A recent decision by the SDNY absolved a Section 16 filer of liability under Section 16(b), but it was the filer’s own oversight that led to the litigation in the first place. The case, Microbot Medical v. Alliance Investment Management, arose after Alliance, an investment adviser and broker dealer, filed a late Form 3 and a late Form 4 on January 17, 2019, reporting that Alliance became a ten percent owner of Microbot on November 11, 2018 and engaged in a number of short-swing transactions after that date. Microbot (represented by David Lopez and Miriam Tauber) filed a complaint to recover the short-swing profits, at which point Alliance apparently took a closer look at what it had done and concluded that it was not a ten percent owner because the Microbot stock it reported was acquired for a customer account, at the customer’s direction, and Alliance had no investment discretion over the account.
Alliance asked the SEC staff to expunge its Form 3 and Form 4 from EDGAR and filed an answer to the complaint explaining the error and denying liability. The customer who owned the account, Joseph Mona, then filed a Form 3 and two Forms 5, reporting the same holdings and transactions Alliance had reported. Microbot responded by amending the complaint to add Mona as a defendant but continuing to seek recovery from Alliance. Alliance filed a motion for summary judgment, which the district court granted last week.
The litigation wasn’t easy, and involved battles over discovery as well as the motion for summary judgment. Before it was over, both parties filed motions to impose Rule 11 sanctions on the other. The details are set forth in a magistrate’s report, which the district court incorporated into its decision. Both motions for sanctions were denied.
While the case doesn’t really address any Section 16(b) issues, it does highlight the importance to financial institutions of having compliance personnel who know Section 13(d) and Section 16. Alliance appears to have made its filings without recognizing the short-swing liability they exposed. Litigating out of the oversight took nearly 18 months, and couldn’t have been cheap.
-Alan Dye, Section16.net September 24, 2020
