Court Opinion

ID: 4095194
Source: CourtListenerOpinion
Date Created: 2016-11-03 14:00:31.946086+00
Date Added: 2024-06-11T14:09:03.373640
License: Public Domain

14-3800-cv
     Lowinger v. Morgan Stanley

 1                         UNITED STATES COURT OF APPEALS
 2
 3                                FOR THE SECOND CIRCUIT
 4
 5                                 August Term, 2014
 6
 7   (Argued: May 15, 2015                          Decided: November 3, 2016)
 8
 9                             Docket No. 14-3800-cv
10   - - - - - -       - - - - - - - - - - - - - - - - - - - - - - - - - -
11
12   ROBERT LOWINGER,
13
14                Plaintiff-Appellant,
15
16   THOMAS E. NELSON, individually and on behalf of all others
17   similarly situated, ROCK SOUTHWARD, derivatively on behalf of
18   himself and all others similarly situated, AVATAR SECURITIES,
19   LLC, MEREDITH BAILEY, on behalf of themselves and all others
20   similarly situated, DMITRI BOUGAKOV, on behalf of themselves and
21   all others similarly situated, RYAN CEFALU, on behalf of
22   themselves and all others similarly situated, LORRAIN CHIN, FIRST
23   NEW YORK SECURITIES L.L.C., ATISH GANDHI, on behalf of themselves
24   and all others similarly situated, PHILLIP GOLDBERG, on behalf of
25   themselves and all others similarly situated, ERIC HAMRICK, on
26   behalf of themselves and all others similarly situated, STEVE
27   JARVIS, JOE JOHNSON, on behalf of themselves and all others
28   similarly situated, NUHKET KAYAHAN, on behalf of themselves and
29   all others similarly situated, DAVID KENTON, on behalf of
30   themselves and all others similarly situated, DENNIS KUHN, on
31   behalf of themselves and all others similarly situated, BENJAMIN
32   LEVINE, on behalf of themselves and all others similarly
33   situated, KATHERINE LOIACONO, on behalf of themselves and all
34   others similarly situated, CRYSTAL MCMAHON, on behalf of
35   themselves and all others similarly situated, GEORGE
36   MICHALITSIANOS, on behalf of themselves and all others similarly
37   situated, RANDY TERESA MIELKE, on behalf of themselves and all
38   others similarly situated, JACINTO RIVERA, on behalf of
39   themselves and all others similarly situated, FAISAL SAMI, on
40   behalf of themselves and all others similarly situated, SANJEEV
41   SHARMA, on behalf of themselves and all others similarly
42   situated, COLIN SUZMAN, on behalf of themselves and all others
43   similarly situated, T3 TRADING GROUP, LLC, VIJAY AKKARAJU, ALEXIS
44   ALEXANDER, as custodian for Chloe Sophie Alexander, BRIAN ROFFE
45   PROFIT SHARING PLAN, individually and on behalf of all others

                                             1
 1   similarly situated, JOSE GALVAN, MARY GALVAN, ROBERT HERPST,
 2   individually and on behalf of all others similarly situated,
 3   SANJAY ISRANI, on behalf of themselves and all others similarly
 4   situated, KBC ASSET MANAGEMENT N.V., and the EMPLOYEES’
 5   RETIREMENT SYSTEM OF THE GOVERNMENT OF THE VIRGIN ISLANDS
 6   (Collectively, the INSTITUTIONAL INVESTORS), DOUGLAS M. LIGHTMAN,
 7   individually and on behalf of all others similarly situated,
 8   DENNIS PALKON, individually and on behalf of all others similarly
 9   situated, RICK POND, JACOB SALZMANN, individually and on behalf
10   of all others similarly situated, MICHAEL SPATZ, MAREN TWINING,
11   individually and on behalf of all others similarly situated,
12   GOLDRICH COUSINS P.C. 401(k) PROFIT SHARING PLAN & TRUST, IRVING
13   S. BRAUN, individually, EDWARD CHILDS, derivately on behalf of
14   himself and all others similarly situated, KATHY REICHENBAUM,
15   individually and on behalf of all others similarly situated, JUN
16   YAN, on behalf of herself and all others similarly situated,
17   ELBITA ALFONSO, VICKY JONES, PHYLLIS PETERSON, JERRY RAYBORN, on
18   behalf of themselves and all others similarly situated, EDWARD
19   VERNOFF, JUSTIN F. LAZARD, on behalf of himself and all others
20   similarly situated, SYLVIA GREGORCYZK, on behalf of herself and
21   all others similarly situated, PETER BRINCKERHOFF, GARRETT
22   GARRISON, DAVID GOLDBER, individually and on behalf of all others
23   similarly situated, KEVIN HYMS, individually and on behalf of all
24   others similarly situated, RICHARD P. EANNARINO, individually and
25   on behalf of all others similarly situated, PETER MAMULA,
26   individually and on behalf of all others similarly situated,
27   KHODAYAR AMIN, on behalf of himself and all others similarly
28   situated, ELLIOT LEITNER, individually and on behalf of all
29   others similarly situated, BARBARA STEINMAN, on behalf of herself
30   and all others similarly situated, HOWARD SAVITT, on behalf of
31   himself and all others similarly situated, CHAD RODERICK, EUGENE
32   STRICKER, individually and on behalf of all others similarly
33   situated, STEVE SEXTON, individually and on behalf of all others
34   similarly situated, KEITH WISE, individually and on behalf of all
35   others similarly situated, JONATHAN R. SIMON, JAMES CHANG,
36   individually and on behalf of all others similarly situated,
37   SAMEER ANSARI, individually and on behalf of all others similarly
38   situated, DARRYL LAZAR, individually and on behalf of all others
39   similarly situated, MICHAEL LIEBER, individually and on behalf of
40   other similarly situated, THOMAS J. AHRENDTSEN, AARON M. LEVINE,
41   individually and on behalf of all others similarly situated,
42   KAREN CUKER, individually and on behalf of all others similarly
43   situated, BRIAN GRALNICK, individually and on behalf of all
44   others similarly situated, JENNIFER STOKES, individually and on
45   behalf of all others similarly situated, VERNON R. DeMOIS, Jr.,
46   individually and on behalf of all others similarly situated, HAL
47   HUBUSCHMAN, derivately on behalf of Facebook, Inc., EDWARD
48   SHIERRY, individually and on behalf of all others similarly

