Court Opinion

ID: 4253846
Source: CourtListenerOpinion
Date Created: 2018-03-13 00:00:23.413205+00
Date Added: 2024-06-11T14:43:48.333723
License: Public Domain

Case: 17-20346      Document: 00514381841         Page: 1    Date Filed: 03/12/2018

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                         United States Court of Appeals
                                                                                  Fifth Circuit

                                      No. 17-20346                              FILED
                                                                          March 12, 2018
                                                                           Lyle W. Cayce
J. D. JORDAN,                                                                   Clerk

              Plaintiff - Appellant

v.

ROBERT C. FLEXTON, President and Chief Executive Officer; MARION
ALONSO, Executive Vice President; CATHERINE CALLAWAY, Executive
Vice President & General Counsel; JEANNE BURKE, Executive Vice
President; CLINT FREELAND, Executive Vice President and Chief Financial
Officer; HENRY JONES, Executive Vice President,

              Defendants - Appellees

                   Appeal from the United States District Court
                        for the Southern District of Texas
                             USDC No. 4:16-CV-3316

Before WIENER, GRAVES, and HO, Circuit Judges.
PER CURIAM:*
       Plaintiff-Appellant J.D. Jordan appeals the district court’s Rule 12(b)(6)
dismissal of his shareholder lawsuit seeking to recover for Dynegy, Inc.

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
     Case: 17-20346       Document: 00514381841         Page: 2     Date Filed: 03/12/2018

                                       No. 17-20346
(“Dynegy”) “short-swing insider trading profits” 1 pursuant to § 16(b) of the
Securities Exchange Act. Jordan contends that the district court improperly
determined that the transactions at issue were exempt from the disgorgement
requirements of § 16(b). We affirm the district court’s dismissal of Jordan’s
action for failure to state a claim.
                              I. FACTS AND PROCEEDINGS
       Jordan alleges that he is a shareholder of Dynegy and that the above-
named Defendants-Appellees (“defendants”) were officers of Dynegy at all
relevant times. 2 Jordan further alleges that the defendants made “short-swing
insider trading profits” on a series of dispositions of equity securities of that
company. He asserts that, because these dispositions occurred less than six
months after the defendants received the equity securities from Dynegy, the
profits must be disgorged to the corporation in accordance with § 16(b). 3 Jordan
argues that the transactions are governed by § 16(b) and do not qualify for an
exemption under Rule 16b-3(e) because the transactions were neither pre-
approved nor automatic, both of which are required for that exemption to
apply.
       Jordan sued the defendants in the Southern District of Texas in
November 2016. 4 The defendants filed a motion to dismiss pursuant to

       1 15 U.S.C.A. § 78p describes short-swing insider trading as “any purchase and sale,
or any sale and purchase, of any equity security of such issuer (other than an exempted
security) or a security-based swap agreement involving any such equity security within any
period of less than six months.”
       2In their brief, the defendants indicate that Jordan has misspelled many of their
names. This opinion uses the names as Jordan initially spelled them when filing this lawsuit.
       3 The security grants were made pursuant to a long term compensation plan. Jordan
does not allege facts to demonstrate that such grants were “non-exempt purchases” as
contemplated in § 16(b). We will nevertheless assume, arguendo, that the stock grants
constitute non-exempt purchases under § 16(b).
       4After filing suit, Jordan sent an email to Dynegy’s corporate counsel, suggesting that
if Dynegy would pay him a “consulting fee equal to 12% of the amount claimed[,]” he would
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                                       No. 17-20346
Rule 12(b)(6), asserting that the stock transfers at issue were exempt from §
16(b) under the express language of Rule 16b-3(e). The defendants argued, in
the alternative, that Jordan’s claims should be dismissed because the
dispositions at issue were made pursuant to an equity compensation plan and
thus not the type of transaction restricted by § 16(b). The district court
determined that the transactions were “compensation related” and “designed
to be exempt under Section 16b-3(e).” 5 The court dismissed Jordan’s claims,
and he timely appealed.
                                  II. LAW AND ANALYSIS
   A. Standard of Review
       This court reviews the grant of a motion to dismiss de novo, “accepting
all well-pleaded facts as true and viewing those facts in the light most favorable
to the plaintiff.” 6 “To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” 7 “A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” 8 “Threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements,

