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August 26, 2005.

MARC BRUH, Plaintiff,

The opinion of the court was delivered by: GEORGE DANIELS, District Judge


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 common stock.

  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 profits.

  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 ...

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