                                     2
 1   situated, JANIS FLEMING, WILLIAM COLE, derivatively on behalf of
 2   Facebook, Inc., STEVE GRIFFIS, HOLLY McCONNAUGHEY, derivatively
 3   on behalf of Facebook Inc., GAYE JONES, derivatively on behalf of
 4   Facebook Inc., LIDIA LEVY, on behalf of herself and all others
 5   similarly situated,
 6
 7        Plaintiffs,
 8
 9                  v.
10
11   MORGAN STANLEY & CO. LLC, J.P. MORGAN SECURITIES LLC, GOLDMAN
12   SACHS & CO., and FACEBOOK, INC., a Delaware corporation,
13
14        Defendants-Appellees,
15
16   BARCLAYS CAPITAL INC., MERRILL LYNCH, PIERCE, FENNER & SMITH
17   INCORPORATED, ERSKINE B. BOWLES, JAMES W. BREYER, DAVID SPILLANE,
18   DAVID A. EBERSMAN, ALLEN & COMPANY LLC, BMO CAPITAL MARKETS
19   CORP., BLAYLOCK ROBERT VAN LLC, DONALD E. GRAHAM, C.L. KING &
20   ASSOCIATES, INC., REED HASTINGS, CABRERA CAPITAL MARKETS, LLC,
21   CASTLEOAK SECURITIES, L.P., PETER A. THIEL, CITIGROUP GLOBAL
22   MARKET, INC., MARK E. ZUCKERBERG, COWEN AND COMPANY, LLC, CREDIT
23   SUISSE SECURITES (USA) LLC, SHERYL K. SANDBERG, DEUTSCHE BANK
24   SECURITIES INC., CIPORA HERMAN, E TRADE SECURITIES LLC, ITAU BBA
25   USA SECURITIES, INC., LAZARD CAPITAL MARKETS LLC, LEBENTHAL &
26   CO., LLC, LOOP CAPITAL MARKETS LLC, M.R. BEAL & COMPANY,
27   MACQUARIE CAPITAL (USA) INC., MURIEL SIEBERT & CO., INC.,
28   OPPENHEIMER & CO., INCORPORATED, PACIFIC CREST SECURITIES LLC,
29   PIPER JAFFRAY & CO., RBC CAPITAL MARKETS, LLC, RAYMOND JAMES &
30   ASSOCIATES, INC., SAMUEL A. RAMIREZ & COMPANY, INC., STIFEL,
31   NICOLAUS & COMPANY, INC., THE WILLIAMS CAPITAL GROUP, L.P., WELLS
32   FARGO SECURITIES, LLC, WILLIAM BLAIR & COMPANY, L.L.C., NASDAQOMX
33   GROUP, INCORPORATED, LAWRENCE CORNECK, individually and on behalf
34   of all others similarly situated, JILL D. SIMON, CITIGROUP GLOBAL
35   MARKETS INC., ALLEN & FACEBOOK (sic) LLC, WILLIAM BLAIR &
36   FACEBOOK (sic) LLC, M.R. BEAL & FACEBOOK (sic) INCORPORATED,
37   COWEN AND FACEBOOK (sic) LLC, STIFEL NICHOLAS & FACEBOOK (sic)
38   INCORPORATED, SAMUEL A. RAMIREZ & FACEBOOK (sic) INC, KEVIN
39   HICKS, individually and on behalf of all others similarly
40   situated, LINH LUU, individually and on behalf of all others
41   similarly situated, HARVEY LAPIN, individually and on behalf of
42   all others similarly situated, KING & ASSOCIATES, INC., DAVID E.
43   (sic) EBERSMAN, NICK E. TRAN, THE NASDAQ STOCK MARKET L.L.C., a
44   Foreign Limited Liability Company, NASDAQ STOCK MARKET,

