It has been decades since a rescinded transaction was the subject of Section 16(b) litigation, but last week, in Rubenstein v. Cosmos Holdings, Inc., the SDNY denied an insider’s motion to dismiss a complaint seeking to match a sale with a rescinded purchase. As I noted a few weeks ago, a judge in the SDNY recently held that a “busted trade” was not matchable under Section 16(b), but the judge in that case said that, because the busted trade never occurred, case law addressing rescinded transactions was irrelevant.
The Cosmos case involved an insider’s open market sales of issuer common stock less than six months after the insider’s wife entered into a purchase agreement under which she agreed to purchase issuer stock from another stockholder at a lower price, allegedly resulting in a short-swing profit of $865,839.50. The insider’s wife entered into the purchase agreement on October 2, 2017, after all conditions to the transaction had been met, and paid the purchase price to the seller at the time of signing. The seller never delivered the shares, though, and after the plaintiff submitted a demand letter seeking to match the two transactions, the parties to the purchase agreement entered into an agreement rescinding the transaction.
The insider moved to dismiss the plaintiff shareholder’s complaint on the ground that the purchase had been rescinded and therefore was not subject to matching. The court denied the motion, noting first that a “purchase” occurs when an insider becomes irrevocably committed to a transaction. Here, the purchase agreement was signed, the purchase price was paid and all conditions to the seller’s obligation to deliver the shares were satisfied. The insider’s wife was therefore irrevocably committed to the transaction, whether or not the seller delivered the shares.
The court also noted that courts have considered a variety of factors in determining whether a rescinded transaction remains subject to Section 16(b), including whether the rescission was motivated by a desire to avoid liability under Section 16(b). Here, the rescission occurred after the plaintiff had submitted a demand letter and 604 days after the purchase agreement was signed. Based on these allegations alone, the court said the plaintiff plausibly alleged that the rescinded purchase remained subject to Section 16(b), subject to consideration of other relevant factors after discovery.
The insider also sought dismissal on the ground that the purchase agreement was signed and consummated in Greece, by residents of Greece, and therefore was beyond the reach of U.S. securities laws. The court acknowledged that no court has addressed whether Section 16(b) can apply where one leg of a short-swing trade occurred outside the U.S., an insider’s execution of one leg of the transaction in U.S. markets is sufficient to give U.S. courts jurisdiction.
-Alan Dye, Section16.net July 15, 2020
