Augenbaum v. Anson Investments Master Fund LP

Background

Todd Augenbaum brought a shareholder derivative action on behalf of Genius Brands International, Inc., which was named as a nominal defendant. He alleged that Anson Investments Master Fund LP and the other Moving Defendants violated Section 16(b) of the Securities Exchange Act of 1934. That provision requires certain short-swing profits—profits from buying and selling, or selling and buying, an issuer’s securities within six months—to be returned to the issuer.

The complaint alleged that the defendants invested in Genius through a March 2020 securities purchase agreement involving convertible notes and warrants. Augenbaum alleged that the defendants should be treated as a single beneficial owner because they acted as a group, and that the group owned more than 10% of Genius’s common stock during the relevant period. He also alleged that some defendants participated in transactions involving Genius stock and warrants. Augenbaum had first demanded that Genius’s board bring a Section 16(b) action; after the board rejected the demand, he filed this derivative case.

Motion to Dismiss Standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. On such a motion, the court generally accepts well-pleaded factual allegations as true and asks whether they plausibly support liability. The court may consider documents incorporated into the complaint or integral to it, but it may consider those documents to determine what they say, not to establish the truth of disputed factual statements in them.

Section 16(b) and Group Ownership

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 both transactions occurring within six months. The person must have been a statutory insider at both the time of the purchase and the time of the sale.

The court focused on whether the defendants plausibly constituted a “group” under Section 13(d)(3) of the Exchange Act. A group exists when two or more persons act together for the purpose of acquiring, holding, or disposing of an issuer’s securities. The court explained that parallel conduct or parallel investments alone generally do not establish a group; the allegations must support an inference that the investors combined in pursuit of a common objective.

The court rejected Augenbaum’s reliance on the Rule 13d-5(b)(2) safe harbor. That rule addresses when an already existing group may be exempt from being treated as having acquired securities beneficially owned by other group members. It does not determine whether a group exists in the first place.

Insufficient Group Allegations

The court held that the defendants’ participation in the same securities purchase agreement and Anson’s role as lead investor were insufficient to plausibly allege a group. The complaint did not allege facts showing that the defendants communicated or coordinated with one another after the transaction, rather than acting individually under a common set of transaction documents.

The court also found insufficient the allegations concerning the voting and lock-up agreements. The defendants were not parties to those agreements; the parties were Genius and certain principal stockholders. Even accepting Augenbaum’s allegation that the defendants were intended third-party beneficiaries, the complaint did not allege communications or interactions showing that the defendants combined to become beneficiaries for the purpose of acquiring, holding, or disposing of Genius stock.

The court likewise found that the later waiver and consent agreement, conversion agreements, and leak-out agreements did not establish a group. Those agreements were separately executed between Genius and each individual defendant, and the complaint did not allege cooperation, communications, meetings, or other coordination among the defendants concerning them. The court also concluded that the leak-out agreement did not appear exceptional enough to require a different analysis from ordinary agreements limiting sales of stock because the complaint did not identify unusual language or coordination.

The court considered Augenbaum’s argument that group membership could be shown through circumstantial evidence even without a written agreement. It concluded that, under either approach—whether an agreement is required or whether the facts and circumstances alone may establish a group—the complaint lacked nonconclusory allegations of communications, discussions, alliances, meetings, or similar conduct showing that the defendants combined in furtherance of a common objective.

Matching Purchases and Sales

Because the court found that the complaint did not plausibly allege a defendant group, it declined to decide whether Augenbaum adequately alleged matching purchases and sales. The court stated that this issue depended on when an alleged group would have acquired beneficial ownership.

Disposition

Judge Marrero granted the Moving Defendants’ Rule 12(b)(6) motion to dismiss the complaint in its entirety without prejudice and with leave to amend. The court gave Augenbaum 20 days from entry of the order to file an amended complaint and directed the clerk to terminate the pending motion.