                                     3
 1   INCORPORATED, NASDAQ OMX GROUP, INCORPORATED, UMA M. SWAMINATHAN,
 2   ROBERT GREIFELD, ANNA M. EWING, MARC L. ANDREESSEN,
 3
 4        Defendants.*
 5
 6
 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
 8
 9   B e f o r e:      WINTER, LOHIER, and CARNEY, Circuit Judges.
10
11        Appeal from a grant by the United States District Court for

12   the Southern District of New York (Robert W. Sweet, Judge) of a

13   Rule 12(b)(6) motion dismissing appellant's complaint.           The

14   principal issue is whether standard lock-up agreements in an IPO

15   between lead underwriters and certain pre-IPO shareholders are

16   alone sufficient to render those parties a "group" under Section

17   13(d) and subject to Section 16(b) disgorgement under the

18   Securities Exchange Act of 1934.            We hold that they are not.   We,

19   therefore, affirm.

20                                        JEFFREY S. ABRAHAM (Mitchell M.Z.
21                                        Twersky & Philip T. Taylor on the
22                                        brief), Abraham, Fruchter &
23                                        Twersky, LLP, New York, NY, for
24                                        Plaintiff-Appellant.
25
26                                        JAMES P. ROUHANDEH (Charles S.
27                                        Duggan & Andrew Ditchfield on the
28                                        brief), Davis Polk & Wardwell LLP,
29                                        New York, NY, for Defendants-
30                                        Appellees Lead Underwriters.
31
32                                        Andrew B. Clubok, Kirkland & Ellis
33                                        LLP, New York, NY, for Defendant-
34                                        Appellee Facebook, Inc.
35

          *
              The Clerk is directed to amend the caption as above.

                                             4
 1                                   Michael A. Conley, John W. Avery,
 2                                   Nicholas J. Bronni, Securities and
 3                                   Exchange Commission, Washington,
 4                                   DC, for Amicus Curiae Securities
 5                                   and Exchange Commission.
 6
 7   WINTER, Circuit Judge:

 8        Robert Lowinger appeals from Judge Sweet's dismissal of his

 9   complaint pursuant to Fed. R. Civ. P. 12(b)(6).        The complaint

10   asserted claims under the Securities Exchange Act of 1934, 15

11   U.S.C. § 78p(b), against, inter alia, appellees Goldman Sachs &

12   Co., Morgan Stanley & Co., LLC, and J.P. Morgan Securities LLC

13   (collectively "Lead Underwriters").        It sought to hold them

14   liable under Section 16(b) for disgorgement of short-swing

15   profits received in connection with their sales and purchases of

16   shares in the course of Facebook, Inc.'s initial public offering

17   (“IPO”).

18        Section 16(b) requires a "beneficial owner" of ten percent

19   or more of an issuer's stock to disgorge all profits realized

20   from short sales or purchases of that security within a six-month

21   period.    See 15 U.S.C. § 78p(b).       The Lead Underwriters alone did

22   not meet the ten-percent threshold.        However, "beneficial owner,"

23   as defined in Section 13(d) of the Exchange Act, includes

24   “groups.”   Appellant contends that the Lead Underwriters and

25   certain pre-IPO shareholders together formed a group under

26   Section 13(d).

27

                                          5
 1        The group was allegedly formed by lock-up agreements between

 2   the Lead Underwriters and pre-IPO Shareholders (“Shareholders”).

 3   The lock-up agreements prevented the Shareholders from selling

 4   their stock for a specified period of time except as permitted by

 5   the Lead Underwriters.   The district court dismissed the

 6   complaint on the grounds that the lock-up agreements alone did

 7   not render the Lead Underwriters beneficial owners of the

 8   aggregated shares held by the Shareholders under Section 13(d).

 9   Because we agree that this standard form lock-up agreement is

10   insufficient, on its own, to establish a group under Section

11   13(d), we affirm.

