2000, Jain learned that InfoSpace would likely not meet
analyst expectations for its second quarter 2000 earnings. In
order to bulk up InfoSpace’s second-quarter balance sheet,
Jain sought to formalize the agreement to terminate Info-
Space’s obligations to share revenue with AOL, and recog-
nize the transaction during the second quarter. Accordingly,
InfoSpace prepared an amendment to the Agreement
(“Amendment 1”), which “acknowledge[d] their agreement
that InfoSpace is not obligated to share revenue with AOL
until after the end of the third quarter 2000.” Representatives
from both companies signed Amendment 1, but it was not
dated. As a result of this amendment, Jain informed his col-
leagues at InfoSpace that he had secured “over [$1] million in
accrued expenses for AOL that we should be able to use in
Q2.” AOL’s reasons for agreeing to Amendment 1 are
unclear; when asked about its purpose at trial, AOL’s signa-
tory to Amendment 1, Eric Keller, invoked the Fifth Amend-
ment and refused to answer.

   Jain sold more than three million InfoSpace shares in 1999.
AOL’s warrants began vesting quarterly under the Agreement
in February 1999, and AOL did not make any InfoSpace stock
transactions in 1999. Jain sold over 1.5 million shares of Info-
Space stock on January 31, 2000. Jain sold another 1.5 mil-
lion shares of InfoSpace between May 1, 2000 and June 13,
2000.

  Two AOL executives, Lennert Leader and Ronald Peele,
determined AOL’s investment strategy with regard to Info-
11372             DREILING v. AMERICA ONLINE
Space stock. Neither Leader nor Peele knew of any agreement
made by AOL to buy or sell stock in concert with Jain; both
testified that they based AOL’s investment decisions “on mar-
ket and financial considerations.” AOL executed its first Info-
Space stock transaction on February 11, 2000, when it entered
into a cashless collar transaction with Goldman Sachs. AOL
and Goldman Sachs entered into three more cashless collar
transactions: one on February 23, 2000 and two on May 10,
2000. Upon Peele’s approval, AOL exercised tranches 2-6 of
its InfoSpace warrants on March 3, 2000. AOL sold 247,476
shares of InfoSpace stock on March 15, 2000. Peele approved
an exercise of tranche 7 of AOL’s InfoSpace warrants on Sep-
tember 19, 2000. AOL did not sell any additional InfoSpace
stock in 2000.

  After InfoSpace’s stock price plummeted, disgruntled
shareholders sued Jain and InfoSpace for securities fraud, in
an attempt to recover their losses. See, e.g., In re InfoSpace,
Inc., 330 F. Supp. 2d 1203 (W.D. Wash. 2004).

   Dreiling filed many actions against various parties associ-
ated with InfoSpace. E.g., Dreiling v. Jain, et al., Case No.
C01-1528 (W.D. Wash.); Dreiling v. Jain, et al., Case No. 01-
2-08155-lSEA (King County (Washington) Superior Court);
Dreiling v. American Express Company, No. C03-3740Z
(W.D. Wash.). On August 1, 2005, Dreiling sued AOL for
recovery of short-swing profits under Section 16(b) of the
Exchange Act. Dreiling’s Complaint against AOL alleges that
AOL and Jain sought “(i) to secretly influence the corporate
affairs of InfoSpace by creating artificial revenues and earn-
ings; (ii) to hold their shares during the creation of artificial
revenues and earnings; and (iii) to then sell their shares to
unsuspecting investors at prices artificially inflated as a result
of their concerted efforts.”

   The district court granted AOL’s motion for summary judg-
ment. For purposes of the motion, the district court assumed
that AOL assisted Jain in accounting manipulation designed
                  DREILING v. AMERICA ONLINE                11373
to inflate InfoSpace’s earnings, but held that Dreiling had not
adduced any evidence to suggest that AOL was subject to
short-swing profits rules. Accordingly, the court concluded
that it “must grant AOL’s motion for summary judgment.”
We review the district court’s decision de novo, assessing
whether, viewing the facts in the light most favorable to the
nonmoving party, there are genuine issues of material fact and
whether the district court correctly applied the substantive
law. See, e.g., Universal Health Servs., Inc. v. Thompson, 363
F.3d 1013, 1019 (9th Cir. 2004).

