Microbot Medical, Inc. v. Alliance Investment Management, Ltd.

Background

Microbot Medical, Inc. sued Joseph Mona under Section 16(b) of the Securities Exchange Act of 1934. That provision requires certain directors, officers, and owners of more than 10% of a company’s stock to give up profits from buying and selling the company’s stock within a six-month period. Microbot alleged that Mona made such trades and sought recovery of the profits.

On March 30, 2021, the court granted Microbot’s motion for judgment on the pleadings. The next day, the Clerk entered judgment against Mona for $484,614.30. After the court dismissed Mona’s counterclaim with prejudice on August 22, 2023, Mona moved to vacate the judgment and dismiss the case for lack of subject-matter jurisdiction. He argued that Microbot lacked standing under Article III of the Constitution.

Magistrate Judge Robert W. Lehrburger recommended denying Mona’s motion. Mona objected, and Microbot responded. District Judge George B. Daniels reviewed the challenged portions of the report and recommendation independently.

Standing and Section 16(b)

Article III standing requires a plaintiff to show an injury that is concrete and particularized, fairly traceable to the challenged conduct, and likely to be remedied by a court decision. Mona argued that Microbot had not shown the required injury in fact.

The court relied on the Second Circuit’s decision in Donoghue v. Bulldog Investors General Partnership, which held that short-swing trading by an owner of more than 10% of an issuer’s stock causes injury to the issuer sufficient for constitutional standing. The court explained that Section 16(b) creates a legal right for the issuer to recover profits from the prohibited trades. The statute treats the profits as comparable to profits held in a constructive trust after a fiduciary breach.

Mona argued that he was merely a retail trader with no affiliation with Microbot and no traditional insider status. The court rejected that argument because Section 16(b) imposes a form of strict liability and can treat a person who owns more than 10% of the stock as a statutory insider, even without an affiliation with the company.

The court also considered the Supreme Court’s decision in TransUnion LLC v. Ramirez, which held that a statutory violation alone does not automatically establish an injury in fact. The court concluded that TransUnion did not displace the Second Circuit’s Section 16(b) precedent because the deprivation of short-swing profits is analogous to the historically recognized harm of depriving a beneficiary of profits gained through a fiduciary breach. Because Microbot was deprived of profits from Mona’s alleged short-swing trading, the court held that Microbot suffered a concrete harm and had Article III standing.

Rulings

The court overruled Mona’s objections and adopted Magistrate Judge Lehrburger’s report and recommendation in its entirety. It denied Mona’s motion to vacate the judgment and dismiss the case for lack of standing. The judgment therefore was not vacated by this order.

Mona also asked the court to stay enforcement of the judgment while awaiting the Second Circuit’s decision in another Section 16(b) case and to waive the bond requirement. The court denied that request because Mona had not provided additional support for waiving the bond. The court stated that it would consider an application to stay enforcement if Mona posted an appropriate bond.