12                               BACKGROUND

13        Upon review of a dismissal of a complaint under Fed. R. Civ.

14   P. 12(b)(6), the facts, and inferences to be drawn from those

15   facts, are viewed in the light most favorable to the plaintiff.

16   Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).

17        This appeal arises from the May 18, 2012 IPO by Facebook,

18   Inc. ("Facebook").   The offering was underwritten by a syndicate

19   of thirty-three financial firms (collectively, “Underwriters”),

20   including the three Lead Underwriters.   Goldman was a Lead

21   Underwriter, and some Goldman subsidiaries owned Facebook shares.

22   As part of the IPO process, each of the Shareholders (who, in the

23   aggregate, owned more than ten percent of Facebook's common

24   stock) entered into lock-up agreements with the Lead Underwriters

                                      6
 1   in order to "induce the Underwriters that may participate in the

 2   Public Offering to continue their efforts in connection with the

 3   Public Offering."     J. App'x at 73.     Appellant makes no claim that

 4   these lock-up agreements departed from standard underwriting

 5   practices.

 6        The lock-up agreements generally provided that the

 7   Shareholders would not sell or otherwise dispose of Facebook

 8   stock for periods ranging from 91 days to 211 days after the date

 9   of the Prospectus without the consent of Morgan Stanley as agent

10   for the Lead Underwriters.       The agreements were disclosed in

11   Facebook's Prospectus and Registration Statement.1

12        As is common in IPOs, the Registration Statement and

13   Prospectus alerted investors that the Underwriters might

14   "over-allot," i.e., sell more than the 421 million shares

15   earmarked for the IPO.      Permitting such sales allows underwriters

16   to stabilize fluctuating share prices during an offering by

17   increasing the supply of shares after the offering price has been

18   determined.    This ensures (and assures investors) that the entire

19   underwritten amount is sold.       Underwriters generally hedge this

20   extra allotment by establishing a short position on oversold

21   shares while simultaneously holding the shares long.

          1
            We may consider Facebook's Registration Statement and Prospectus as
     documents integral to the complaint. See Chambers, 282 F.3d at 152-53; see
     also San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris
     Cos., Inc., 75 F.3d 801, 808-09 (2d Cir. 1996).

                                          7
1    Underwriters are thus protected against upward or downward

2    movements in the stock's price.           The Facebook IPO permitted the

3    Underwriters to cover this short position either by purchasing

4    the requisite additional shares directly from Facebook and the

5    Shareholders at a fixed price (per the terms of a so-called

6    "over-allotment option," or "Green Shoe"), or by purchasing

7    shares directly from the open market once secondary trading had

 8   commenced.2

 9         Because of their role in the IPO, the Lead Underwriters were

10   necessarily granted access to nonpublic financial information

11   concerning Facebook.      In March and April 2012, Facebook shared

12   its internal forecasts with the Lead Underwriters for both the

13   second quarter of 2012 and for fiscal year 2012.            These forecasts

14   estimated revenue between $1.1 and $1.2 billion and approximately

15   $5 billion, respectively.       That information was "incorporated

16   into materials used by the Underwriters to market the Facebook

17   IPO to investors in a road show commenced on May 7, 2012."              J.

18   App'x at 20.

           2
             Facebook’s Registration Statement disclosed that “the underwriters may
     engage in transactions that stabilize, maintain or otherwise affect the price
     of the Class A common stock.” J. App’x at 43. This gave leeway to the IPO
     underwriters by allowing them to “sell more shares than they are obligated to
     purchase under the underwriting agreement, creating a short position” that
     they could cover by exercising a Green Shoe option or “by purchasing shares in
     the open market.” Such open-market purchases “may raise or maintain the
     market price of the Class A common stock above independent market levels or
     prevent or retard a decline in the market price of the common stock.”

                                           8
 1         That same day, May 7, however, the complaint alleges,

 2   Facebook revised its revenue estimates downward for the second

 3   quarter to the low end of the $1.1 to $1.2 billion range and

 4   projected the 2012 fiscal year estimate to be 3% to 3.5% lower

 5   than the previously forecasted $5 billion.          Facebook shared those

 6   concerns with Morgan Stanley.        On May 9, Facebook amended its

 7   Registration Statement to advise potential investors of its

 8   revised estimates.

 9         On May 17 and 18, 2012, the Underwriters sold 484,418,657

10   shares of Facebook common stock to the public at prices ranging

11   from $38.00 to $42.05 per share.          Facebook received $37.582 for

12   each share sold and the Underwriters received discounts and

13   commissions amounting to $0.418 per share.          Over 310 million of

14   these shares were sold by the Lead Underwriters, which generated

15   $129,000,000 in discounts and commissions for appellees.