                        II.   DISCUSSION

   [1] “Congress enacted [Section] 16(b) as part of the
Exchange Act to prevent corporate insiders from exploiting
their access to ‘information not generally available to oth-
ers.’ ” Dreiling v. Am. Exp. Co., 458 F.3d 942, 946-47 (9th
Cir. 2006) (quoting Kern County Land Co. v. Occidental
Petroleum Corp., 411 U.S. 582, 592 (1973)). Section 16(b)
prescribes that insiders must disgorge profits that derive from
“short-swing” sales:

    For the purpose of preventing the unfair use of infor-
    mation which may have been obtained by such bene-
    ficial owner, director, or officer by reason of his
    relationship to the issuer, any profit realized by him
    from any purchase and sale . . . of any equity secur-
    ity of such issuer . . . within any period of less than
    six months . . . shall . . . be recoverable by the issuer,
    irrespective of any intention on the part of such ben-
    eficial owner, director, or officer in entering into
    such transaction of holding the security.

15 U.S.C. § 78p(b).

   Congress decided upon disgorgement as a deterrence mea-
sure because it “recognized that short swing speculation by
stockholders with advance, inside information would threaten
11374              DREILING v. AMERICA ONLINE
the goal of the Securities Exchange Act to ‘insure the mainte-
nance of fair and honest markets,’ ” Dreiling, 458 F.3d at 947
(quoting Kern County, 411 U.S. at 591). Section 16(b) there-
fore addresses a “ ‘class of transactions in which the possibil-
ity of abuse was believed to be intolerably great,’ ” Dreiling,
458 F.3d at 947 (quoting Kern County, 411 U.S. at 592 (inter-
nal quotation marks omitted)), by “impos[ing] a strict prophy-
lactic rule with respect to insider, short-swing trading,”
Dreiling, 458 F.3d at 947 (quoting Foremost-McKesson, Inc.
v. Provident Sec. Co., 423 U.S. 232, 251 (1976)).

   [2] Section 16(b) identifies three classes of “insiders”
whose profits on short-swing trades are subject to disgorge-
ment: directors, officers, and beneficial owners of more than
10% of any class of any equity security registered under U.S.
securities law. Dreiling, 458 F.3d at 947; 15 U.S.C.
§ 78p(a)(1). Section 16(b) is “blunt” and unforgiving. See id.
(citing Citadel Holding Corp. v. Roven, 26 F.3d 960, 965 (9th
Cir. 1994) (“[Section] 16(b) is a relatively arbitrary, ‘flat
rule’ ”)). It imposes strict liability on insiders, regardless of
motive, and disgorges profits from all short-swing trades—
even those not actually based on inside information. Dreiling,
458 F.3d at 947; Kern, 411 U.S. at 595 (noting that Section
16(b) requires disgorgement of profits “without proof of
actual abuse of insider information, and without proof of
intent to profit on the basis of such information”). The
Supreme Court has therefore narrowly construed Section
16(b)’s reach. See, e.g., Gollust v. Mendell, 501 U.S. 115, 122
(1991) (expressing the Supreme Court’s “reluctan[ce] to
exceed a literal, ‘mechanical’ application”).

   [3] AOL was neither an InfoSpace director nor officer. It
therefore may only be required to disgorge its short-swing
trading profits if it is an insider by virtue of being a beneficial
owner of more than 10% of InfoSpace’s shares.

  [4] The Exchange Act does not define what makes a person
a “beneficial owner” as the term is used in Section 16(b).
                  DREILING v. AMERICA ONLINE             11375
Accordingly, the courts developed a body of law to determine
whether a person making short-swing trades is an insider for
Section 16(b) purposes. See Morales v. Quintel Entm’t, Inc.,
249 F.3d 115, 122 (2d Cir. 2001) (citing Mayer v. Chesapeake
Ins. Co., 877 F.2d 1154, 1158-62 (2d Cir. 1989) (reviewing
cases)). In 1991, however, the SEC substantially altered this
body of case law by promulgating Rule 16a-1. See Ownership
Reports and Trading by Officers, Directors and Principal
Security Holders, Exchange Act Release No. 34-28869, Pub-
lic Utility Holding Company Act Release No. 25254, Invest-
ment Company Act Release No. 17991, 56 Fed. Reg. 7242
(Feb. 21, 1991). Rule 16a-1 established that, for purposes of
determining insider status as a 10% securities holder, “the
term ‘beneficial owner’ shall mean any person who is deemed
a beneficial owner pursuant to section 13(d) of the
[Exchange] Act and the rules thereunder.” Morales, 249 F.3d
at 122 (citing 17 C.F.R. § 240.16a-1(a)(1)).

