Donoghue v. Gad

Background

Deborah Donoghue, a stockholder of Y-mAbs Therapeutics, Inc., brought a derivative claim under Section 16(b) of the Securities Exchange Act of 1934. A derivative claim is brought by a stockholder on behalf of a corporation. Donoghue alleged that Thomas Gad, an officer and director of Y-mAbs, purchased 1,029,927 Y-mAbs shares on or about March 10, 2021, and sold 249,569 shares of Y-mAbs stock within six months before or after that date at higher prices. She alleged that Gad realized at least $2,543,000 in short-swing profits and sought recovery of those profits for Y-mAbs, the nominal defendant.

Motion to Dismiss

Gad moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which asks whether a complaint states a legally sufficient claim. He argued that the March 10, 2021 acquisition was exempt from Section 16(b) under Securities and Exchange Commission Rule 16a-13. That rule can exempt a transaction that changes only the form of beneficial ownership—such as from indirect to direct ownership—without changing the person’s financial interest in the securities.

The court addressed which materials it could consider at the motion-to-dismiss stage. It allowed consideration of public Securities and Exchange Commission filings, but only to determine what those filings stated, not whether their contents were true. It also considered the Distribution Agreement because Donoghue’s complaint relied on the transaction it described. The court declined to consider the Shareholder Registers and Shareholders Agreement because the complaint did not mention or rely on them.

Court’s Analysis

The court explained that a Section 16(b) claim requires a plausible allegation of a purchase and sale of securities by a covered insider within six months. The court concluded that the limited record did not establish as a matter of law that Gad’s March 10 acquisition qualified for the Rule 16a-13 exemption. In particular, the documents the court could not consider were central to Gad’s argument that he had an indirect financial interest in the Y-mAbs shares before the acquisition. The Securities and Exchange Commission filings showed what Gad had reported, but they did not establish the truth of those reports or show that his financial interest remained unchanged.

Disposition

The court denied Gad’s motion to dismiss for failure to state a claim under Rule 12(b)(6). The parties were ordered to submit a proposed case-management plan by August 29, 2022. This summary classifies the ruling as a procedural order because the court ruled on a Rule 12(b)(6) motion, even though it discussed the legal merits of Gad’s claimed exemption.