The opinion of the court was delivered by: Hon. Harold Baer, Jr., U.S.D.J.
Plaintiff Steven Goldstein, an alleged shareholder of nominal defendant Medivation, Inc. ("Medivation"), brings this action pursuant to Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78b(p), in order to recover short-swing insider trading profits allegedly realized by defendants QVT Associates, LLC, QVT Overseas Ltd., Quintessence Fund, L.P., QVT Associates, L.P., and QVT Global II L.P. (collectively, the "QVT Defendants"). The Complaint alleges that the QVT Defendants as a "group," within the meaning of the Exchange Act, owned more than 10 percent of Medivation's outstanding stock, that within a period of less than six months, the QVT Defendants purchased and sold Medivation stock at a profit, and that section 16(b) requires the disgorgement of that profit to Medivation, a public company that trades on NASDAQ.
On May 20, 2010, the QVT Defendants moved to dismiss the Complaint, and on June 9, 2010, the Court heard oral argument on the motion. The critical questions at this stage in the litigation are (1) whether Plaintiff has met the demand requirement as set forth in Section 16(b) of the Exchange Act and (2) whether Plaintiff has plausibly pleaded the existence of a section 16 "group" among the QVT Defendants. For the reasons that follow, the Court concludes that Plaintiff has overcome that burden. Accordingly, the motion to dismiss must be denied.
There are five interrelated QVT entities named as defendants in this action. Quintessence Fund L.P., QVT Associates LP, and QVT Global II L.P. are U.S.-based limited partnership investment funds that allegedly owned Medivation common stock (hereinafter, the "U.S. Funds"). Complt. ¶¶ 5-6. Defendant QVT Associates GP LLC is the general partner of the U.S. Funds, and allegedly held a pecuniary interest in the securities they owned. Id. at ¶ 7. Defendant QVT Overseas Ltd. is a Cayman Islands-based fund with distinct investors. Id. at ¶ 8. The Complaint alleges that nonparty QVT Financial LP directed the vote and disposition of Medivation common stock for the U.S. Funds and the Cayman Islands Fund (together, the "Advised Funds"). Plaintiff alleges that all the QVT entities are related, with QVT Financial LP in control of voting and investment decisions for all four of the Advised Funds.
The Complaint alleges that as of January 23, 2008, the QVT Defendants collectively owned over 10% of the outstanding common stock of Medivation. In a Schedule 13G/A filed with the SEC on that date, the QVT entities stated that QVT Overseas beneficially owned 1,455,275 shares of common stock, and the U.S. Funds beneficially owned an aggregate amount of 1,571,288 shares. Complt ¶ 13; Fruchter Decl., Ex. A. at 2. This comprised 5.05 percent and 5.45 percent, respectively, of Medivation's outstanding common stock, for a total of 10.50 percent. See Oral Argument, Def.'s Ex. A.
At the end of 2008, the QVT entities filed another Schedule 13G/A that provided details about the QVT entities' beneficial ownership. Complt. ¶ 14. As of December 31, 2008, QVT Overseas owned 2,155,391 shares of common stock, and the U.S. Funds beneficially owned an aggregate of 2,261,712 shares. This comprised 7.17 percent and 7.52 percent, respectively, of Medivation's outstanding common stock, for a total of 14.69 percent. See Oral Argument, Def's Ex. A. A year later, at the end of 2009, Medivation filed a Schedule 13G/A, in which QVT Overseas is listed as the beneficial owner of 1,299,321 shares of common stock, and the U.S. funds are named as the beneficial owner of 2,451,930 shares. See Fruchter Decl., Ex. C at 4. This comprised 3.88 percent and 7.32 percent, respectively, of Medivation's outstanding common stock, for a total of 11.2 percent. See Def.'s Ex. A, Oral Arg. of Jun. 9, 2010. All three Schedules filed with the SEC state explicitly that "QVT Financial has the power to direct the vote and disposition of the Common Stock held by QVT Overseas Ltd. [and] each of the [U.S.] Funds." See Fruchter Decl., Ex. A at 2; Ex. B at 4; Ex. C at 4. With respect to the short-swing profits allegedly realized by the QVT Defendants as beneficial owners of Medivation stock, the Complaint alleges seven purchases or sales of Medivation stock by the QVT entities, on March 31, 2008, June 30, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, meaning that there were several instances of a purchase-and-sale within six months, the statutory "short swing" period.
A complaint will be dismissed under Rule 12(b)(6) if there is a "failure to state a claim upon which relief can be granted." Fed.R.Civ.P.12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must "plead enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Landmen Partners Inc. v. Blackstone Group, L.P., 659 F.Supp.2d 532, 538 (S.D.N.Y. 2009). A facially plausible claim is one where "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Where the court finds well-pleaded factual allegations, it should assume their veracity and determine whether they "plausibly give rise to an entitlement to relief." Id. at 1950.
In addition to well-pleaded factual allegations in the complaint, a court "may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); In re Morgan Stanley Tech. Fund Secs. Litig., Nos. 02 Civ. 6153, 02 Civ. 8579 (BSJ), 2009 WL 256005 (S.D.N.Y. Feb. 2, 2009)(applying ATSI to Securities Act claims), aff'd, 592 F.3d 347 (2d Cir. 2010).
A. Demand Requirement Section 16(b) of the Exchange Act permits derivative actions by shareholders suing on behalf of an issuer. The Act requires, however, that the plaintiff in a section 16(b) action meet the demand requirement set forth by the statute, which provides, in relevant part, "Suit to recover such profit may be instituted.by the issuer, or by the owner of any security of the issuer in the name and on behalf of the issuer if the issuer shall fail or refuse to bring such suit within 60 days after request." 15 U.S.C. § 78p(b).
The QVT Defendants argue that the Complaint must be dismissed because Plaintiff has failed to meet the demand requirement as set forth in the statute. Specifically, Defendants contend that Plaintiff Goldstein lacks standing to sue, because a different shareholder, Mark Levy, made the demand upon Medivation on December 17, 2009. The statutory text, however, does not require that the plaintiff who ultimately initiates an action must be the same shareholder who demanded suit. The text itself specifies that a shareholder may initiate an action if the issuer fails "to bring such suit within 60 days after request." 15 U.S.C. § 78p(b). Furthermore, Congress intended to grant standing to a broad class of plaintiffs in Section 16(b) suits. "The statutory definitions identifying the class of plaintiffs (other than the issuer) who may bring suit indicate that Congress intended to grant enforcement standing of considerable breadth." Gollust v. Mendell, 501 U.S. 115, 122 (1991). The purpose of the demand requirement is to afford the issuer "a reasonable opportunity to assert and prosecute its claim in its own name for the recovery of profits from the insider." Henss v. Fruehauf Trailer Corp., et al., 132 F.Supp. 60, 62 (S.D.N.Y. 1955) (Weinfeld, J.) (noting that corporation's failure to take action within sixty days means that the right to sue passes to the "security holders").
Here, demand for prosecution was made upon Medivation on December 17, 2009. Complt. ¶ 27. Counsel for the QVT Defendants allegedly responded by letter on February 4, 2010, asserting that "none of QVT's advised funds.directly or beneficially owned more than 10% of the registered class of Medivation Stock during the Period. Therefore, the QVT funds are not subject to Section 16." The response from the QVT Defendants clearly indicates that Medivation received the shareholder demand, and communicated with the QVT Defendants as to their ownership of Medivation stock and potential liability. Medivation declined to sue, and this derivative action was properly initiated on ...