On May 8, 2006 the United States Court of Appeals issued their mandate withdrawing plaintiffs' appeal against the lower court's summary judgment in favor of the defendant. The case is now closed.
The plaintiff has filed a notice of appeal from the Opinion and Order granting the defendants’ motion for summary judgment and dismissing the case. The appeal is pending in the Second Circuit Court of Appeals.
According to a press release dated February 28, 2006, the U.S. District Court for the Southern District of New York granted summary judgment to an investor in a company's suit to recover short swing profits pursuant to § 16(b) of the Securities Exchange Act because the investor did not own at least 10% of the company's stock and was not considered part of a group with two other investors. Section 16(b) of the Securities Exchange Act of 1934 allows an issuer of securities to recover any profit realized by a beneficial owner, which is a 10% owner, within a six-month period. Group of investors may be considered single owner under § 16(b). Section 13(d)(3) of the Securities Exchange Act of 1934 allows a group of investors to be considered a single owner for the purpose of § 16(b). In order to show the existence of a group, there must be an agreement amongst the investors to acquire or dispose of the securities.
The district court granted summary judgment in favor of Citadel, ruling that there was no group under § 13(d)(3) because each investor was represented by separate counsel, did its own due diligence, and decided to convert its stock independently of the others.
Further, the district court noted that Citadel's counsel simply acted as a draftsman for the purchase agreements, but no agreement was made among the investors to purchase or convert their shares. Because Citadel owned only 8.5% of Data Race securities and was not a group with the other investors, the district court found no liability under § 16(b).
Data Race Inc. sought investors to obtain capital to market a new product. Investors, including Citadel Ltd. Partnership, Capital Ventures International (CVI) and Castle Creek Partners, showed interest in private placement of a Series C convertible preferred stock. Each investor was represented by separate counsel and conducted its own due diligence prior to purchasing Data Race stock. However, Citadel's attorney acted as the principal draftsperson of the Securities Purchase Agreement. Citadel owned 8.5% of Data Race. Each investor purchased its own preferred shares and immediately individually sought to convert the preferred shares into common stock. Data Race agreed with the investors that the conversion transactions would not be considered "short sales." By the time all of the preferred stock had been converted, the price of Data Race's common stock dropped from $5 per share to $0.625 per share.
One year after the completion of the conversions, a shareholder's attorney, Barbara Schaffer, requested Data Race to commence an action to recover the short-swing profits realized by the Series C investors. Data Race refused to do so but subsequently filed Chapter 7 bankruptcy. Schaffer sued the investors, seeking to recover the short swing profits, and the Chapter 7 Trustee for Data Race was substituted as plaintiff. CVI and Castle Creek settled with Data Race, and Citadel is the remaining defendant. The Trustee seeks to recover the profits of the short sale, alleging that Citadel was a beneficial owner because it shared group ownership with the other two investors. Citadel moved for summary judgment.