Rubenstein v. Knight-Swift Transportation Holdings Inc.

Background

Mark Rubenstein, a Knight-Swift shareholder, brought a suit under Section 16(b) of the Securities Exchange Act of 1934. That provision requires certain insiders to return profits from a purchase and sale, or a sale and purchase, of the company’s stock within less than six months. The defendants were Jerry C. Moyes and Vickie Moyes, whom the opinion says beneficially owned more than 10% of Knight-Swift’s shares. Knight-Swift was named as the nominal defendant.

Rubenstein asserted two claims. Claim I concerned transactions from December 2018 through February 2019 involving an agreement under which Cactus Holding Company II, LLC had sold Knight-Swift shares to Citigroup Global Markets, Inc. and retained an obligation to repurchase them. The agreement was partially terminated and amended on December 21, 2018; Cactus II later sold 1,173,680 shares to Knight-Swift on December 27, 2018; and Cactus II terminated the amended agreement and reacquired 3,331,003 shares on February 13, 2019. The shares were then placed into a variable pre-paid share forward contract.

Claim II concerned amendments made on August 23 and September 10, 2019, to several variable pre-paid share forward contracts involving Citigroup Global Markets, Inc. The amendments extended valuation or settlement dates and changed floor and cap prices. The contracts’ maximum share amounts remained unchanged. Rubenstein alleged that these amendments were treated under Section 16(b) as dispositions of the old contracts and establishments of new contracts, creating short-swing purchases and sales.

Motion to Dismiss Standards

The Moyes Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, the court generally accepts well-pleaded factual allegations as true, draws reasonable inferences for the plaintiff, and asks whether the allegations plausibly support relief. The court does not have to accept bare legal conclusions.

To state a Section 16(b) claim, a plaintiff must allege a purchase and a sale of securities by an insider within a six-month period. The court explained that repurchase agreements may qualify as derivative securities—financial instruments whose value derives from an underlying security. Under Securities and Exchange Commission rules, increasing a call-equivalent position can be treated as a purchase of the underlying security, while decreasing one can be treated as a sale.

Claim I

The Moyes Defendants conceded that the December 2018 open-market sale and the February 2019 variable pre-paid share forward transaction were sales for Section 16(b) purposes. They argued, however, that the December 21, 2018 partial termination and amendment of the repurchase agreement was not a purchase. The court agreed that Rubenstein had not adequately pleaded a qualifying purchase.

The court treated the repurchase agreement as a derivative security and concluded that the agreement placed the Moyes Defendants in a call-equivalent position. But the December amendment increased the effective per-share repurchase price, which reduced rather than increased that position. The court noted that the other terms, including the agreement’s expiration date, remained the same. On the materials properly considered at the motion-to-dismiss stage, Rubenstein had not adequately alleged that the amendment increased the call-equivalent position or made another material change that would constitute a purchase, or a simultaneous purchase and sale, under Section 16(b).

Because Claim I pleaded sales but no matching purchases during the relevant six-month periods, the court concluded that Rubenstein had not adequately alleged a Section 16(b) violation for Claim I. The court granted the motion to dismiss with respect to Claim I.

Claim II

The Moyes Defendants did not dispute that the August and September 2019 amendments were sufficiently material to be treated as deemed sales and repurchases. Instead, they argued that Rubenstein had not adequately alleged that they realized a profit.

The court rejected that argument at the pleading stage. The complaint expressly alleged that the transactions generated profits in an amount unknown to Rubenstein and requested an accounting of those profits. The court found no requirement that Rubenstein provide an accounting or state the precise profit amount to plead Claim II adequately. The court therefore denied the motion with respect to Claim II.

Disposition

The court granted in part and denied in part the Moyes Defendants’ motion to dismiss. It granted the motion as to Claim I and denied it as to Claim II. The Moyes Defendants were ordered to answer the remaining claim by October 23, 2020, and the parties were ordered to submit a proposed case-management plan by October 30, 2020.