16         Stating that the amendment to the Registration Statement did

17   not adequately disclose the revised estimates, the complaint

18   alleges that only after trading closed on May 18, 2012, did the

19   investors become aware that the Underwriters had already cut

20   their estimates for Facebook ahead of the IPO.3           On May 21, the

21   first trading day thereafter, Facebook's stock price declined to

           3
            Because this appeal raises only a claim under Section 16, which
     imposes a strict-liability rule, as discussed infra, the adequacy of
     disclosure and the misuse of material, nonpublic information are not before
     us.

                                           9
 1   "$34.03 on extremely high volume reflecting a decline of more

 2   than 10%" from the IPO price.    J. App'x at 25.   On May 22, 2012,

 3   a report by Reuters further divulged that the revised projections

 4   had been revealed by the Underwriters to select clients in a

 5   manner that avoided a general and direct disclosure of the

 6   relevant material information.   The decline continued and on May

 7   22, Facebook's stock closed at $31 per share -- 18.42% below the

 8   IPO price -- on high trading volume.

 9        During that period, the Underwriters declined to exercise

10   their Green Shoe option to cover their short positions, choosing

11   instead to purchase the over-allotted shares directly on the

12   secondary market, at prices lower than the Green Shoe fixed price

13   of $38.00 per share.   As a result, the Underwriters "made a

14   profit of about $100 million with the bulk of that profit [having

15   been] made on" May 21. J. App'x at 26 (internal citation and

16   quotation marks omitted).

17       On September 12, 2012, appellant, a Facebook shareholder,

18   made a demand on Facebook that it compel J.P. Morgan, Morgan

19   Stanley, and Goldman to disgorge their profits –- as explained

20   infra, calculated under Section 16(b) by subtracting the sales

21   prices of May 17 from the purchase prices during the following

22   four days.   Facebook declined to bring suit, and appellant filed

                                      10
 1   his complaint on June 12, 2013.4

 2         On May 2, 2014, the district court granted appellees' motion

 3   to dismiss the complaint.       It held that because appellant's

 4   Section 13(d) group allegation was based entirely on the lock-up

 5   agreements, it was insufficient to state a claim under Section

 6   16(b).    The district court noted that "[b]ecause lock-up

 7   agreements are standard industry practice," they are, without

 8   more, "insufficient to establish a Section 16(b) group."             In re

 9   Facebook, Inc., IPO Sec. & Derivative Litig., 986 F. Supp. 2d

10   544, 553 (S.D.N.Y. 2014).       The district court declined to reach

11   the alternative argument that the Underwriters' transactions were

12   exempt under SEC Rule 16a-7 as part of a good faith

13   underwriting.5

14

           4
             The Facebook IPO has spawned multiple lawsuits that have been
     consolidated in the district court. See In re Facebook, Inc., IPO Sec. &
     Derivative Litig., 922 F. Supp. 2d 475, 477 (S.D.N.Y. 2013). Only the Section
     16 issues are before us.

           5
             With regard to the Rule 16a-7 issue, the court stated, “Whether, if
     beneficial owners, the Lead Underwriters would be exempt from Section 16
     liability under Rule 16a–7 presents certain complex and unprecedented issues,
     for instance, whether Defendants' creation of informational disparities
     accompanied by unusually high levels of short selling, though compliant with
     the letter of the law, may still be ‘indecent’ or ‘dishonest’ for purposes of
     determining ‘good faith.’ The Court declines to reach these issues at this
     time, because even if the Lead Underwriters are not exempt under the statute,
     they lack the prerequisite ‘beneficial owner’ status for Section 16 to apply.”
     In re Facebook, Inc., 986 F. Supp. at 554 (internal citations omitted). In
     view of our disposition of this matter, we also do not address this Rule 16a-7
     issue.

                                           11
 1          This appeal followed.   We solicited, and received, the views

 2   of the SEC, as amicus curiae, relevant to the disposition of this

 3   appeal.

 4                                  DISCUSSION

 5          We review de novo a district court's dismissal of a

 6   complaint pursuant to Rule 12(b)(6). See Chambers, 282 F.3d at

 7   152.   To survive dismissal, a complaint must plead "enough facts

 8   to state a claim to relief that is plausible on its face."      Bell

 9   Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

10          Section 16(a) of the Exchange Act provides that any

11   director, officer, or "beneficial owner of more than 10 percent

12   of" a firm’s securities, commonly called "statutory insiders,"

13   must report to the SEC the amount owned and must disclose changes

14   in ownership. 15 U.S.C. § 78p(a).       Section 16(b), intended to

15   prevent the defined insiders from profiting from short-swing

16   variations in share price, imposes a strict-liability rule for

17   disgorgement of profits.   It states:

