The opinion of the court was delivered by: GEORGE DANIELS, District Judge
MEMORANDUM DECISION AND ORDER
This action arises out of the automatic conversion of Preferred
Stock to Common Stock at the closing of VistaCare, Inc.'s
("VistaCare") initial public offering and the subsequent sale of
such stock within six months by Defendant, Bessemer Venture
Partners III L.P. ("Bessemer"). Plaintiff, a VistaCare
shareholder, sued VistaCare and Bessemer, seeking disgorgement of
short-swing profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78p(b) ("Exchange Act").
Defendants counterclaimed, seeking declaratory judgment that the
transactions were not subject to Section 16(b) liability, or
alternatively, that their transactions were subject to two
exceptions that waived liability under Section 16(b). Both
Plaintiff and Defendants move for summary judgment pursuant to
Federal Rule of Civil Procedure 56. Plaintiff's motion for
summary judgment is DENIED. Defendants' motion for summary
judgment is GRANTED.
VistaCare is a publiclytraded company whose common stock is
registered with the Securities and Exchange Commission ("SEC").
Plaintiff is a shareholder of VistaCare. Bessemer, a long-term
investor in VistaCare, entered into a Stock Purchase Agreement
with Vista Hospice Care, Inc. ("VHS"), pursuant to which Bessemer
purchased and acquired 305,292 shares of VHS Series A-1 Preferred
Stock in 1995.*fn1 At the time of this purchase, the
Preferred Stock was not convertible to common stock. In 1998, as part of a recapitalization, VHS became
a wholly owned subsidiary of VistaCare, Inc., and VHS Series A-1
Preferred Stock became VistaCare, Inc. A-1 Preferred Stock.
On December 23, 1999, VistaCare filed a Third Amended and
Restated Certificate of Incorporation ("Restated Certificate").
Under the terms of the Restated Certificate, upon closing of an
initial public offering of VistaCare Common Stock (the "IPO"),
VistaCare Series A-1 Preferred Stock would automatically convert
to shares of VistaCare Common Stock. The Restated Certificate set
forth a specific ratio under which the preferred stock would be
converted to common stock:*fn2
Upon the closing of a Qualified Initial Public
Offering, each outstanding share of Series A-1
Preferred Stock shall automatically be converted into
a number of shares of Class A Common Stock equal to
(i) the Original Issue Price of the Series A-1
Preferred Stock (as adjusted for any stock splits,
stock dividends, recapitalizations and similar
events), plus all accrued but unpaid dividends on
such shares of Series A-1 Preferred Stock, divided by
(ii) the per share price at which the Common Stock is
sold to the public in the Qualified Initial Public
Offering (the "IPO Price").
(June 4, 2004, Twersky Decl., Ex. 2).
Bessemer argues that because the ratio was fixed and set at the
time of the Restated Certificate, even if it were privy to
insider information, it would be unable to alter the ratio to
take advantage of the information. It is further undisputed that
the value of Bessemer's holding was the same after the conversion
because under the formula set forth, an increase in the IPO price
per share would lead to an offsetting decrease in the number of common shares Bessemer
would received in the conversion. Bessemer argues, therefore,
that the conversion was not a new investment by Bessemer in
VistaCare. The conversion's sole effect on Bessemer's holdings
was to change its preferred stock into an equivalent value of
On December 23, 2002, VistaCare completed the IPO of its common
stock at a price of $12.00 per share. Pursuant to the terms of
the 1999 Restated Certificate, Bessemer's Preferred Stock was
converted to 251,865 shares of Common Stock. On May 13, 2003,
VistaCare conducted a secondary offering in which certain selling
shareholders, including Bessemer, sold additional shares of
VistaCare Common Stock to the public at $20.00 per share (the
"Secondary Offering"). At all relevant times, Bessemer held ten
percent or more of the stock of VHS or VistaCare. Bessemer did
not have a position on VistaCare's Board of Directors. Bessemer
had no control over the board or management of VistaCare
concerning the timing, form, or occurrence of the IPO, or the
per-share price to the public of VistaCare common stock.*fn3
On June 24, 2003, counsel for Plaintiff demanded VistaCare
bring suit against Bessemer seeking disgorgement of the profits
Bessemer made from their sale in the Secondary Offering.
Plaintiff's counsel asserted that Bessemer's acquisition of
Common Stock by conversion of its Preferred Stock at the closing
of the IPO constituted a "purchase" for purposes of Section 16(b)
liability. By letter dated July 2, 2003, VistaCare asked Bessemer
to advise why VistaCare should not be entitled to disgorgement of
On July 31, 2003, Bessemer filed a complaint in the United
States District Court for the Southern District of New York
seeking a declaratory judgment that Bessemer has no Section 16(b)
liability because, among other things, the conversion of
VistaCare Common Stock pursuant to the closing of the IPO, should not be considered a "purchase" under
the SEC's rules. On September 18, 2003, Plaintiff filed the
instant Complaint, seeking "disgorgement of short-swing insider
trading profits" allegedly realized by Bessemer. Plaintiff seeks
disgorgement of short-swing profits in the amount of
$1,725,275.25. On October 9, 2003, Bessemer dismissed its
separate declaratory judgment action. Bessemer filed an Answer
and Counterclaim in Plaintiff's action on October 17, 2003.
Summary judgment is proper "if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue of
material fact and the moving party is entitled to judgment as a
matter of law." Fed.R.Civ.P. 56(c); Nebraska v. Wyoming,
507 U.S. 584, 590, 113 S. Ct. 1689, 1694, 123 L. Ed. 2d 317 (1993).
The burden of demonstrating that no factual dispute exists is on
the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323,
106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Once the moving party
has met this burden, the nonmoving party "must set forth specific
facts showing that there is a genuine issue for trial."
Fed.R.Civ.P. 56 (e). In deciding a motion for summary judgment, a
court must resolve all ambiguities and draw all reasonable
inferences in favor of the party opposing the motion. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505,
91 L. Ed. 2d 202 (1986). Summary judgment should be granted only
when no reasonable trier of fact could find in favor of the
nonmoving party. Gallo v. Prudential Residential Services,
Ltd., 22 F.3d 1219, 1224 (2d. Cir. 1994).
Section 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78p(b), which imposes liability for "short-swing" profits,
forbids an insider's speculative short-term trading based upon
insider information. Its purpose is to prevent corporate insiders
from exploiting material information about the issuer to have an
advantage over others with whom they trade. Gwozdsinsky v.
Zell/Chilmark Fund, L.P., 156 F.3d 305
, 308 (2d Cir. 1998).
Section 16(b) provides, in pertinent part:
For the purposes of preventing the unfair use of
information which may have been obtained by such
beneficial owner, director, or officer by reason of
his relationship to the issuer, any profit realized
by him from any purchase and sale, or any sale and
purchase, of any equity security of such issuer . . .
involving any such equity security within ...