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Donna Ann Gabrielle Chechele v. John G. Sperling and Peter v. Sperling

March 29, 2012


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:


DOC #:


Plaintiff Donna Ann Gabriele Chechele ("Chechele"), brings this shareholder derivative action on behalf of nominal defendant Apollo Group, Inc. ("Apollo"), against John G. Sperling and Peter V. Sperling (collectively, "Defendants") pursuant Section 16(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78p(b) ("Section 16(b)"). Chechele seeks disgorgement of alleged short-swing profits realized by Defendants in connection with five prepaid forward sale agreements for Apollo stock. Chechele also alleges that Defendants violated Section 16(a) of the Exchange Act by failing or refusing to file reports to disclose their sale of Apollo stock during the six months after they purchased those securities. On June 6, 2011, Defendants moved to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons discussed below, Defendants' motion to dismiss is granted.


The facts alleged in this case are not in dispute. John G. Sperling ("JGS") serves as Executive Chairman of the Board of Directors of Apollo. His son, Peter V. Sperling ("PVS"), is the Vice Chairman of Apollo's Board of Directors. Between January 2006 and July 2007, Defendants each entered into separate prepaid forward sale agreements ("PFSAs")*fn1 with unaffiliated third party buyers for shares of Apollo Class A common stock. On April 24, 2006 and July 11, 2007, JGS executed PFSAs with an unaffiliated third party buyer in which JGS agreed to sell a total of up to 1,500,000 shares of Apollo Class A common stock for future delivery. (Compl. ¶¶ 11-12.) On January 19 and April 24, 2006, and on July 11, 2007, PVS also executed separate PFSAs with a third party buyer for a total of up to 1,815,000 of Apollo Class A common shares for future delivery. (Id. ¶¶ 19-20.)

As part of each transaction, the third party agreed to pay an up-front fixed aggregate price for future delivery of the shares on a predetermined settlement date. (Declaration of John G. Sperling ("JGS Decl."), Ex. A3; Declaration of Peter V. Sperling ("PVS Decl."), Ex. A3.) Although JGS and PVS pledged as security the maximum number of shares covered by the PFSAs, the contracts provided that the exact number of shares sold would be determined on the settlement date based on financial formulas that were linked to the stock's market price on the settlement date. (Compl. ¶¶ 12-13, 20-21.) If the market price of Apollo stock on the settlement date dipped below a fixed floor price, the PFSAs would require Defendants to deliver the maximum number of specified shares. If the stock price exceeded a fixed ceiling price, however, or leveled off between the floor price and the ceiling price, the formulas in the PFSAs would determine the exact number of pledged shares that Defendants would be required to transfer. Under the PFSAs, Defendants also retained the option of making a cash payment equal to the value of the Apollo shares owed on the settlement date, provided that they notified the third party prior to the settlement date.

On January 9, 2009 and April 24, 2009, JGS' forward sale agreements settled for below the pledge amount, and JGS recovered the remaining 211,700 and 63,500 shares, respectively, that JGS had initially pledged pursuant to the PFSAs. (Compl. ¶ 15.) When PVS's forward sale agreements settled on January 9 and 20, 2009, and April 24, 2009, the settlement price also fell below the pledge amount, and the remaining shares of Apollo stock were returned to him (in share amounts of 788,300; 254,606; and 436,500, respectively). (Id. ¶ 22.)

In January 2009, shortly after the PFSA settlement dates, Defendants each sold shares of Apollo stock on the open market. (Id. ¶¶ 18, 26.) In each of these open market transactions, the Apollo share price was higher than the previous settlement price under the PFSAs. (Id.) Plaintiff alleges that the return of the remaining Apollo shares on the PFSA settlement dates constitute "purchases" for purposes of Section 16(b), and that Defendants realized short-swing profits when they subsequently sold Apollo shares on the open market. (Id. ¶¶ 31, 37.)


A. Standard of Review

In considering a Fed. R. Civ. P. 12(b)(6) motion to dismiss, a court accepts the complaint's factual allegations as true and draws all reasonable inferences in the plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). A court need not accept as true, however, "[l]egal conclusions, deductions or opinions couched as factual allegations." In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1960 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In determining the sufficiency of a complaint, the Court may consider "the factual allegations in [the] . . . complaint, . . . documents attached to the complaint as an exhibit or incorporated in it by reference, . . . matters of which judicial notice may be taken, [and] documents either in plaintiffs' possession or of which the plaintiffs had knowledge and relied on in bringing suit." Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993).

B. Section 16(b)

Section 16(b)*fn2 seeks to deter corporate "insiders," who are presumed to possess material information about an issuer, from using inside information as a basis for trading in the issuer's securities "at an advantage over persons with whom they trade." Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). The statute imposes a general rule of strict liability on "beneficial owners" of more than ten percent of a corporation's listed stock, as well as the issuer's officers and directors, for any profits realized from a "short swing" purchase and sale, or sale and purchase, of such stock occurring within a six-month period. 15 U.S.C. ยง 78p(a)(1), (b). These statutorily defined "insiders" are liable to the issuer of the stock for their short-swing profits, ...

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