18               For the purpose of preventing the unfair use
19               of information which may have been obtained
20               by such beneficial owner . . . by reason of
21               his relationship to the issuer, any profit
22               realized by him from any purchase and sale
23               . . . of any equity security of such issuer
24               . . . within any period of less than six
25               months . . . shall inure to and be
26               recoverable by the issuer, irrespective of
27               any intention on the part of such beneficial
28               owner . . . in entering into such
29               transaction.
30

                                        12
 1   15 U.S.C. § 78p(b).      A disgorgement action may be brought by the

 2   issuer or on behalf of the issuer by a security holder, like

 3   appellant.    Because Section 16(b) operates regardless of intent

 4   and calculates “profits” in an automatic and non-intuitive way,6

 5   we have cautioned that Section 16(b) is a "blunt instrument" to

 6   be confined within "narrowly drawn limits."          Magma Power Co. v.

 7   Dow Chem. Co., 136 F.3d 316, 321 (2d Cir. 1998) (internal

 8   quotation marks omitted).

 9         To state a claim, the complaint here must allege facts

10   demonstrating that appellees were at relevant times statutory

11   insiders, i.e., as pertinent here, beneficial owners of more than

12   ten percent of Facebook's stock.           Congress did not explicitly

13   define the term "beneficial owner," see Levy v. Southbrook Int'l

14   Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001), but the SEC has

15   adopted Exchange Act Rule 16a-1, defining beneficial owner to

16   mean "any person who is deemed a beneficial owner pursuant to

17   Section 13(d) of the [Exchange] Act and the rules thereunder,"

           6
            Section 16(b), long recognized by this court as a “crude,”
     “arbitrary,” and “Draconian” mechanism for curbing insider trading, see Blau
     v. Lamb, 363 F.2d 507, 515 (2d Cir. 1966), is especially so with respect to
     calculating the amount of “profit realized” from short-swing trading, see
     Smolowe v. Delendo Corp., 136 F.2d 231, 239 (2d Cir. 1943) (setting forth the
     general procedure for calculating disgorgement under Section 16(b)). Under
     the established method of calculating disgorgeable “profit” for Section 16(b)
     purposes, an individual may be charged with a Section 16(b) “profit” even when
     his or her relevant trading actually resulted in a substantial financial loss.
     See Feder v. Frost, 220 F.3d 29, 32 (2d Cir. 2000); Adler v. Klawans, 267 F.2d
     840, 847-48 (2d Cir. 1959). For example, imagine a statutory insider who
     purchases 100 shares at $100 per share on January 1, sells 100 shares at $50
     per share on February 1, purchases 100 shares at $150 per share on March 1,
     and sells 100 shares for $125 per share on April 1. This trader has lost
     $7,500 in real terms, but he has a profit of $2,500 for Section 16(b)
     purposes. See Smolowe, 136 F.2d at 239.

                                           13
1    17 C.F.R. § 240 16a-1(a); see also Ownership Reports and Trading

2    by Officers, Directors and Principal Security Holders, Exchange

3    Act Release No. 34-28869, 56 Fed. Reg. 7242, 7244 (Feb. 21,

4    1991).    Section 13(d) requires any person acquiring beneficial

5    ownership of five percent or more of a corporation's common stock

6    to disclose certain information.      See 15 U.S.C. § 78m(d).

7    Section 13(d)’s purpose is to compel disclosure of certain events

 8   that may portend changes in corporate control.     Wellman v

 9   Dickinson, 682 F.2d 355, 365 (2d Cir. 1982).

10        Exchange Act Rule 13d-3(a) describes a beneficial owner as

11   "any person who, directly or indirectly, through any contract,

12   arrangement, understanding, relationship, or otherwise has or

13   shares:   (1) Voting power . . . ; and/or, (2) Investment power

14   which includes the power to dispose, or to direct the disposition

15   of, such security."   17 C.F.R. § 240.13d-3(a).    Additionally,

16   according to Section 13(d)(3), "[w]hen two or more persons act as

17   a partnership, limited partnership, syndicate, or other group for

18   the purpose of acquiring, holding, or disposing of securities of

19   an issuer, such syndicate or group shall be deemed a 'person' for

20   the purposes of this subsection."     15 U.S.C. § 78m(d)(3); see

21   also 17 C.F.R. § 240.16a-1(a)(1).      Ultimately, according to

22   Exchange Act Rule 13d-5(b)(1), "[w]hen two or more persons agree

23   to act together for the purpose of acquiring, holding, voting or

24   disposing of equity securities of an issuer, the group formed

                                      14
 1   thereby shall be deemed to have acquired beneficial ownership,

 2   for purposes of section [] 13(d) . . . of all equity securities

 3   of that issuer beneficially owned by any such persons."      17

 4   C.F.R. § 240.13d-5(b)(1).   This Rule tracks the language of

 5   Section 13(d), except for its addition of “voting” to the acts

 6   that trigger a “group” finding.