enter a confidential agreement “provid[ing] a full and complete release” and dismiss the suit
with prejudice. The parties did not enter into any such agreement.
       5As Jordan emphasizes in his brief, there is no “Section 16b-3(e)” in the Security
Exchange Act. SEC Rule 16b-3(e), however, does exist and both Jordan and the defendants
discuss Rule 16b-3(e) in their filings. The district court’s reference to “Section 16b-3(e),” as
opposed to Rule 16b-3(e), appears to have been a typographical error.
       6Hines v. Alldredge, 783 F.3d 197, 201 (5th Cir. 2015) (quoting True v. Robles, 571
F.3d 412, 417 (5th Cir. 2009)).
       7Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)).
       8   Id.
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do not suffice.” 9        Although a complaint “does not need detailed factual
allegations,” the “allegations must be enough to raise a right to relief above the
speculative level . . . .” 10 “[C]onclusory allegations or legal conclusions
masquerading as factual conclusions will not suffice to prevent a motion to
dismiss.” 11
   B. Section 16(b)
       Under § 16(b) of the Securities Exchange Act, 12 a shareholder “may bring
suit against the officers, directors, and certain beneficial owners of the
corporation who realize any profits from the purchase and sale, or sale and
purchase, of the corporation’s securities within any 6–month period.” 13 “To
state a claim for disgorgement of short-swing profits under Section 16(b), a
plaintiff must allege: (1) a non-exempt purchase and subsequent non-exempt
sale (or a non-exempt sale and subsequent non-exempt purchase) of a class of
an issuer’s equity securities (2) within a six-month period (3) by a statutory
insider.” 14

       9   Id.
       10   Twombly, 550 U.S. at 555.
        Beavers v. Metro. Life Ins. Co., 566 F.3d 436, 439 (5th Cir. 2009) (quoting Fernandez-
       11

Montes v. Allied Pilots Ass’n, 987 F.2d 278, 284 (5th Cir. 1993)).
       12   15 U.S.C. § 78p(b).
       13   Credit Suisse Sec. (USA) LLC v. Simmonds, 566 U.S. 221, 223 (2012).
       14 In re Facebook, Inc., IPO Sec. & Derivative Litig., 986 F. Supp. 2d 544, 550 (S.D.N.Y.
2014) (citing Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998));
Sun River Energy, Inc. v. McMillan, 3:13-cv-2456-D, 2014 WL 4771852 at *6 (N.D. Tex. Sept.
25, 2014) (citing Gwozdzinsky, 156 F.3d at 308); Donoghue v. Patterson Companies, Inc., 990
F. Supp. 2d 421, 424 (S.D.N.Y. 2013) (“To plead a plausible claim for a violation of Section
16(b), plaintiff must plead facts sufficient to show that there is the purchase and sale (or sale
and purchase) of a security not otherwise exempt from Section 16(b).”). The parties do not
dispute that the transactions at issue occurred within a six-month period and involved
statutory insiders.
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                                         No. 17-20346
       The Securities and Exchange Commission (“SEC”), however, has
provided specific exemptions from § 16(b)’s general requirements. Apropos
here, a disposition of equity securities from an officer or director to the issuer—
Dynegy, in this case—is exempt from § 16(b)’s disgorgement requirement if the
transaction (1) is not discretionary and (2) is pre-approved in accordance with
the requirements of Rule 16b-3. 15 To survive the defendants’ motion to dismiss,
Jordan had to have pled facts which demonstrate that the dispositions were
discretionary or not pre-approved in accordance with Rule 16b-3.
             a. Jordan failed to allege facts which show that the dispositions were
                discretionary.
       To qualify as discretionary under Rule 16b-3(e), a transaction must be
“at the volition of a plan participant”; 16 not made as a result of the participant’s
death, retirement, or termination; not required to be available to the
participant by the IRS; and result in an intra-plan transfer of equity securities
or cash, “funded by a volitional disposition of an issuer equity security.” 17
       The only allegation in Jordan’s complaint regarding whether the
transactions were discretionary is that “none of the dispositions . . . were
‘automatic’ as required to achieve an exemption under 16b-3(e) as the approval
documents give the choice of payment of the tax liability to the insider. . . .” 18