   [5] Congress enacted Section 13(d) as part of the Williams
Act of 1968, passed in response to hostile corporate takeovers
in the 1960s. See id. at 122-23; Act of July 29, 1968, Pub. L.
No. 90-439, § 2, 82 Stat. 454. Section 13(d) was designed to
“alert the marketplace to every large, rapid aggregation or
accumulation of securities, regardless of technique employed,
which might represent a potential shift in corporate control.”
Morales, 249 F.3d at 122-23 (citing GAF Corp. v. Milstein,
453 F.2d 709, 717 (2d Cir. 1971); SEC v. Savoy Indus., Inc.,
587 F.2d 1149, 1167 (D.C. Cir. 1978)). To that end, Section
13(d) “encompasses not only the isolated shareholder who
accumulates shares of a corporation’s common stock, but also
a group of shareholders who undertake the same activity as
part of a collective effort.” Morales, 249 F.3d at 123. Subsec-
tion (d)(3) states further that “[w]hen two or more persons act
as a . . . group for the purpose of acquiring, holding, or dis-
posing of securities of an issuer, such . . . group shall be
deemed a ‘person’ for the purposes of this subsection.” 15
U.S.C. § 78m(d)(3). Congress appears to have enacted these
11376             DREILING v. AMERICA ONLINE
rules to prevent insiders from attempting to evade the disclo-
sure requirement by pooling their interests:

    This provision would prevent a group of persons
    who seek to pool their voting or other interests in the
    securities of an issuer from evading the provisions of
    the statute because no one individual owns more
    than . . . 10 percent of a class of securities at the time
    they agreed to act in concert . . . . This provision is
    designed to obtain full disclosure of the identity of
    any person or group obtaining the benefits of owner-
    ship by reason of any contract, understanding, rela-
    tionship, agreement or other arrangement.

S. Rep. No. 90-550, at 8 (1967); H.R. Rep. No. 90-1711, at
8-9 (1968), as reprinted in 1968 U.S.C.C.A.N. 2811, 2818.
See also Morales, 249 F.3d at 123.

   [6] The SEC promulgated Rule 13d-5 to implement and
clarify Section 13(d)(3). Rule 13d-5 defines beneficial owner-
ship by a “group” as follows:

    When two or more persons agree to act together for
    the purpose of acquiring, holding, voting or dispos-
    ing of equity securities of an issuer, the group
    formed thereby shall be deemed to have acquired
    beneficial ownership, for purposes of sections 13(d)
    and (g) of the [Exchange] Act, as of the date of such
    agreement, of all equity securities of that issuer ben-
    eficially owned by any such persons.

17 C.F.R. § 240.13d-5(b)(1). Thus, courts have concluded that
the key inquiry in determining whether a group existed such
that beneficial ownership could be imputed to certain share-
holders is whether the parties “agree[d] to act together for the
purpose of acquiring, holding, voting or disposing of” a firm’s
securities. See Morales, 249 F.3d at 122-23 (citing 17 C.F.R.
§ 240.13d-5(b)(1)); Corenco Corp. v. Schiavone & Sons, Inc.,
                  DREILING v. AMERICA ONLINE               11377
488 F.2d 207, 217 (2d Cir. 1973) (“[A]bsent an agreement
between them a ‘group’ would not exist.”).

   [7] The other appellate courts to conduct this inquiry have
held that whether such an agreement exists is a question of
fact. See Morales, 249 F.3d at 124 (2d Cir.); Corenco Corp.,
488 F.2d at 218 (2d Cir.); Bath Indus., Inc. v. Blot, 427 F.2d
97, 111 (7th Cir. 1970). “The agreement may be formal or
informal and may be proved by direct or circumstantial evi-
dence.” Morales, 249 F.3d at 124 (citations omitted); Savoy
Indus., 587 F.2d at 1163. “In summary, [we must] sift through
the record to determine whether” the district court erred by
concluding that no such agreement existed between Jain and
AOL. See Savoy Indus., 587 F.2d at 1163.

