Complaint Dismissed as Moot After Issuer Files 8-K Disclosing Recovery of Profit
A federal district judge has dismissed a complaint filed by David Lopez and Miriam Tauber seeking to recover a short-swing profit, holding that the action was rendered moot by the insider’s prior disgorgement of the profit, as disclosed in a Form 8-K filed by the issuer. See Donoghue v. Astro Aerospace Ltd.
Mootness isn’t a common basis for dismissing 16(b) complaints, but the case also is interesting for the way the issuer stonewalled the plaintiffs’ attorneys. Based on the briefs filed by the parties, it appears that the insider (CEO and a 10% owner) filed Forms 4 reporting short-swing transactions in mid-2019, leading Mr. Lopez and Ms. Tauber to submit demand letters on June 26, 2019. “Shortly thereafter,” the insider disgorged to the issuer $178,394.24.
Apparently the issuer didn’t tell the plaintiffs the money had been paid, or at least wasn’t willing to share proof of the recovery with the plaintiffs. In any case, the plaintiffs filed their complaint on August 26 seeking recovery of $170,365, and eight days later the issuer filed with the SEC a Form 8-K disclosing that, in June, it had collected from the CEO a short-swing profit of $178,394.24. The insider then filed a motion to dismiss the complaint, arguing, among other things, that the action had been rendered moot by his payment of the full amount of the profit (and more than the plaintiff alleged was owed).
The plaintiffs argued that the case was not moot because there was no evidence in the record establishing the fact, form or timing of payment, and that any affirmative defenses should be raised in an answer to the complaint. There was also, the plaintiffs noted, the matter of attorneys’ fees.
The court took judicial notice of the issuer’s 8-K, concluded that it constituted “competent evidence” that the profit had been disgorged, and declared the 16(b) claim to have been mooted. The court acknowledged the claim for attorneys’ fees but held that a claim for attorneys’ fees does not create a “case or controversy where none exists on the merits of the underlying claim.”
The judge directed the clerk of court to “close the case,” but I suspect the case isn’t over yet — the plaintiffs aren’t likely to go away without a fee.
-Alan Dye, Section16.net November 24, 2020
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