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Federal Court Denies Motions To Dismiss Finding Plaintiff Sufficiently Alleged Insider Trading And Group Liability

Posted In Securities
Segen v. Comvest Venture Partners, LP., C.A. No. 04-822 JJF, 2005 WL 1320875 (D.Del. June 2, 2005). This opinion decided two motions to dismiss the Complaint. The motions were filed by two sub-groups of defendants, referred to as the "ComVest Defendants" and the "Priddy Defendants" for convenience. The Court denied both motions because they relied upon the same grounds and arguments. The plaintiff brought this action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78p and alleged that he was suing derivatively on behalf of Intraware, Inc., a nominal defendant. The Complaint alleged that defendants, a Section 13(d) group, obtained short-swing profits, and requested the profits to be disgorged to Intraware, Inc. The Court examined Section 16(b) and found that an insider purchase or sale of securities within a six month period that created profits were disgorgeable to the issuer of the securities. The Court examined 15 U.S.C. §78p (b) which defines insiders as officers or directors of the issuer and includes holders of over 10% of the issuer's securities. The Court found that "group" for purposes of section 13(d)(3) and for defining Rule 16(b) liability included two or more persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing an issuer's securities. Further, the Court observed that if a group held over 10% of the beneficial stock, each member could be potentially liable under Rule 16(b). The Complaint alleged that the ComVest Defendants and the Priddy Defendants were group members and provided facts in support of that allegation. The Court found that because the two above named defendant groups were involved in several private placements, the group held over 10% of the common stock of Interware. The defendants contended that: (1) plaintiff was time barred because he did not bring suit within the two year limitation statute; (2) plaintiff had not sufficiently alleged the existence of a section 13(d) group for claiming liability under rule 16(b); and (3) sufficient facts were not alleged to show wrongful refusal by Interware's board. The plaintiff countered that: (1) the statute of limitations was tolled by Section 16(a) of the Securities Exchange Act or until plaintiff had actual knowledge of defendants' violation of the statute; (2) sufficient facts were alleged to show the formation and acts of a Section 13(d) group; and (3) the business judgment rule did not apply in these circumstances. The Court denied Defendants' request to dismiss on the statute of limitations ground because it found that Form 4 was not filed by defendants and case law from other circuits supported tolling under such circumstances. The Court also held that application of equitable tolling could only be decided in a motion for summary judgment after discovery was completed. Further, because the Court found that the defendants had acted in concert, it declined to dismiss the Complaint on the lack-of-group ground raised by Defendants. Finally, the Court rejected the Defendants' claim that they were protected under the business judgment rule because under Section 16(b), shareholders could sue if an issuer did not commence a suit within sixty days of receiving a demand. Authored by: Raj Srivatsan 302.888. 6831 rsrivatsan@morrisjames.com