Chechele v. Standard General Master Fund L.P.
- Katherine Failla
- 1:20-cv-03177
- U.S. District Court · Southern District of New York
- 31
In Chechele v. Standard General Master Fund, Judge Failla denied defendants’ motion to dismiss a stockholder’s short-swing trading claim.
The ruling affects stockholder Donna Ann Gabriele Chechele, the defendants Standard General L.P., Standard General Master Fund L.P., and Soohyung Kim, and TEGNA, Inc., which could benefit from any recovery. The lawsuit proceeds, but the court did not make a final liability or damages determination.
What happened
In Chechele v. Standard General Master Fund L.P., stockholder Donna Ann Gabriele Chechele sued Standard General L.P., Standard General Master Fund L.P., and Soohyung Kim under a securities law that can require insiders to give back profits from purchases and sales made within six months. She alleged that the defendants’ stock sales and related swap transactions involving TEGNA shares violated that law.
The defendants argued that they were not covered insiders, that their transactions were exempt, that the requested recovery could not exceed their actual gains, and that the claim conflicted with the law’s purpose. Chechele alleged that the defendants remained beneficial owners of shares sold after TEGNA’s voting record date and became more than 10% beneficial owners through the swap transactions.
Judge Katherine Polk Failla denied the defendants’ motion to dismiss, allowing the claim to proceed; she also denied their separate request for oral argument as moot. The ruling did not decide the final amount of any recovery or establish liability after a trial.
The detailed version
- Chechele v. Standard General Master Fund L.P. · No. 1:20-cv-03177
- Katherine Failla
- July 8, 2021
Background
Donna Ann Gabriele Chechele, a TEGNA, Inc. stockholder, brought a claim under Section 16(b) of the Securities Exchange Act of 1934 on behalf of TEGNA. Section 16(b) is an insider-trading provision that can require certain corporate insiders to give back profits from matching purchases and sales of the company’s securities within a period of less than six months. TEGNA was named as the nominal defendant, meaning the action was brought for its potential benefit even though it was not accused of wrongdoing.
The defendants were Standard General L.P., Standard General Master Fund L.P., and Soohyung Kim. The opinion states that Standard General managed the Master Fund and that Kim was Standard General’s managing partner, chief executive officer, and chief investment officer. Standard General owned about 9.7% of TEGNA’s outstanding common stock as of January 15, 2020, including physical shares and shares referenced by equity swaps.
On March 18, 2020, Standard General received 2,015,362 TEGNA shares after settling equity swaps. TEGNA’s record date for voting at its April 30 annual meeting was March 20, 2020. Between March 25 and March 31, Standard General sold five blocks of 1,000,000 shares and separately entered into swaps covering the same number of shares. It later bought 4,591,164 TEGNA shares in a block trade.
Chechele sent TEGNA a demand asking it to pursue recovery of alleged short-swing profits. TEGNA declined. Chechele then filed this action after TEGNA did not bring the claim.
Motion to Dismiss Standard
The defendants moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which asks whether the complaint alleges enough facts to state a legally plausible claim. At this stage, the court generally accepts well-pleaded factual allegations as true and does not decide the ultimate truth of those allegations.
Court’s Analysis
To state a Section 16(b) claim, a plaintiff must plausibly allege a purchase and a sale of securities by an issuer’s officer, director, or shareholder owning more than 10% of a class of the issuer’s securities, with the transactions occurring within six months.
The court rejected the defendants’ argument that they never crossed the 10% ownership threshold. It concluded that, under the applicable beneficial-ownership rule, they remained beneficial owners of the shares sold between March 25 and March 31 because they retained the power to vote those shares through TEGNA’s annual meeting. The court also accepted, at the pleading stage, the allegation that each new swap gave the defendants beneficial ownership of an additional 1,000,000 TEGNA shares. Based on those allegations, the defendants reached 10.13% beneficial ownership on March 25, 2020.
The court also rejected the defendants’ argument that the stock sales and swaps were exempt as transactions that merely changed the form of beneficial ownership. The court treated the trades as separate transactions because they were executed at different times, with different counterparties, and at different prices. It further concluded that the alleged transactions presented at least a potential for speculative abuse, including because the defendants could influence their timing and structure.
The court separately concluded that the defendants were not entitled to dismissal based on the claimed lack of any change in their financial interests. The opinion defines a pecuniary interest as the opportunity, directly or indirectly, to profit from a transaction in the securities. The defendants acknowledged that the transactions resulted in losses, and the court reasoned that this supported the conclusion that their financial interests changed.
The defendants also argued that Chechele could not seek more than their actual net profits. The court disagreed at this stage and continued to apply the Second Circuit’s “lowest price in, highest price out” method for calculating Section 16(b) profits. Using that method, the amended complaint alleged approximately $4,840,000 in recoverable profit. The court declined to extend Supreme Court decisions concerning other statutory disgorgement provisions to limit the recovery available under Section 16(b).
Finally, the court rejected the argument that applying Section 16(b) would conflict with the statute’s purpose. The court emphasized that the statute operates mechanically and does not require proof of improper intent or actual misuse of inside information.
Disposition
The court denied the defendants’ motion to dismiss. It also denied as moot the defendants’ letter motion for oral argument. The court ordered the defendants to file a responsive pleading by July 29, 2021, and directed the parties to submit a joint case-management letter and proposed scheduling order by August 12, 2021. The opinion did not make a final determination of liability or award disgorgement.
Read the full 31-page opinion on CourtListener, the free public archive maintained by the Free Law Project.