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Chechele v. Elstain

February 24, 2012

DONNA ANN GABRIELLE CHECHELE, PLAINTIFF,
v.
EDUARDO S. ELSTAIN; CONSULTORES ASSETS MANAGEMENT S.A.; CONSULTORES VENTURE CAPITAL URUGUAY S.A.; AGROINVESTMENT S.A.; CONSULTORES VENTURE CAPITAL LIMITED; IFIS LIMITED; INVERSIONES FINANCIERAS DEL SUR S.A.; CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA, FINANCIERA Y AGROPECUARIA; AGROLOGY S.A.; IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA; TYRUS S.A.; JIWIN S.A.; IDALGIR S.A.; REAL ESTATE INVESTMENT GROUP L.P.; REAL ESTATE INVESTMENT GROUP II L.P.; AND REAL ESTATE INVESTMENT GROUP III L.P., DEFENDANTS, AND HERSHA HOSPITALITY TRUST, NOMINAL DEFENDANT.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

I. INTRODUCTION

Donna Ann Gabriele Chechele owns shares in Hersha Hospitality Trust ("Hersha"), a Maryland real estate investment trust.*fn1 She has brought a shareholder derivative suit against Eduardo S. Elstain, one of Hersha's trustees who at all relevant times owned more than ten percent of Hersha's outstanding Class A common shares, and against fifteen corporate entities controlled by Elstain, each of which also controlled, either directly or indirectly, at least ten percent of Hersha's stock.*fn2 Chechele claims that defendants violated Section 16(b) of the Securities and Exchange Act of 1934 ("the Act") by purchasing approximately $17 million of Hersha stock from Hersha's underwriters at its October 29, 2010 public offering and then selling that stock between December 2010 and March 2011 for a total profit of approximately $1.31 million.*fn3 Chechele claims that these profits should be disgorged from defendants and returned to Hersha. Defendants have moved to dismiss Chechele's claim, arguing that their purchase of Hersha stock was exempted from the prohibition on short swing insider profits because it was authorized by the Hersha Board and thus permissible under Rule 16b-3 ("the Rule") of the Securities and Exchange Commission ("SEC").*fn4 Because defendants' purchase is not covered by the terms of Rule 16b-3, which exempts in relevant part only "acquisitions from the issuer" and not acquisitions from intermediaries such as underwriters, and because there are no compelling reasons to depart from the plain language of the Rule, their motion to dismiss is denied.

II. LEGAL STANDARD

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court may disregard "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements."*fn5 In contrast, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."*fn6

To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of "plausibility."*fn7 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."*fn8

"[A] district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint."*fn9 "Where public records that are integral to a . . . complaint are not attached to it, the court, in considering a Rule 12(b)(6) motion, is permitted to take judicial notice of those records."*fn10 However, "[i]f the court takes judicial notice, it does so in order to determine what statements they contained . . . not for the truth of the matters asserted."*fn11

III. APPLICABLE LAW

Section 16(b) of the Actprovides for the disgorgement of certain profits earned through insider trading, regardless of the insider's intention when making the trades:

For the purpose 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 (other than an exempted security) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction . . .*fn12

Section 16(b) explicitly empowers the SEC to exempt from the law's ambit any transactions that the agency determines are "not comprehended within the purpose" of the law, and the SEC has done so in Rule 16b. The Rule exempts "[t]ransactions between an issuer and its officers or directors," that meet certain conditions.*fn13 Acquisitions from the issuer are exempt if the transaction is approved by the issuer's board of directors (or by an independent committee of the board) or approved by the issuer's shareholders, or if the security is held for more than six months.*fn14

IV. DISCUSSION

The issue presented by this motion is discrete and surprisingly novel.*fn15

Defendants were insiders who made their purchase of Hersha stock from underwriters who had been hired by the company to ...


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