Judge Considers Referring Insider to SEC for Potentially False Information in Form 4
A judge’s recent denial of an insider’s motion to dismiss a 16(b) complaint may offer more of a lesson about completing Forms 4 than about avoiding 16(b) liability.
The case involves an effort to recover a $511,398 short-swing profit from Pierre Laubies, who at the time of his trades was the CEO of beauty products maker Coty Inc. Laubies purchased 262,000 shares of Coty common stock on August 30, 2019 for $9.54 a share, and later, in connection with his resignation from Coty, sold those shares and all of his other common stock holdings to Coty’s largest shareholder, Cottage Holdco, for $11.49 a share. The issue before the court was when the sale occurred—on February 27, 2020 (the last day of the short-swing period) or a later date (March 12).
Both Coty and Cottage reported their transaction on Form 4, each showing February 27 as the transaction date and each explaining in a footnote that the parties had “entered into a stock purchase agreement” on February 27. Laubies’ Form 4 also reported that he had sold his holdings of Coty preferred stock directly to Coty, by entering into a separate stock purchase agreement with Coty. Coty filed a Form 8-K making the same disclosure.
Several plaintiffs’ attorneys submitted demand letters based on Laubies’ Form 4. In response, both Laubies and Cottage amended their Forms 4 to report that they entered into their stock purchase agreement on March 12, not February 27. The plaintiffs’ attorneys questioned the change, and, according to the plaintiffs, Coty’s counsel explained that Laubies did not sign the stock purchase agreement until March 12. The plaintiffs’ attorneys pressed for details, and Coty’s counsel then revised the explanation to say that Laubies had declined to deliver the agreement on February 27 because he was dissatisfied with its tax indemnity provision, and did not deliver it until March 12, after the provision was revised.
The plaintiffs sued to recover the profit, and Laubies moved to dismiss the complaint on the ground that his reported sale date of March 12 should be considered dispositive. The court framed the question as whether the complaint “plausibly alleged” a sale date of February 27. On that point, the court said, “this question is not close.” The Forms 4 alone, the court said, made plaintiff’s allegation “eminently plausible.” In addition, the timing of the amendments in relation to the plaintiffs’ demand letters suggested that they may have been, as plaintiffs argued, a “cover-up” and “an unusually transparent act of corporate CYA aimed at avoiding” short-swing liability. The court also highlighted these additional allegations:
The stock purchase agreement provided that the sale price per share would be the VWAP during the 15 trading days preceding February 26. By March 12, news of the COVID pandemic had hit the markets, and Coty’s stock price had dropped to $6.30. It seemed implausible that, if the agreement wasn’t binding on February 27, Cottage would agree on March 12 to buy stock at a 40% premium to market
The agreement provided for closing no later than March 9
The tax indemnity provision added to the March 12 version of the agreement was immaterial and was unlikely to have prevented the parties from reaching agreement earlier
Coty did not amend its Form 8-K to change the date of its purchase of Laubies’ preferred stock.
The court added that “the inference from the pleadings of fraudulent intent on the part of Laubies and others, and of the collusive submission of false public filings, is so strong as to raise more substantial questions. These include whether the events at issue merit a referral for investigation to, inter alia, the SEC, and why Coty . . . is standing alongside Laubies in this litigation.” The court said it expects to “take up these questions with counsel in due course.”
I don’t recall any other case in which a judge considered referring a Section 16(a) matter to the SEC, even where the judge disagreed with legal conclusions set forth in the filing. Here, though, the court seemed to assume, based on the allegations in the complaint, that Laubies intentionally reported a false sale date for the purpose of avoiding Section 16(b) liability. While the SEC’s Section 16(a) enforcement program is focused on late filings and failures to file, there is precedent for enforcement actions based on intentionally false transaction dates. The SEC brought several Section 16(a) actions against insiders who reported false grant dates during the option backdating scandal in the mid-2000’s. Regardless, clearly an overly aggressive reporting position can have adverse consequences in a 16(b) action.
Other issues may need to be resolved, though, before the 16(b) issue (and perhaps the 16(a) issue) is resolved. The court noted that the date of a transaction is the date the parties become irrevocably committed to the transaction, and said a commitment can be made even before a written agreement is signed. The agreement provided for a closing, though, and apparently no one has raised the question whether there were material conditions to closing, or when the parties actually exchanged cash for stock, all of which may be relevant to when the sale occurred.
-Alan Dye, Section16.net March 22, 2021
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