A California judge has denied a motion for summary judgment filed by O.C. Kim, the CEO of OTC-traded Franklin Wireless, in a 16(b) action alleging that Kim’s sale of common stock was matchable with his adult daughter’s purchase. The insider had argued that the daughter’s acquisition was not a purchase and that, even if it was, the insider didn’t beneficially own his daughter’s shares.
The alleged purchase involved the daughter’s acquisition of stock from the insider’s sister, who lived in Korea. The sister was having difficulty selling her stock because there is a limited market for OTC securities in Korea, so she asked the insider’s daughter to sell the securities for her in the U.S. and said the daughter could keep any sale proceeds exceeding the current market price of $2.50 a share.
The insider reported the daughter’s acquisition as a “purchase” (using transaction code “P”) and showing ownership of the shares indirectly through his daughter. Kim sold 500,000 directly owned shares three months later for $15 a share, but the Form 4 reporting the sale didn’t show the daughter’s holdings.
The court held that the following facts created a triable question of fact regarding whether the daughter’s acquisition was a purchase, making summary judgment inappropriate:
- The insider completed the Form 4 himself and reported the transaction as a purchase
- The insider executed the Form 4 under penalty of perjury
- The insider never amended the Form 4 to disavow a purchase, even though he had amended other Forms 4 in the past
- The daughter testified at her deposition that she took title to the securities at $2.50 a share, as a consignment, and later returned the shares to the sister
- Franklin’s general counsel said in an email that the daughter “purchased” the shares at $2.50 a share
Regarding beneficial ownership, the court noted that the daughter was an adult and had a full-time job at a salary of $150,000 a year. It appears that the daughter was not residing with the insider at the time of her acquisition of stock, but the court held that a triable question of fact existed regarding beneficial ownership because:
- Kim’s first Form 4 reported that he beneficially owned the daughter’s shares indirectly
- The daughter may have been financially dependent on the insider, as evidenced by (i) the daughter’s testimony that she resided with her parents for a year or less beginning in 2018 (the alleged purchase occurred in late 2020)
- Kim made gifts of $15,000 to the daughter on two or three occasions
- The insider and his wife loaned $100,000 to the daughter in 2019 to help her purchase a house.
If the daughter didn’t live with her parents at the time of her alleged purchase, the court relied on slim evidence supporting attribution of beneficial ownership to the insider. The litigation in this case has been contentious, though, so the court may be right in deferring findings of fact until a full trial has been conducted.
In a separate decision, the court granted the plaintiff’s motion for judgment on the pleadings regarding Kim’s assertion of equitable defenses, effectively striking the defenses of laches, estoppel, waiver, acquiescence and unclean hands on the ground that equitable defenses are not allowed in a 16(b) action.
– Alan Dye, Section16.net, March 15, 2023