United States District Court, N.D. California
ORDER GRANTING MOTION TO DISMISS IN PART AND DENYING
IT IN PART
PHYLLIS J. HAMILTON United States District Judge.
motion to dismiss the first amended complaint
(“FAC”) in the above-entitled action pursuant to
Federal Rule of Civil Procedure 12(b)(6) came on for hearing
before this court on May 18, 2016. Plaintiffs appeared by
their counsel Glenn Ostrager, Paul Wexler, and Willem
Jonckheer; and defendants appeared by their counsel Michael
Swartz, Randall Adams, Roger Mead, and Steven Shatz. Having
read the parties’ papers and carefully considered their
arguments and the relevant legal authority, the court hereby
GRANTS the motion in part and DENIES it in part.
Stacey Greenfield brings this action derivatively under
§ 16(b) of the Securities Exchange Act of 1934
("Exchange Act"), 15 U.S.C. § 78p(b), on
behalf of nominal defendant Veeva Systems, Inc.
("Veeva"). FAC ¶ 15. Plaintiff seeks
disgorgement of "short-swing" profits she alleges
were recovered by Criterion Capital Management LLC
("Criterion Capital"), three individual members of
Criterion Capital, and certain funds for which Criterion
Capital acts as the investment adviser. Id.
Plaintiff brought this action after Veeva declined to do so.
FAC ¶ 42.
Capital is a California limited liability company with its
principal place of business in San Francisco. FAC ¶ 3.
It is a registered investment adviser ("RIA"). FAC
¶ 22. Named as defendants in addition to Criterion
Capital are three individuals and six funds. The individual
defendants are Christopher H. Lord ("Lord"), David
Riley ("Riley"), and Tomoko Fortune
("Fortune"), each of whom resides in California and
is a member and portfolio manager of Criterion Capital. FAC
¶¶ 10-12. Plaintiff asserts that "[t]rusts
established by Lord, Riley, and Fortune own Criterion
Capital.” FAC ¶ 12.
defendant funds are Criterion Capital Partners Master Fund,
L.P. ("Partners Master Fund"); Criterion Capital
Partners Master Fund GP, Ltd. ("Partners GP");
Criterion Horizons Master Fund, L.P. ("Horizons Master
Fund"); Criterion Horizons Master Fund GP, Ltd.
("Horizons GP"); Criterion Vista Master Fund, L.P.
("Vista Master Fund"); and Criterion Vista Master
Fund GP, Ltd. ("Vista GP"). FAC ¶¶ 4-9.
Master Fund, Horizons Master Fund, and Vista Master Fund are
Cayman Islands exempted limited partnerships. FAC
¶¶ 4, 6, 8. They are hedge funds (“Criterion
Hedge Funds” or “Hedge Funds”) which were
allegedly established by Criterion Capital and the individual
defendants in order to “manage their investments and
generate substantial fees.” FAC ¶ 13. Partners GP,
Horizons GP, and Vista GP are Cayman Islands corporations,
each serving as the general partner of the corresponding
(Partners, Horizons, Vista) limited partnership. FAC
¶¶ 5, 7, 9. Criterion Capital is the investment
adviser for each of the defendant limited partnerships, FAC
¶ 14, which hold title to various securities
investments. According to plaintiff, however, Criterion
Capital "controls" the holdings. FAC ¶ 22.
16 OF THE EXCHANGE ACT
16 of the Exchange Act includes two subsections - §
16(a) and § 16(b). Section 16(a) provides that
"[e]very person who is directly or indirectly the
beneficial owner of more than 10 percent of any class of any
equity security . . . which is registered pursuant to"
§ 12 of the Act, or who is "a director or an
officer of the issuer of such security" must file
certain statements/reports with the SEC. 15 U.S.C. §
78p(a)(1). Initial ownership statements are filed on SEC Form
3, and statements disclosing changes in beneficial ownership
are filed on SEC Form 4. See 17 C.F.R. §
240.16a-3(a), (g). There is no private right of action under
§ 16(a) to compel the required trading reports, see
Scientex Corp. v. Kay, 689 F.2d 879, 884 (9th Cir.
1982), and § 16(a) does not form the basis of the claims
§ 16(b), any profit realized by "such beneficial
owner, director, or officer by reason of his relationship to
the issuer . . . from any purchase and sale, or any sale and
purchase, of any equity security of such issuer . . . within
any period of less than six months . . . shall be . . .
recoverable by the issuer." 15 U.S.C. § 78p(b)
(emphasis added). Section 16(b) was enacted to prevent the
unfair use of information which may have been obtained by a
beneficial owner, director, or officer by reason of his
relationship to the issuer. Gollust v. Mendell, 501
U.S. 115, 122 (1991); see also Dreiling v. Am. Online,
Inc., 578 F.3d 995, 1001 (9th Cir. 2009). Section 16(b)
“imposes strict liability regardless of motive,
including trades not actually based on inside
information.” Dreiling v. Am. Express Co., 458
F.3d 942, 947 (9th Cir. 2006).
present case, none of the defendants is an officer or a
director of Veeva, and thus the question of liability under
§ 16(b) turns in part on defendants’ status as
"beneficial owners of more than 10 percent of" a
class of Veeva securities. Under SEC Rule 16a-1, 17 C.F.R.
§ 240.16a-1, in determining whether a person is "a
"beneficial owner of more than ten percent of any class
of equity securities registered pursuant to section 12 of the
Act, " the term "beneficial owner" means
"any person who is deemed a beneficial owner pursuant to
section 13(d) of the Act and the rules thereunder." 17
C.F.R. § 240.16a-1(a)(1).
