Williams v. Caption Management LLC

Background

Tara Williams, a Clarus Corporation shareholder, brought a derivative action under Section 16(b) of the Securities Exchange Act of 1934. A derivative action is brought by a shareholder on behalf of the company. Clarus was named as the nominal defendant, meaning the company was included as the entity on whose behalf the claim was brought.

Williams alleged that Caption Management LLC, Caption Partners II LP, Caption GP, LLC, William Cooper III, and Jason Strasser acted as a group of beneficial owners of Clarus securities. She alleged that the defendants owned 10.01% of Clarus’s outstanding shares on July 19, 2022, 17.1% on July 27, 2022, and 7.39% on August 30, 2022. She further alleged that the defendants purchased approximately 2,450,000 Clarus shares between July 19 and July 27 and sold approximately 3,500,000 shares before August 30.

Section 16(b) generally requires a statutory insider to return to the company profits from matching a purchase and sale, or a sale and purchase, of the company’s equity securities within less than six months. Williams alleged that the defendants’ transactions produced recoverable short-swing profits for Clarus.

Motion to Dismiss

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. They argued that the defendants were not subject to Section 16(b) because of statutory exemptions for registered investment advisers and control persons. They also argued that Williams had not adequately alleged that the defendants formed a qualifying group of beneficial owners.

The court explained that it generally may dismiss based on an affirmative defense at the pleading stage only when the facts supporting the defense appear on the face of the complaint and defeat the claim beyond doubt. The court agreed with Williams that the investment-adviser and control-person exemptions could not be used to dismiss the complaint at this stage. The court concluded that, at the pleading stage, Williams needed to allege insider status, trades within six months of one another, and profits, and that she had done so.

Insider Status

The court noted that the defendants had reported purchases and sales of Clarus securities during the relevant period, satisfying three parts of the Section 16(b) test: a purchase, a sale, and transactions within six months. The remaining question was whether the defendants were beneficial owners and therefore insiders under Section 16(b).

The court recognized that beneficial ownership may be treated differently under different securities-law provisions. It also noted that the Schedule 13G filing relied on by Williams did not automatically establish beneficial ownership for Section 16(b) purposes because Section 16(b) contains exemptions for registered investment advisers and control persons. Nevertheless, because those exemptions could not be resolved on this motion, and because Williams alleged that the defendants were beneficial owners of more than 10% of Clarus stock with a financial interest, the court found that she adequately pleaded insider status.

Group Allegations

The court next considered whether Williams plausibly alleged that the defendants formed a group. Under the governing securities rules, people or entities may be treated as a group when they agree to act together to acquire, hold, or dispose of an issuer’s securities. The court cited precedent stating that liability requires an agreement to trade the securities of a particular issuer.

Although Williams did not specifically allege an express agreement, she alleged that the defendants were a group and relied on a September 2, 2022 email from Caption to Clarus. The email stated that Caption had taken the opposite side of transactions believed to have been made by a single large shareholder and option trader and then hedged its risk. The court found that this supported an inference of a common objective to trade in Clarus securities. The court therefore concluded that Williams adequately alleged an agreement among a group of beneficial owners at the pleading stage.

Disposition

The court denied the defendants’ motion to dismiss. The Clerk of Court was directed to terminate the motion at ECF No. 20, and the defendants were ordered to file an answer within 21 days after entry of the order.