 7        It is agreed that the Underwriters themselves did not hold

 8   ten percent of Facebook’s stock.       Rather, appellant alleges that

 9   the Underwriters were members of a group that in the aggregate

10   held ten percent of Facebook shares.      This group was allegedly

11   formed by the lock-up agreements between the Lead Underwriters

12   and Shareholders, which prevented the Shareholders from selling

13   (“disposing,” in statutory language) their pre-IPO shares of

14   Facebook stock for a specified period of time after the IPO

15   without the Lead Underwriters’ consent.

16        A plain language argument suggests application of Section

17   13(d), but we have explicitly avoided holding that such an

18   agreement, without more, forms a group under Section 13(d).

19   Rather, we have stated only that a lock-up agreement "may bear

20   upon" the question of whether a group exists or that evidence of

21   coordination in acquiring, holding, or disposing of securities

22   may demonstrate the existence of a group.      Morales v. Quintel

23   Entm’t, Inc., 249 F.3d 115, 127 (2d Cir. 2001); see also CSX

24   Corp. v. Children’s Inv. Fund Mgmt. (UK) LLP, 654 F.3d 276, 283

                                       15
 1   (2d Cir. 2011) (noting that the "touchstone" of the court's

 2   finding of a group is that "the members combined in furtherance

 3   of a common objective" to acquire, hold, vote or dispose of

 4   securities) (internal quotation marks omitted).

 5        Our reluctance to recognize the existence of a “group,”

 6   notwithstanding a contractual arrangement explicitly limiting the

 7   disposal of shares, reflects the fact that lock-up agreements,

 8   rather than being agreements “to act together,” are generally

 9   one-way streets keeping certain shareholders out of the IPO

10   market for a specified period of time or without compliance with

11   other restrictions, as discussed immediately below.

12        However, we cannot avoid a larger, legitimate concern

13   emphasized in the SEC’s amicus brief over applying Section 13(d)

14   literally in the context of standard lock-up agreements.    As the

15   brief notes, a lock-up agreement is common, Brief of the SEC as

16   Amicus Curiae, at 19 (citing NYSE/NASD IPO Advisory Comm., Report

17   & Recommendations of a committee convened by the NYSE, Inc. &

18   NASD at the request of the U.S. Securities and Exchange

19   Commission (May 2003), at p.16, available at

20   http://www.finra.org/sites/default/files/Industry/p010373.pdf),

21   even essential, to the typical IPO, and some other public

22   offerings as well, id. at 19-22.    Such an agreement assures

23   potential buyers of securities in the IPO “that shares owned [by

24   pre-IPO shareholders of the issuer will not] enter the public

                                    16
 1   market too soon after the offering.”   Initial Public Offerings:

 2   Lockup Agreements, Fast Answers, U.S. Securities & Exchange

 3   Commission, available at http://www.sec.gov/answers/lockup.htm

 4   (last visited Oct. 17, 2016); see also In re Facebook, Inc., 986

 5   F. Supp. 2d at 553.   These assurances lead investors reasonably

 6   to expect an orderly market free of the danger of large sales of

 7   pre-owned shares depressing the share price before the pricing of

 8   the newly offered shares has settled in the market.

 9        Applying Section 16(b) to underwriters engaged in lock-up

10   agreements as facilitators of a public offering would impair the

11   market for public offerings by complicating the role of

12   underwriters –- adding tens of millions of dollars in legal

13   exposure to the underwriters’ costs.   As parties to lock-up

14   agreements, the underwriters are not acting as investors seeking

15   to buy low and sell high.   Rather, they are conduits for the

16   distribution of securities in an offering to the public in which

17   their participation begins and ends with the offering.    A central

18   role of the standard lock-up agreement is to limit the investment

19   decisions of large shareholders in order to bring about an

20   orderly, and successful, offering.

