Last summer, I blogged about the U.S. District Court for the Southern District of New York’s denial of a motion to dismiss the complaint in Chechele v. Standard General Master Fund L.P., in which the judge held an investment fund remained the beneficial owner of TEGNA common stock it sold just after the record date for TEGNA’s annual meeting, making the fund a 10% owner at the time of subsequent short-swing trades. The court rejected the defendants’ argument that the long-standing Smolowe rule, under which an insider’s recoverable profits are calculated by matching the lowest price purchase with the highest price sale, is inconsistent with the U.S. Supreme Court’s holding in Liu v. SEC that the SEC’s right to seek disgorgement in civil enforcement actions is limited to the “wrongdoer’s” net profits.
The defendants filed a motion asking the court to certify the profit calculation issue for an interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. The court denied that motion, based primarily on the fact that the Second Circuit has applied the Smolowe rule for nearly 80 years and its conclusion the Supreme Court’s decision in Liu addressed a different statute and applied equitable principles that don’t apply under Section 16(b), making it unlikely an interlocutory appeal would advance resolution of the action.
There may be more to come from the district judge. Standard General has entered into an agreement to acquire TEGNA in a cash merger. The defendants moved to stay the action pending closing of the merger, on the ground that the merger will deprive the plaintiff of a financial interest in the litigation and, therefore, render the action moot.
— Alan Dye, Section16.net, March 21, 2022