Roth v. Armistice Capital, LLC
- Analisa Torres
- 1:20-cv-08872
- U.S. District Court · Southern District of New York
- 7
In Roth v. Armistice Capital, Judge Torres denied defendants’ motion to dismiss Roth’s securities-profit claim under Section 16(b).
Andrew Roth’s Section 16(b) claim against Armistice Capital, LLC, Armistice Capital Master Fund Ltd., and Stephen J. Boyd was allowed to continue after the court denied their motion to dismiss.
What happened
In Roth v. Armistice Capital, LLC, shareholder Andrew Roth claimed that Armistice Capital, Armistice Capital Master Fund Ltd., and Stephen J. Boyd had to give up profits from Vaxart stock transactions. He relied on a federal securities law that can require company insiders to return profits from matched purchases and sales within six months.
The defendants agreed they were covered insiders and that the Fund sold Vaxart stock in June 2020. They argued, however, that changing the warrants’ ownership limits did not count as a new purchase. Roth argued that the changes allowed the Fund to exercise the warrants while holding more stock, making the changes significant enough to count as a purchase.
Judge Analisa Torres ruled that Roth had plausibly alleged the required purchase and sale within six months and denied the defendants’ motion to dismiss. The ruling allowed Roth’s claim to continue, but it did not decide whether the defendants ultimately owed money.
The detailed version
- Roth v. Armistice Capital, LLC · No. 1:20-cv-08872
- Analisa Torres
- Mar. 29, 2022
Background
Andrew Roth brought a claim under Section 16(b) of the Securities Exchange Act of 1934 against Armistice Capital, LLC, Armistice Capital Master Fund Ltd., and Stephen J. Boyd. Vaxart, Inc. was named as a nominal defendant. Roth is a Vaxart common-stock holder.
The Fund began buying Vaxart stock in August 2018 and later owned 65.2% of Vaxart’s outstanding common stock. The Fund and Vaxart entered into two warrants that allowed the Fund to acquire Vaxart shares, but the warrants limited the Fund’s beneficial ownership to 4.99% and 9.99%. In June 2020, Vaxart and the Fund amended the warrants to raise both limits to 19.99% and remove a 60-day notice requirement. The Fund exercised the warrants on June 26 and 29, 2020, acquired 20,757,576 shares, and sold nearly all of its Vaxart holdings during the same four-day period. The complaint alleged that the Fund realized at least $87 million in profits.
Legal standard
The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint did not state a legally sufficient claim. At this stage, the court had to treat the complaint’s factual allegations as true and decide whether they plausibly showed a right to relief.
Section 16(b) requires certain insiders—directors, officers, and shareholders owning more than 10% of a class of company stock—to return profits from a purchase and sale, or sale and purchase, of the same security within six months. The required elements are a purchase, a sale, an eligible insider, and the six-month period.
Court’s analysis
The parties agreed that the defendants were statutory insiders and that the Fund made a sale in June 2020. The dispute was whether the June 8 amendments to the warrants constituted a purchase within six months of that sale.
The court explained that, for Section 16(b) purposes, acquiring a warrant generally matters rather than exercising it. An amendment counts as a new purchase only when it is sufficiently substantial and material that the amended warrant is effectively newly issued. Terms such as the exercise price, expiration date, or number of underlying shares can be essential to a warrant’s value.
The court concluded that Roth plausibly alleged that the amendments were material. Before the amendments, the Fund had to sell stock before exercising warrants if exercising them would exceed the lower ownership limits. Afterward, the Fund could hold up to 19.99% of Vaxart’s stock while exercising the warrants. The court reasoned that retaining more stock could give an insider a greater opportunity to use inside information for a larger return. The court therefore treated Roth’s allegations as sufficient at the motion-to-dismiss stage.
Disposition
The court denied the defendants’ motion to dismiss. It concluded that Roth had adequately pleaded a Section 16(b) violation based on a purchase and sale of securities by a company director within six months. The order did not decide the ultimate merits of the claim or award Roth any money.
Read the full 7-page opinion on CourtListener, the free public archive maintained by the Free Law Project.