   Dreiling asserts that AOL and Jain acted in concert to fur-
ther three “common objectives”: (1) “to secretly influence the
corporate affairs of InfoSpace by creating artificial revenues
and earnings;” (2) “to hold their shares during the creation of
such artificial revenues and earnings;” and (3) “to then sell
their InfoSpace shares to unsuspecting investors” at
artificially-inflated prices. Our analysis of the record leads us
to conclude that Jain and AOL did not enter into a Rule 13d-
5 agreement.

   [8] As an initial matter, Section 16(b) does not provide any
remedy for Dreiling’s first assertion, that AOL and Jain acted
“to secretly influence the corporate affairs of InfoSpace by
creating artificial revenues and earnings.” Rule 13d-5 makes
clear that beneficial ownership is only imputed when “two or
more persons agree to act together for the purpose of acquir-
ing, holding, voting or disposing of equity securities of an
issuer.” 17 C.F.R. § 240.13d-5(b)(1). Viewing the facts in the
light most favorable to Dreiling, as we must, at most AOL
and Jain worked together to fraudulently inflate InfoSpace’s
revenues and earnings. This activity, however, is not within
Section 16(b)’s ambit, because concerted efforts to engage in
11378             DREILING v. AMERICA ONLINE
accounting fraud do not form a beneficial ownership group
for Section 13(d) purposes. See 17 C.F.R. § 240.13d-5(b)(1).

   We note that Sections 16(b) and 13(d) were not devised to
provide private litigants with another means of litigating
securities fraud. Further, Section 10(b) of the Exchange Act
authorizes private litigants to bring actions against issuers for
securities fraud, but private litigants are barred from bringing
actions against “secondary actors,” such as AOL, for alleg-
edly aiding and abetting securities fraud. See generally
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552
U.S. 148, 128 S.Ct. 761 (2008); Central Bank, N.A. v. First
Interstate Bank, N.A., 511 U.S. 164 (1994). Secondary actors
are, however, subject to criminal penalties, see, e.g., 15
U.S.C. § 78ff, and civil enforcement by the SEC, see, e.g.,
§ 78t(e), for aiding and abetting securities fraud. See
Stoneridge, 128 S.Ct. at 773. The Supreme Court has con-
cluded that the civil enforcement mechanism and possible
“criminal penalties [provide secondary actors] a strong deter-
rent” to engaging in fraudulent conduct such that private liti-
gation is not necessary. Id. Moreover, “some state securities
laws permit state authorities to seek fines and restitution from
aiders and abettors.” Id. (citing e.g., Del. Code Ann., Tit. 6,
§ 7325 (2005)).

   [9] Allowing Dreiling to bring what amounts to a barred
Section 10(b) federal securities fraud claim under Section
16(b), without showing that a beneficial ownership situation
existed under Section 13(d), would subvert Congress’s intent
in passing the Private Securities Litigation Reform Act of
1995, Pub. L. 104-67, 109 Stat. 737 (codified as amended in
scattered sections of 15 U.S.C.) (“PSLRA”). The PSLRA
imposed heightened pleading requirements and a loss causa-
tion requirement upon “any private action” arising from the
Exchange Act, in an attempt by Congress to reduce the num-
ber of frivolous securities lawsuits filed in federal court. See
Stoneridge Inv. Partners, 128 S. Ct. at 773; 15 U.S.C. § 78u-
4(b). See also S. Rep. No. 104-98, p. 4-5 (1995), reprinted in
                  DREILING v. AMERICA ONLINE               11379
1995 U.S.C.C.A.N. 679, 684 (indicating that, by enacting the
PSLRA, Congress intended to reassert its authority to deter-
mine the extent of private rights of action). Because private
actions do not extend to secondary actors under the typical
Section 10(b) securities fraud claim, and, in light of Con-
gress’s desire to further limit private rights of action, Dreiling
may not assert a securities fraud claim he could not bring
under Section 10(b), simply by shoehorning the claim into
Section 16(b).

