Roth v. Armistice Capital, LLC

Background

Andrew E. Roth brought this action under Section 16(b) of the Securities Exchange Act of 1934 on behalf of nominal defendant Vaxart, Inc. Section 16(b) generally requires certain corporate insiders to give up profits from buying and selling the company’s securities within a six-month period. Roth sought disgorgement of alleged short-swing profits from Armistice Capital, LLC, Armistice Capital Master Fund Ltd., and Stephen J. Boyd.

Armistice held two Vaxart warrants with provisions limiting the percentage of Vaxart stock it could own after exercising them. In June 2020, Vaxart’s board amended both warrants to raise those limits to 19.99 percent. The board approved the amendments in advance, and Armistice later exercised the warrants and sold Vaxart shares. Roth alleged that the amendments were material enough to count as new stock purchases, matching the later sales for purposes of Section 16(b).

Evidence and Procedural History

The defendants moved for summary judgment under Federal Rule of Civil Procedure 56. The court considered declarations and interview memoranda from several Vaxart directors, but gave no weight to one memorandum that lacked an accompanying declaration from the interviewee. The court stated that its decision would be the same based on other evidence, including testimony from Vaxart’s corporate representative.

The defendants also questioned Roth’s constitutional standing. The court addressed standing before the merits and rejected the defendants’ argument that later Supreme Court authority had displaced the Second Circuit’s precedent recognizing standing for Section 16(b) derivative plaintiffs. The court held that a breach of the statutory insider’s trust-based duty not to engage in short-swing trading is a concrete injury sufficient for constitutional standing.

Legal Standard

Summary judgment is appropriate when there is no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law. The court must view supported factual disputes in favor of the party opposing the motion, but the opposing party must present admissible evidence from which a reasonable factfinder could rule in its favor.

Merits

The defendants argued that the warrant amendments were not purchases under Section 16(b). They also argued that, even if the amendments qualified as acquisitions of securities, they were exempt under Securities and Exchange Commission Rule 16b-3(d). The court did not resolve the first argument because it agreed with the defendants on the exemption.

Rule 16b-3(d) exempts a transaction when three conditions are met: the defendant acquires the issuer’s securities directly from the issuer; the defendant is an issuer’s director or officer, including a director by deputization, when the transaction occurs; and the issuer’s board approves the transaction in advance.

The court found all three conditions satisfied. The amendments were undertaken directly with Vaxart. Boyd was a Vaxart director, and Armistice was a Vaxart director by deputization because Boyd and Maher served as Armistice’s representatives on Vaxart’s board. The Vaxart board approved the amendments before they took effect.

The court rejected Roth’s argument that Armistice could not use the exemption because it had not formally told Vaxart that it considered itself a director by deputization. The court interpreted the relevant Securities and Exchange Commission guidance as requiring the board to understand that a board member represented the short-swing seller—not to understand the legal label “director by deputization” or to receive a formal notice of that status.

The evidence showed that Vaxart’s board understood that Boyd and Maher represented Armistice, were extensions of Armistice, and could share Vaxart information with Armistice. The court concluded that this understanding allowed the board to perform its oversight function. It also held that Rule 16b-3(d) did not require purpose-specific approval of the transaction or a formal declaration that the board intended to invoke the exemption.

Disposition

The court held that the defendants established their entitlement to Rule 16b-3(d)’s exemption from Section 16(b) liability. Judge Jennifer L. Rochon granted Defendants’ motion for summary judgment. The Clerk of Court was directed to terminate the motion and close the case.