Chechele v. Dundon

Background

Donna Ann Gabriele Chechele, a shareholder of Santander Consumer USA Holdings, Inc. (SCUSA), brought a derivative action under Section 16(b) of the Securities Exchange Act of 1934 on behalf of SCUSA. She alleged that Thomas G. Dundon violated the statute’s short-swing-profit rule. Dundon was a former SCUSA executive and beneficial owner of more than 10% of SCUSA’s common stock, making him a statutory insider under Section 16(b).

The complaint alleged that Dundon received an option to purchase 759,773 SCUSA shares at $24 per share on January 28, 2014. On November 15, 2017, he exercised that option and sold 34,598,506 SCUSA shares at $27.225 per share. Chechele sought disgorgement of allegedly realized short-swing profits and alleged that Dundon owed $2,450,267.

Legal Standard

Dundon moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not allege enough facts to state a legally plausible claim. The court accepted well-pleaded factual allegations as true for purposes of the motion and drew reasonable inferences in Chechele’s favor.

Section 16(b) requires an insider to give up profits from a purchase and sale, or sale and purchase, of the company’s equity securities occurring within a period of less than six months. The statute imposes strict liability, meaning the plaintiff does not have to prove that the insider used confidential information or acted with an improper intent.

Court’s Analysis

The parties agreed that Dundon was a statutory insider. Chechele argued that the purchase occurred when Dundon’s option was exercised and settled on November 15, 2017, the same day as the stock sale. Dundon argued that, for a fixed-price option, the relevant purchase date was when he acquired the option.

The court agreed with Dundon. Under the Securities and Exchange Commission’s rule governing a call-equivalent position, an option to purchase stock at a fixed price is treated as a purchase of the underlying stock when the option is established. The court therefore treated Dundon’s purchase as occurring on January 28, 2014, when he received the option. It concluded that the later exercise and settlement merely changed the form of Dundon’s beneficial ownership and did not create a new purchase for Section 16(b) purposes.

Because the operative purchase occurred in 2014 and the sale occurred in 2017, the transactions were not within six months. The court found that Chechele’s Section 16(b) claim therefore failed.

Disposition

The court granted Dundon’s motion to dismiss. The clerk was directed to close the motion. The opinion does not state that the court entered a separate damages award or specify any additional disposition.