   [10] Though Dreiling did not explicitly allege an “acquire”
claim in his Complaint, the Complaint arguably could be read
to include an allegation that Jain and AOL entered into an
agreement to acquire InfoSpace stock. We therefore address
Dreiling’s assertions under the “Acquire Theory.” Dreiling’s
argument is premised on his contention that AOL and Jain
entered into a beneficial ownership arrangement as early as
August 12, 1998, when Jain proposed to AOL a method for
subverting SFAS No. 123 and expensing the warrants based
on InfoSpace’s pre-IPO price. Dreiling argues that this
accounting manipulation, combined with AOL’s acquisition
of InfoSpace securities through the vesting of the warrants at
issue, support his theory that AOL and Jain were acting spe-
cifically to “allow AOL to acquire InfoSpace securities.”

   Dreiling’s “Acquire Theory” fails for several reasons. To
prevail on this theory, Dreiling must show that (a) an agree-
ment existed between Jain and AOL, and (b) the purpose of
the agreement was to acquire InfoSpace stock. 15 U.S.C.
§ 78m(d); 17 C.F.R. § 240.13d-5(b)(1). Dreiling cannot meet
either requirement.

   [11] The record demonstrates that AOL entered into its
Agreement with InfoSpace in order to “jointly operate the
AOL White Pages.” The warrants provided to AOL as part of
the deal were only part of AOL’s total compensation for what
amounted to its services as a sales/marketing agent for the
new website. If AOL’s main purpose was to acquire shares in
11380             DREILING v. AMERICA ONLINE
InfoSpace prior to its IPO, AOL could have done so through
a myriad of less complicated transactions. That AOL was
ready to walk away from the deal when Jain informed the
firm of accounting complications bolsters this conclusion.
Dreiling has not presented sufficient evidence that AOL and
InfoSpace entered into any agreement for any reason other
than to establish a joint venture to create a website and market
it to AOL subscribers.

   [12] Moreover, even if AOL entered the Agreement with
InfoSpace with the purpose of acquiring InfoSpace stock, the
Agreement was with InfoSpace, not Jain. AOL therefore can-
not be said to have acted in a concerted effort with Jain to
acquire stock. Dreiling cannot point to any authority for his
assertion that an individual such as Jain becomes a member
of a Section 13(d) group by participating in the negotiations
that result in the formation of a business agreement between
two companies, absent further evidence of concerted activity.
Extending Section 13(d) to these limits eviscerates the
Supreme Court’s narrow interpretation of Section 16(b)’s
reach. See, e.g., Gollust, 501 U.S. at 122 (construing Section
16(b) narrowly).

   [13] Dreiling points to AOL’s agreement to enter into
Amendment 1 in early 2000 as the basis for his “hold” and
“sell” claims. These arguments also fail. First, Amendment 1
was an agreement between AOL and InfoSpace, not AOL and
Jain. InfoSpace’s Assistant General Counsel, Kurt Langkow,
drafted Amendment 1, and numerous other employees partici-
pated in the process preceding its execution. Moreover,
Amendment 1 did not have anything to do with “holding” or
“selling” InfoSpace’s stock. The Amendment may well have
been an attempt by InfoSpace and AOL to inflate InfoSpace’s
balance sheets, but it is not the kind of stock-related agree-
ment Section 13(d) contemplates. Finally, there is no evidence
whatsoever of coordination between Jain and AOL regarding
the stock transactions each party executed.
                   DREILING v. AMERICA ONLINE               11381
                       III.   CONCLUSION

   [14] After conducting an exhaustive review of this record,
we conclude (as did the district court) that Dreiling “offers no
probative evidence suggesting that there was ever an agree-
ment between AOL and [Jain], in his personal capacity, to act
together to acquire, hold, vote or dispose of InfoSpace stock.”
This fact is fatal to Dreiling’s theory of Section 16(b) liability,
because it means that AOL cannot be an “insider” subject to
disgorgement of the profits derived from its InfoSpace stock
trades. By bringing a Section 16(b) action against AOL,
Dreiling attempts to shoehorn facts that at worst may show
aiding and abetting accounting fraud—a theory for which
Dreiling would have no recovery—into an ill-fitting theory he
hopes to broaden. Given the narrow interpretation generally
given Section 16(b) by Congress and all judicial precedent
thus far, Section 16(b)’s intended purpose, and its blunt and
unforgiving nature, we cannot conclude that it should apply
to AOL under these facts. We therefore reject Dreiling’s
attempt to disguise an aiding and abetting of securities fraud
action—a claim barred by statutory and Supreme Court
precedent—as a short-swing profits case. We affirm the dis-
trict court’s decision to grant AOL summary judgment.

  AFFIRMED.