"beneficial owner" can be an individual, §
13(d) of the Act also provides that "[w]hen two or more
persons act as a . . . group for the purpose of acquiring,
holding, or disposing of securities of an issuer, such . . .
group shall be deemed a 'person' for the purposes of
this subsection." 15 U.S.C. § 78m(d)(3) (emphasis
added). SEC Rule 13d-5, which was promulgated to implement
and clarify § 13(d), defines beneficial ownership by a
"group" as follows:
When two or more persons agree to act together for
the purpose of acquiring, holding, voting or disposing of
equity securities of an issuer, the group formed thereby
shall be deemed to have acquired beneficial
ownership, for purposes of sections 13(d) and (g) of the
[Exchange] Act, as of the date of such agreement, of all
equity securities of that issuer beneficially owned by
any such persons.
17 C.F.R. § 240.13d-5(b)(1) (emphasis added).
inquiry in determining whether a group existed such that
beneficial ownership could be imputed to certain shareholders
is whether the parties “agree[d] to act together for
the purpose of acquiring, holding, voting or disposing
of” a firm's securities. See Dreiling, 578
F.3d at 1002-03 (citing Morales v. Quintel Entm't,
Inc., 249 F.3d 115, 122-23 (2nd Cir. 2001) (citing 17
C.F.R. § 240.13d-5(b)(1))). Generally, courts have
concluded that whether such an agreement existed is a
question of fact. See Dreiling, 578 F.3d at 1003
(the agreement “may be formal or informal and may be
proved by direct or circumstantial evidence") (citing
Morales, 249 F.3d at 124).
under Rule 13d-5, which is incorporated in § 16(b) and
Rule 16a-1, where there is such an agreement, the shares held
by persons in such a group are aggregated to determine
whether the group has a greater than ten percent beneficial
ownership in the issuing corporation. If the aggregate number
of shares beneficially owned by the group exceeds ten
percent, each member of the group is deemed to be a greater
than ten percent beneficial owner and is liable to disgorge
profits from transactions by such group member effected
within a less than six-month period.
while Rule 16a-1 defines “beneficial ownership”
for purposes of § 16 by reference to § 13(d), the
SEC has also exempted certain categories of institutions and
persons who are not deemed to be beneficial owners even if
they otherwise would be covered by § 13(d).
Specifically, Rule 16a-1 provides that certain persons or
entities are exempted from the category "beneficial
owner of more than ten percent of any class of equity
securities registered pursuant to section 12 of the
Act” where the securities of such class are
“held for the benefit of third parties or in
customer or fiduciary accounts in the ordinary
course of business" provided that "such shares
are acquired by such institutions or persons without the
purpose or effect of changing or influencing control of the
issuer . . . ." 17 C.F.R. § 240.16a-1(a)(1)
exempted persons and entities include "[a]ny person
registered as an investment adviser under Section
203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3)
or under the laws of any state" (referred to as
"the RIA exemption"); and "[a] . . . control
person, provided the aggregate amount held directly by the .
. . control person, and directly and indirectly by their
subsidiaries or affiliates that are not persons specified in
§ 240.16a-1(a)(1)(i) through (x), does not exceed
one percent of the securities of the subject class"
(referred to as "the control-person exemption"). 17
C.F.R. § 240.16a-1(a)(1)(iv), (vii) (emphasis added).
promulgating Rule 16a-1, the SEC acknowledged that without
such exemptions the listed institutions - which in the
ordinary course of their business manage customer and
fiduciary accounts - would be subject to liability under
§ 16(b) if they exercised either their voting or
investment power over accounts that when aggregated held over
ten percent of a class of equity securities. See
Ownership Reports and Trading by Officers, Directors and
Principal Security Holders, Exchange Act Release No.
34-27148, 54 Fed. Reg. 35667, at 35670 (Aug. 18, 1989) (the
“1989 Release"). Responding to this concern, the
SEC stated that “[t]he proposed revision appears
necessary to avoid undue interference with the day-to-day
business of banks, brokers, dealers, investment advisers and
other specified institutional fiduciaries and
alleges that she is the owner of Class A common stock in
Veeva. FAC ¶ 1. She asserts further that the ten
defendants collectively constitute a "group" (which
plaintiff refers to throughout the FAC as "the Criterion
Group") for purposes of determining beneficial ownership
under § 13(d)(3) and § 16(b) of the Exchange Act.
FAC ¶ 21. Plaintiff claims that at all relevant times,
the Criterion Group was a greater than ten percent beneficial
owner of Veeva's Class A common stock, and that it
garnered short- swing profits disgorgeable to Veeva.
alleges that defendants' membership in the § 13(b)
group is shown by the following: (a) Criterion Capital
acknowledged in its Form ADV that it manages the three Hedge
Funds; (b) Criterion Capital, directly or indirectly,
controls the Hedge Funds' holdings in Veeva through a
"master feeder structure" as alleged in FAC ¶
14 - that is, each of the three Hedge Funds act as a
"master feeder" through which the other three
defendant Funds invest substantially all their assets, and
Criterion Capital acts as the general partner of the Hedge
Funds; (c) SEC filings were made collectively on behalf of
all group members; and (d) Criterion Capital provides the
defendant Funds with office space, utilities, and clerical
and administrative services, including payment of the
salaries of all personnel providing those services. FAC
alleges that the Hedge Funds acted together with Criterion
Capital, their common investment adviser, and an appointed
agent, to manage the Hedge Funds' trading in Veeva's
Class A common stock. FAC ¶ 23. She asserts that this
"investment structure" establishes that the Hedge
Funds were members of a group, and also that the Criterion
Group members (i.e., all the defendants) have