21        Public offerings are heavily regulated.   See, e.g., In re

22   Public Offering Fee Antitrust Litig., 98-cv-7890 (LLM), 2003 WL

23   21496795, at *2 (S.D.N.Y. June 27, 2003); David A. Westenberg,

24   Initial Public Offerings:   A Practical Guide to Going Public,

                                     17
 1   § 18:12 (1st ed. 2011).    Among the most heavily regulated are

 2   IPOs.     See Adoption of Integrated Disclosure System, Securities

 3   Act Release No. 33-6383, 47 Fed. Reg. 11380 (Mar. 16, 1982).

 4   Disclosure to the public of relevant facts is extensive and, in

 5   this case, included all of the pertinent facts asserted in the

 6   complaint.    IPOs contemplate the sharing of confidential

 7   financial information with underwriters, agreements between

 8   underwriters and large pre-IPO shareholders limiting disposal of

 9   their shares, and trading by underwriters in the course of the

10   offering.    Far from being nefarious, these actions benefit

11   existing shareholders and new public investors.    For example, one

12   purpose of the regulation of public offerings is to enhance

13   relatively accurate pricing of the offering’s shares by

14   disclosure before sales of an offering to the public are allowed.

15   See 15 U.S.C. § 77h.    Achieving that purpose requires assurances

16   of control over the disposition of blocs of shares owned by large

17   pre-IPO investors, and lock-up agreements provide that control.

18   (One effect of a lock-up agreement in an IPO is to prevent pre-

19   IPO insiders from using nonpublic information to trade in a

20   nascent public market.)    The purpose also requires stabilization

21   efforts by underwriters, as discussed above.    Lock-up agreements

22   are, therefore, essential to the regulation of public offerings.

23           As amicus, the SEC advises us that ordinary lock-up

24   agreements do not implicate the purposes of Section 13(d) and its

                                       18
 1   definition of a “group.”   Section 13(d) is intended to alert

 2   investors about possible changes in control and provide

 3   information about possible parties to those changes.   See, e.g.,

 4   Brief of the SEC, Amicus Curiae, Morales v. Quintel Entm't, Inc.,

 5   249 F.3d 115 (2d Cir. 2001), at 20–21 ("There is no doubt that

 6   the purpose of Section 13(d) is to require disclosure of

 7   information by persons who have acquired a substantial interest,

 8   or increased their interest in equity securities of a company by

 9   a substantial amount . . . so that investors might assess the

10   potential for changes in corporate control and adequately

11   evaluate the company's worth.") (internal quotation marks

12   omitted).   To that end, the beneficial ownership rule seeks to

13   "prevent a group of persons who seek to pool their voting or

14   other interests . . . from evading" Section 13(d)'s disclosure

15   requirements.   Wellman, 682 F.2d at 366 (quoting S. Rep. No. 550,

16   90th Cong., 1st Sess. 8 (1967)).

17        While appellant is correct that both the Underwriters and

18   Shareholders hoped to profit from the IPO -- the Underwriters

19   profiting according to the underwriting agreement and the

20   Shareholders profiting from a newly established public market for

21   their shares -- this common objective creates no need for

22   information about potential changes in control beyond that

23   inherent in a public offering.   Using Section 13(d) to create a

24   “group” subject to Section 16(b) would impose large damages on

                                      19
 1   transitory conduits of a public offering of shares.            This

 2   imposition of damages would have nothing to do with the allaying

 3   of concerns about changes in control but would greatly raise the

 4   costs, and reduce the number, of IPOs.

 5         To be sure, our analysis applies only to standard lock-up

6    agreements like those at issue here.         As the SEC’s amicus brief

7    states, “[a]typical language in the lock-up agreement, or other

8    facts and circumstances outside of the lock-up agreement,” may

9    trigger a Section 13(d) “group” finding.          Brief of the SEC as

10   Amicus Curiae, at 22.      Our cases, discussed supra, have clearly

11   indicated that coordination between underwriters and the other

12   parties to a lock-up agreement with implications for control

13   changes beyond those inherent in an IPO might trigger such a

14   finding.    But no facts alleged in this matter, in the petition

15   for reconsideration in the district court, or in the request to

16   amend persuade us that such a trigger exists.7

17         We, therefore, affirm.

           7
            Appellant also advances an argument based on the fact that Goldman
     subsidiaries owned some pre-IPO Facebook shares. The substance of appellant’s
     argument is rendered rather murky by issues related to how it was raised in
     the district court. Goldman’s subsidiaries’ ownership of pre-IPO Facebook
     shares was disclosed in the documents filed with the SEC that accompanied the
     IPO and its underwriting. J. App’x at 106. These documents were before the
     district court on the motion to dismiss, but appellant raised the stock
     ownership issues as relevant only in its motion for reconsideration in the
     district court. It comes before us as a claim of error by that court either
     in its decision on the merits or in the court’s declining to allow the
     complaint to be amended. We hold that these allegations do not render the
     lock-up agreements here as atypical in a way pertinent to our refusal to apply
     Section 13(d). No facts that might be alleged by plaintiff suggest, whether
     the lock-up agreements covered the Goldman shares or not, any implications
     regarding control changes as contemplated by Section 13(d) as is fully
     explained in the text.

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