Donoghue v. Tannenbaum

Background

Dennis Donoghue and Mark Rubenstein, shareholders of Oaktree Specialty Lending Corporation (OCSL), brought a claim under Section 16(b) of the Securities Exchange Act of 1934. They sought recovery of alleged short-swing profits—profits from certain purchases and sales within a six-month period—realized by Leonard M. Tannenbaum, an OCSL insider. Oaktree Specialty Lending Corporation was named as the nominal defendant.

OCSL acquired Oaktree Strategic Income Corporation (OCSI) in a stock-for-stock merger announced in October 2020. Tannenbaum, who owned more than 10% of OCSL’s equity securities, received OCSL shares in connection with the merger and sold OCSL shares during the six months before and after the merger. The sales produced a profit of $1,076,049.86.

Section 16(b) generally requires certain insiders to return profits from qualifying purchases and sales within six months. The court recognized a limited exception for an “unorthodox transaction” if the insider’s acquisition was involuntary and the insider had no access to inside information.

Earlier Proceedings and Remand

The district court previously granted Tannenbaum summary judgment, concluding that both parts of the exception applied. The Second Circuit agreed that Tannenbaum’s merger-related acquisition of OCSL shares was involuntary, because voting agreements required him to vote for the merger as directed by Oaktree. But the Second Circuit held that a factual dispute remained about whether Tannenbaum had access to inside information. It vacated the earlier judgment and sent the case back for limited discovery concerning Tannenbaum’s phone call with Matthew Pendo and the methods used to calculate the companies’ net asset values.

Evidence After Remand

Tannenbaum testified that he called Pendo after learning about the merger because he wanted to understand how the net asset values and exchange ratio would affect his holdings. He said Pendo referred him to public release documents and that they did not discuss material nonpublic information. In a later deposition, Tannenbaum described the discussion as focused on why the exchange ratio shown in the merger materials was only illustrative and when the final net asset value would be calculated.

Pendo likewise testified that he reviewed information from the public investor presentation or an SEC filing and denied sharing material nonpublic information. However, he could not recall several details of the call, including whether Tannenbaum asked questions that Pendo could not answer because of insider-trading restrictions. Tannenbaum’s descriptions of the call also differed in some respects between his depositions. Neither participant took notes, and no other document directly confirmed what was discussed.

The record also showed that the companies’ general net-asset-value methods had been publicly described, but that some assets did not have readily observable prices and were valued using internal or external models. The models could change over time based on market and financial data. A witness testified that particular asset values could help predict the companies’ net asset values and the merger’s exchange ratio, and the record permitted an inference that Pendo may have had access to information from merger-related valuation discussions.

Court’s Analysis

Because Tannenbaum was seeking summary judgment on an exception for which he bore the burden, he had to provide evidence so strong that no reasonable jury could find against him on the issue. The court held that his and Pendo’s testimony, if credited, could establish that Tannenbaum lacked access to inside information. But the court also held that a reasonable jury could disbelieve that testimony.

The court identified three reasons. First, both witnesses had interests that could affect their testimony: Tannenbaum could lose the profits at issue, and Pendo could face professional or reputational harm if he had shared inside information. Second, Pendo’s inability to recall important details and differences between Tannenbaum’s accounts created credibility questions. Third, the testimony lacked documentary corroboration, and the existing communication plan was compatible with the possibility that Pendo discussed more than public documents.

The court separately rejected Tannenbaum’s argument that no material nonpublic information existed concerning the exchange ratio. Although general valuation methods had been disclosed publicly, the court found that a reasonable jury could determine that important information about the valuation of particular assets was not public and could have helped predict the exchange ratio. The court therefore concluded that Tannenbaum had not conclusively shown that he had no access to material nonpublic information.

Ruling

The court denied Tannenbaum’s motion for summary judgment. The issue of whether he had access to material nonpublic information remains for trial, and the court stated that the case would proceed promptly to trial. The court directed the clerk to terminate all pending motions.