       1517 C.F.R. § 240.16b-3(e) (2017). The transaction may be pre-approved by the issuer’s
board of directors, a committee of the board, or a majority of the shareholders.
       16 17 C.F.R. § 240.16b-3(b)(1) (2017). Jordan also seems to argue that the transactions
were discretionary because the issuer—Dynegy—had discretion whether to accept cash or
stock for the tax liability. The plain language of Rule 16b-3(e) refutes this argument.
       17   17 C.F.R. § 240.16b-3(b)(1) (2017).
       18 Other than this single allegation, Jordan did not address the discretionary nature
of these transactions in the district court. The defendants contend that Jordan has waived
this issue because he did not raise it in the district court. “An argument not raised before the
district court cannot be asserted for the first time on appeal.” SmithGroup JJR, P.L.L.C. v.
Forrest Gen. Hosp., 661 F. App’x 261, 265 (5th Cir. 2016) (quoting XL Specialty Ins. Co. v.
Kiewit Offshore Servs., Ltd., 513 F.3d 146, 153 (5th Cir. 2008)); see also United States v.
Zuniga, 860 F.3d 276, 285 n.9 (5th Cir. 2017) (“Failure to raise a claim to the district court
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                                            No. 17-20346
Jordan does not, however, allege any facts to support his conclusion that
allowing the defendants to choose between using cash or securities to fulfill a
tax withholding right means the dispositions were “at the volition of a plan
participant.” 19 His bald legal conclusions, therefore, “will not suffice to prevent
a motion to dismiss.” 20
             b. Jordan failed to allege facts which demonstrate that the
                dispositions were not pre-approved in accordance with Rule 16b-3.
       Under Rule 16b-3, a transaction is exempt from § 16(b)’s disgorgement
requirements when an issuer such as Dynegy has pre-approved a transaction
involving equity securities. 21 To qualify as “pre-approved” under this rule, the
terms of the transaction must be approved in advance by the issuer’s
shareholders, board of directors, or a board committee. 22 The SEC has specified
that to qualify as pre-approved, either “each specific transaction” must be
approved in advance or the board or shareholders must pre-approve “a plan
pursuant to which the terms and conditions of each transaction are fixed in
advance.” 23 Such pre-approval applies to plans that call for the disposition of

‘constitutes a forfeiture, not a waiver, of that right for the purposes of appeal.’” (quoting
United States v. Chavez-Valencia, 116 F.3d 127, 130 (5th Cir. 1997)). Given Jordan’s status
as a pro se litigant, however, we will view this allegation as sufficient to preserve his right to
challenge the discretionary nature of the transaction on appeal. See Calhoun v. Hargrove,
312 F.3d 730,733 (5th Cir. 2002) (quoting Taylor v. Books A Million, Inc., 296 F.3d 376, 378
(5th Cir. 2002) (explaining that pro se litigants should be “held to less stringent standards
that formal pleadings drafted by lawyers”)).
       19Jordan acknowledges in his brief that the defendants, as the plan participants, did
not have “any control over the timing of the transaction, the amount of the tax payment made
to Dynegy, or the price at which the restricted stock units were disposed.” Jordan did not
include these factual details in his complaint, but they lend further support to the conclusion
that the dispositions were not discretionary.
       20   Fernandez-Montes, 987 F.2d at 284.
       21   17 C.F.R. § 240.16b-3 (2017).
       22   17 C.F.R. § 240.16b-3(d)–(e) (2017).
       23   17 C.F.R. § 240.16b-3 n.3 (2017).
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shares for tax withholdings: “Where the terms of a subsequent transaction
(such as . . . the provision of an exercise or tax withholding right) are provided
for in a transaction as initially approved . . . such subsequent transaction shall
not require further specific approval.” 24
       Jordan admits that the equity securities at issue were withheld pursuant
to Dynegy’s 2012 Long-Term Incentive Plan. 25 His opening brief does not
otherwise discuss whether the transactions were pre-approved. In his reply
brief, however, he contends that when a transaction is pre-approved, but allows
a director or officer the discretion to pay tax liability in cash or in equity shares,
such approval does not satisfy the requirements of Rule 16b-3(e). Fifth Circuit
law is “clear that any issue not raised in an appellant’s opening brief is
forfeited.” 26 Even under the more lenient standard afforded to pro se litigants,
Jordan has forfeited this issue. 27
                                       III. CONCLUSION
       We have reviewed the briefs, the record, the district court’s decision, and
the applicable law, as a result of which we are convinced that Jordan has failed
to allege facts which demonstrate that the dispositions were not exempt from
§ 16(b)’s requirements. We are satisfied that the district court was correct in
dismissing Jordan’s claims.
       AFFIRMED.

       24   17 C.F.R. § 240.16b-3 n.3 (2017).
       25The defendants explain that the Plan was a long-term incentive plan approved by
stockholders after Dynegy emerged from Chapter 11 bankruptcy.
       26United States v. Bowen, 818 F.3d 179, 192 (5th Cir.), cert. denied, 136 S. Ct. 2477,
195 L. Ed. 2d 812 (2016).
       27See Longoria v. Dretke, 507 F.3d 898, 901 (5th Cir. 2007) (“Although we liberally
construe pro se briefs, such litigants must still brief contentions in order to preserve them.”).
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