Rubenstein v. Urban One, Inc.

Background

Mark Rubenstein, a shareholder in Urban One, Inc., brought a claim under Section 16(b) of the Securities Exchange Act of 1934. That provision is designed to require certain company insiders to give the company profits from matching purchases and sales of the company’s equity securities made within less than six months. Rubenstein alleged that Alfred C. Liggins III, Urban One’s CEO, violated Section 16(b) through transactions involving Urban One’s Class A and Class D shares during 2020. Urban One was named as a nominal defendant after the company declined Rubenstein’s demand that it pursue the claims.

Urban One’s Class A shares had voting rights and could be converted into Class D shares on a one-to-one basis. Class D shares had no voting rights and could not be converted. The two classes traded publicly at different, though sometimes similar, prices.

In June 2020, Liggins purchased 729,873 Class D shares from Brigade Capital Management, LP. On June 22, 2020, he sold 574,909 Class A shares on the public market. In November 2020, he purchased additional Class D shares on four dates. Rubenstein sent Urban One a demand for prosecution in November 2020. Urban One responded that it did not believe liability existed and would not seek recovery of any profits. Rubenstein then filed suit. Liggins moved to dismiss, and Urban One joined that motion.

Legal standard

The court applied the standard for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). At that stage, the court accepted the complaint’s factual allegations as true, drew reasonable inferences for Rubenstein, and asked whether the allegations plausibly showed that Liggins was liable. The court also considered certain documents attached to or incorporated into the complaint and public company disclosures of which courts may take judicial notice.

Section 16(b) analysis

Section 16(b) generally requires an insider to give the company profits from a purchase and sale of the company’s equity security within six months. The provision imposes strict liability, meaning that a plaintiff does not have to prove that the insider intended to profit from inside information. Ordinarily, the relevant transactions must involve the same class of security. Courts may depart from that straightforward approach in limited situations involving unusual transactions that create an opportunity for speculative abuse, including certain derivative securities.

The court first concluded that the statutory purpose was not implicated. It stated that Rubenstein had not identified short-swing transactions within the same class of stock and instead relied on transactions occurring within a six-month period despite the lack of a meaningful connection between the different share classes. The court recognized that Liggins knew about Urban One’s decision to purchase and retire additional Class D shares before his purchase from Brigade, but concluded that the identified trades did not present an opportunity for speculative abuse.

The court reasoned that, when Liggins sold the Class A shares, the market had access to the relevant information about the earlier Class D purchases. Rubenstein did not allege that the increase in Urban One’s stock price resulted from inside information available to Liggins. Rubenstein also did not allege that the Class A shares had been purchased within the six-month period, and Liggins described them as long-held. The court therefore concluded that the Class A sale reflected an unexpected increase in the company’s stock price and long-term profits, rather than a short-term speculative position.

The court also found no sufficient connection between the June Class A sale and the November Class D purchases. The November purchases involved a different share class, occurred on the open market, and were not linked to the June sale. Liggins never exercised the Class A shares’ conversion privilege. The court stated that exercising that privilege would not have made economic sense during the relevant period because of the price difference between the classes.

Derivative-security and economic-equivalence analysis

The court separately held that Section 16(b) did not apply because the Class A shares were not covered derivative securities. Securities with a fixed conversion price may qualify as derivatives under the applicable Securities and Exchange Commission rules, but securities with a floating conversion price generally do not. The court found that the Class A shares had no fixed conversion price or fixed formula for determining an exercise price. Instead, the conversion price was determined when the shares were exchanged.

Rubenstein argued that the one-to-one conversion ratio made the Class A shares economically equivalent to the Class D shares and therefore effectively gave them a fixed price. The court rejected that argument. It found that the classes traded independently and at materially different prices, that their price difference varied substantially, and that Class A’s voting rights distinguished it from the nonvoting Class D shares. The court concluded that the two classes were economically distinct and that the conversion privilege did not make the Class A shares a matchable derivative security under Section 16(b).

Disposition

The court granted Liggins’s motion in its entirety. The amended complaint was dismissed with prejudice, and the clerk was directed to terminate the motion and close the case. Judge Naomi Reice Buchwald also determined that oral argument was unnecessary because the issues were purely legal.