Calenture, LLC v. Pulte
- P. Castel
- 1:21-cv-00402
- U.S. District Court · Southern District of New York
- 12
In Calenture v. Pulte, Judge Castel denied the trustees’ motion to dismiss a short-swing-profit claim, allowing the case to proceed.
The ruling allowed Calenture, LLC and Revive Investing LLC’s section 16(b) claim against Karen J. Pulte and Mark T. Pulte, as trustees, to proceed past the pleading stage; PulteGroup, Inc. remained a nominal defendant.
What happened
Calenture, LLC and Revive Investing LLC sued Karen J. Pulte and Mark T. Pulte, as co-trustees of the William J. Pulte Trust, seeking the return of profits from certain PulteGroup, Inc. stock trades. They alleged that the Trust acted as a PulteGroup director through William J. Pulte, Jr., who served on the company’s board. PulteGroup was named as a nominal defendant.
The trustees argued that the Trust was not legally a director because William J. Pulte, Jr. did not control the Trust’s investments. They also argued that an agreement restricting his disclosure of company information protected the Trust from liability. The plaintiffs argued that the complaint plausibly showed that the Trust had placed him on the board as its representative and that the Trust’s trades fell within the short-swing-profit rules of the Securities Exchange Act.
The court held that the complaint plausibly alleged the Trust was a director for purposes of those rules and denied the trustees’ motion to dismiss. Judge P. Castel concluded that the alleged appointment agreement, the relationship between the Trust and William J. Pulte, Jr., and other allegations were enough at this stage, even though the agreement restricted disclosure of confidential information.
The detailed version
- Calenture, LLC v. Pulte · No. 1:21-cv-00402
- P. Castel
- Mar. 29, 2022
Background
Calenture, LLC and Revive Investing LLC brought an action under section 16(b) of the Securities Exchange Act of 1934. That provision requires certain insiders to return profits from purchases and sales of an issuer’s equity securities occurring within a period of less than six months. The defendants were Karen J. Pulte and Mark T. Pulte, co-trustees of the William J. Pulte Trust. PulteGroup, Inc. was named as a nominal defendant.
The amended complaint alleged that the Trust traded PulteGroup securities between November 2018 and January 2019 while William J. Pulte, Jr. served on PulteGroup’s board. It alleged that the Trust earned approximately $1.75 million from those trades. The plaintiffs claimed that the Trust functioned as a statutory director through William J. Pulte, Jr., even though the Trust itself was not formally elected to PulteGroup’s board.
The complaint described a 2016 Settlement Agreement involving PulteGroup, the Elder William J. Pulte, William J. Pulte, Jr., and the Trust. According to the allegations, the agreement required PulteGroup to appoint William J. Pulte, Jr. to the board and at least two committees. It also gave the Trust a role in proposing a replacement if he left the board, while requiring the Trust to vote its PulteGroup shares in specified ways and to avoid assisting a hostile proxy solicitation. William J. Pulte, Jr. remained on the board until May 7, 2020, when he left without a replacement.
Motion to Dismiss
The trustees 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 accepted well-pleaded factual allegations as true and drew reasonable inferences for the plaintiffs, but did not treat bare legal conclusions as true.
Section 16(b) applies to a statutory insider, including a director, officer, or person owning at least 10 percent of a registered class of the issuer’s equity securities. The parties did not dispute that, in appropriate circumstances, an entity that was not formally elected to a board may still be treated as a director if it functions through a deputy. The issue was whether the Trust plausibly deputized William J. Pulte, Jr. to act as its representative on PulteGroup’s board.
Court’s Analysis
The court explained that deputization is a fact-based question decided case by case. It rejected the trustees’ argument that William J. Pulte, Jr. had to control the Trust’s investment decisions before he could be considered its deputy. The court stated that direct personal involvement in the Trust’s investments was not essential and was only one possible factual consideration.
The court found the allegations sufficient to support an inference that William J. Pulte, Jr. joined the board at the Trust’s behest. The Settlement Agreement was executed by the Elder William J. Pulte both individually and as trustee, identified William J. Pulte, Jr. as the director to be nominated, required his appointment to two committees, and addressed a replacement candidate proposed by the Elder William J. Pulte as trustee and individually.
The court also considered allegations that William J. Pulte, Jr. had participated in the Trust’s operations, consulted with the Elder William J. Pulte, met with PulteGroup officials, and participated in a media campaign concerning PulteGroup’s leadership. The complaint further alleged that the younger Pulte’s appointment continued the role previously played by James Grosfeld as the Trust’s board representative. The court said the family relationships and alleged interest in the Trust’s investment success also supported an inference of deputization.
The trustees relied on Settlement Agreement provisions requiring William J. Pulte, Jr. to preserve confidential company information and not share board materials with specified Pulte-related parties. The court rejected the argument that these restrictions insulated the Trust from section 16(b) liability. Section 16(b) imposes strict liability on a statutory director and does not require proof that the insider actually traded on confidential information. The court also noted that the agreement allowed private communications with the board and permitted confidential information to be used to monitor and evaluate investments, subject to restrictions.
Disposition
The court concluded that the complaint plausibly and sufficiently alleged that the Trust deputized William J. Pulte, Jr. to serve as its representative on the PulteGroup board. The defendants’ motion to dismiss the complaint was DENIED. The Clerk was directed to terminate Document 18.
Read the full 12-page opinion on CourtListener, the free public archive maintained by the Free Law Project.