New Concept Energy, Inc. v. Gentile

Background

Avalon Holdings Corp. and New Concept Energy, Inc. brought separate, related actions against Guy Gentile and Mintbroker International, Ltd. The companies alleged that the defendants violated Section 16(b) of the Securities Exchange Act of 1934 by engaging in short-term trading in the companies’ securities. Section 16(b) generally requires a beneficial owner of more than 10% of a company’s stock to give up profits from certain purchases and sales made within a short period. The companies sought recovery of the alleged trading profits.

The pleadings alleged that the defendants became beneficial owners of more than 10% of Avalon and New Concept in 2018 and then engaged in short-term trading. The alleged profits exceeded $7 million from Avalon stock and $6 million from New Concept stock. For purposes of deciding the motion, the court accepted the plaintiffs’ factual allegations as true and drew reasonable inferences in their favor.

The court had previously denied motions to dismiss in 2019. In 2022, it granted the plaintiffs’ motions for summary judgment on their Section 16(b) claims, denied the defendants’ summary-judgment motions, and referred the cases for an inquiry into damages. The actions were later stayed as to Mintbroker after the plaintiffs stated that Mintbroker had been placed in involuntary liquidation proceedings in the Bahamas. Gentile then moved to dismiss the claims against him for lack of standing, relying on the Supreme Court’s decision in TransUnion LLC v. Ramirez.

Issue

The issue was whether TransUnion had displaced the Second Circuit’s decision in Donoghue v. Bulldog Investors General Partnership, which held that an issuer’s shareholder had constitutional standing to bring a Section 16(b) derivative action against a beneficial owner of more than 10% of the issuer’s securities.

Under Article III of the Constitution, standing requires a plaintiff to allege an actual or concrete injury, a connection between that injury and the defendant’s conduct, and a likelihood that a court decision can remedy the injury. Gentile argued that the plaintiffs had alleged only a statutory violation, not a concrete injury.

Court’s Analysis

The court explained that it was required to follow Bulldog unless the Supreme Court’s later decision in TransUnion was an intervening decision that conflicted with or undermined the earlier Second Circuit ruling.

In Bulldog, the Second Circuit reasoned that Section 16(b) created a fiduciary duty requiring 10% beneficial owners to refrain from short-term trading in the issuer’s stock. The issuer’s deprivation of its legal right to those profits was treated as an injury similar to the common-law injury caused by a breach of trust. The Second Circuit also made clear that Section 16(b) did not eliminate the requirement of an injury; it identified the type of injury that could support standing.

The court found Bulldog compatible with TransUnion. In TransUnion, the Supreme Court held that a statutory violation alone does not establish standing unless the plaintiff also suffered a concrete harm. The Supreme Court recognized, however, that Congress may make previously unrecognized but concrete injuries legally actionable. The court concluded that Bulldog had already analyzed the concrete harm associated with a Section 16(b) violation by comparing it to a breach of trust.

The court also distinguished decisions applying TransUnion to other statutes. Those decisions involved statutory violations without allegations of a comparable concrete injury, such as the dissemination of inaccurate information, a cloud on title, reputational harm, or an intention to visit allegedly inaccessible locations. Here, the plaintiffs alleged dramatic stock-price fluctuations and millions of dollars in profits allegedly obtained through the defendants’ trading. The court held that these allegations established the concrete harm recognized by Section 16(b).

Disposition

Judge Denise Cote denied Gentile’s March 22, 2023 motion to dismiss the two related actions for lack of standing. The opinion did not alter the earlier summary-judgment ruling or decide the amount of damages. The report and recommendation concerning the damages inquiry was still pending, and the proceedings against Mintbroker remained stayed.

Classification

This is a procedural order because the ruling concerned a Rule 12(b)(1) challenge to constitutional standing and did not decide the underlying Section 16(b) claims on this motion.