In Wagner v. Royal Bank of Scotland Grp. PLC, the United States District Court for the Southern District of New York denied a motion to dismiss Jeff Wagner's (the "Plaintiff") claim to recover short-swing profits generated by defendants, Royal Bank of Scotland Group PLC and its conglomerates (collectively, “Defendants”), through swap agreements that led to transactions in LyondellBasell Industries, N.V. (“LBI”) securities, of which Plaintiff was a shareholder. No. 12 Civ. 8726 (PAC), 2013 BL 239950 (S.D.N.Y. Sept. 5, 2013). In denying the Defendants’ motion to dismiss, the court recognized the Plaintiff’s complaint pursuant to Section 16(b) of the Securities Exchange Act of 1934 (“Section 16(b)”).
Since its formation in 2009, LBI maintained two classes of ordinary outstanding shares that were structured to automatically convert to a single class of ordinary outstanding shares upon a triggering event. On December 6, 2010, LBI’s Class B shares were converted into Class A shares according to this provision.
During October 2010, the Defendants and various counterparties entered swap agreements that related to specified baskets of equities. LBI’s Class B shares were the primary focus of several of these swap agreements. Between October 2010 and December 2010, the Defendants maintained beneficial ownership of more than 10% of LBI’s outstanding Class A shares.
Plaintiff alleged that because the Defendants controlled the equity baskets subject to the swap agreements, the addition of approximately 358,000 LBI Class B shares to the equity baskets between October and November 2010 was equivalent to purchasing the same quantity of Class B shares, which, in turn, was equivalent to purchasing Class A shares, a potential Section 16(b) violation.
The legislative intent of Section 16(b) was to prevent inside parties from “engaging in speculative transactions on the basis of information not available to others.” Section 16(b) imposes a strict-liability standard on insiders who procure short-swing profits on transactions made within a six-month period of time. Under Section 16(b), a plaintiff must prove that an issuer’s officers, directors, or principal shareholders purchased and sold its securities within a six-month period.
To support their motion to dismiss, Defendants first argued that the swap transactions at issue were exempt from Section 16(b) because the Defendants’ pecuniary interest in LBI securities was never affected by the swap transactions. Defendants emphasized that the swap transactions merely altered the nature of their beneficial ownership in the underlying securities. The court declined to address this issue because, in considering a motion to dismiss, a court must only assess the plausibility of facts alleged in the complaint and is not required to assess the factual validity.
Defendants also argued that the transactions were not based on any type of inside information that would trigger liability under Section 16(b). The court denied the validity of this argument based on precedent reemphasizing the strict liability standard imposed by Section 16(b), indicating that “such a blunt instrument was the only way to control insider trading.”
Finally, Defendants pointed to certain administrative decisions that ostensibly precluded similar transactions from Section 16(b) liability due to a lack of pecuniary interest in subject securities. The court, however, emphasized that the administrative decisions referenced were narrowly construed and expressly stated that “any different facts or conditions might require a different conclusion.” More importantly, the court pointed out that Defendants explicitly admitted to having a pecuniary interest in the LBI securities.
For the foregoing reasons, the court denied the Defendants’ motion to dismiss.
The primary materials for this case may be found on the DU Corporate Governance website.