Rubenstein v. Siokas

Background

Mark Rubenstein, a Cosmos shareholder, sued under Section 16(b) of the Securities Exchange Act of 1934 on behalf of Cosmos Holdings, Inc. Cosmos was named as a nominal defendant, meaning it was included as a party to the action even though Rubenstein sought recovery for Cosmos. Rubenstein alleged that Grigorios Siokas was a Cosmos officer, director, and beneficial owner of more than 10% of Cosmos common stock.

The complaint alleged that Siokas’s wife, Ourania Matsouki, agreed on October 2, 2017, to purchase 100,000 post-split Cosmos shares from Vasileios Mavrogiannis, an unrelated third party. The complaint alleged that Matsouki paid the purchase price and completed her obligations under the agreement. Within six months, Siokas sold 100,000 Cosmos shares through eight open-market sales. Using a “lowest in–highest out” method, Rubenstein estimated the short-swing profit at $865,839.50, although the court noted that the complaint’s stated price per share appeared mathematically inconsistent with the stated total price.

Rubenstein demanded that Cosmos’s board seek recovery of the alleged profits. After more than 60 days passed without recovery, Matsouki and Mavrogiannis entered into a rescission agreement on May 29, 2019, purporting to cancel the purchase from the beginning. Rubenstein alleged that the rescission was intended to avoid Section 16(b) liability.

Motions and governing standards

Siokas and Cosmos moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint did not state a legally sufficient claim. They alternatively sought judgment on the pleadings under Rule 12(c). The court explained that Rule 12(c) was procedurally improper because the pleadings were not closed: the defendants had not filed an answer. The court therefore treated the matter as a Rule 12(b)(6) motion.

At the dismissal stage, the court accepted well-pleaded factual allegations as true, drew reasonable inferences for Rubenstein, and considered whether the allegations plausibly showed an entitlement to relief. The court did not resolve disputed facts or decide whether Siokas was ultimately liable.

Section 16(b) claim

Section 16(b) requires statutory insiders to give up profits from a purchase and sale, or sale and purchase, of the issuer’s equity securities within a period of less than six months. The court described the provision as imposing strict liability, meaning that a plaintiff need not prove misuse of inside information or an intent to profit. To state a claim, a plaintiff must plausibly allege a purchase, a sale, the required insider status, and the required six-month period. The court also accepted that the plaintiff must plausibly allege a realized profit because the statute provides for recovery of profits.

Whether a purchase occurred

The defendants argued that Matsouki never received the shares and that the failure of delivery amounted to rescission. The court rejected that argument at the pleading stage. Under federal securities law, a purchase can occur when the buyer becomes irrevocably committed to the transaction and no longer controls it in a way that could create a speculative advantage. Technical matters such as delivery of share certificates or passage of title do not alone determine whether a purchase occurred under Section 16(b).

The complaint and attached documents alleged that Matsouki paid in full before or when she entered the purchase agreement and completed all of her obligations. The court therefore held that Rubenstein plausibly alleged that the purchase was complete when Matsouki signed the agreement and paid, even if Mavrogiannis later failed to deliver the shares.

Effect of the rescission agreement

The defendants argued that the rescission agreement voided the purchase from the beginning and eliminated any matching purchase and sale. The court explained that rescissions entered into solely to avoid Section 16(b) liability may be invalid, while rescissions based on other genuine circumstances may sometimes be effective. Whether the rescission here was motivated by a genuine contract dispute or by an effort to avoid liability presented a factual question that could not be resolved on a motion to dismiss.

Rubenstein alleged that the rescission occurred long after the purchase and after he demanded recovery. The court found those allegations sufficient to make the claimed liability-avoidance purpose plausible. It also distinguished a prior case in which summary judgment followed a rescission because neither side had performed the contract. Here, the complaint alleged that Matsouki had paid in full, making the purchase materially different. The court held that Rubenstein plausibly alleged that the rescission agreement could not nullify the purchase for Section 16(b) purposes.

Profit allegation

The defendants argued that the rescission meant Matsouki and Siokas realized no profit. The court rejected dismissal for the same reason: if the rescission were treated as ineffective for Section 16(b) purposes, the later return of the shares or rights could be viewed as a separate transaction that did not eliminate the earlier matching purchase and sales. The court therefore concluded that Rubenstein plausibly alleged a recoverable profit.

Application outside the United States

The defendants briefly argued that Section 16(b) could not apply because the purchase agreement appeared to have been executed in Greece. The court noted that the defendants did not cite authority directly addressing the territorial reach of Section 16(b), and it declined to develop arguments they had not presented. The court also found that Rubenstein plausibly alleged a domestic connection because the Siokas sales allegedly occurred in the United States and Cosmos stock was traded through domestic market facilities on the over-the-counter market. The court did not definitively resolve the broader territorial question.

Disposition

In Rubenstein v. Siokas, Judge Katherine Polk Failla denied the defendants’ motion to dismiss. The court directed the defendants to answer the remaining claims by July 31, 2020, and ordered the parties to submit a proposed case-management plan by August 7, 2020. The ruling allowed the case to continue; it did not determine whether Siokas ultimately violated Section 16(b) or the amount, if any, that must be paid.