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Greenfield v. Criterion Capital Management, LLC

United States District Court, N.D. California

June 23, 2017




         Defendants' motion pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the second amended complaint (“SAC”) for failure to state a claim came on for hearing before this court on December 7, 2016. Plaintiff appeared by her counsel Glenn F. Ostrager, Paul D. Wexler, and Willem F. Jonckheer. The Criterion defendants appeared by their counsel Michael Swartz and Roger Mead. Nominal defendant Veeva Systems Inc. appeared by its counsel Kelley Kinney. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby GRANTS the motion.


         Plaintiff Stacey Greenfield brings this shareholder derivative action 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"). “Congress passed § 16(b) of the 1934 Act 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) (quoting 15 U.S.C. § 78p(b)).

         Section 16(b) permits the issuer to recover any profit realized by an “insider” 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.” 15 U.S.C. § 78p(b); Strom v. United States, 641 F.3d 1051, 1056 (9th Cir. 2011) (“Section 16(b) . . . is a prophylactic rule prohibiting corporate insiders from profiting on 'short-swing' securities trades-specifically, on a purchase and a sale of their company's securities made within any period of less than six months.”); Dreiling v. Am. Online Inc., 578 F.3d 995, 1001 (9th Cir. 2009) (under § 16(b), any "beneficial owner" of more than ten percent of any class of equity securities issued by an entity that issues registered equity securities - or any officer, or director of such an entity - must disgorge to the issuer any profit realized from the purchase and sale, or sale and purchase, within a six-month period, of any equity security by the issuer).

         In the present case, none of the defendants is an officer or director of Veeva, and thus the question of liability under § 16(b) turns in part on each defendant's status as a “beneficial owner” of more than ten percent of a class of Veeva securities. The Exchange Act does not define what makes a person a “beneficial owner” as the term is used in § 16(b). For purposes of § 16, SEC Rule 16a-1 defines "beneficial owner" of more than ten percent of any class of equity securities as meaning “any person who is deemed a beneficial owner” pursuant to § 13(d) of the Exchange Act and the rules promulgated thereunder. See 17 C.F.R. § 240.16a-1(a)(1). SEC Rule 13d-3, which was promulgated to implement and clarify § 13(d), defines "beneficial owner" as "any person who[ ] directly or indirectly . . . has or shares: (1) [v]oting power which includes the power to vote, or to direct the voting of, such security; and/or (2) [i]nvestment power which includes the power to dispose, or to direct the disposition of, such security." 17 C.F.R. § 240.13d-3(a)(1), (2).

         While Rule 16a-1 defines "beneficial ownership" by reference to § 13(d), it also removes from § 16's reach certain categories of persons who otherwise would be covered by § 13(d). Of relevance here, under Rule 16a-1(a)(1), neither a registered investment adviser nor a parent holding company or “control person” will be deemed the beneficial owner of securities held "for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business, " as long as such shares are acquired "without the purpose or effect of influencing control of the issuer or engaging in any arrangement subject to Rule 13d-3(b)." 17 C.F.R. § 240.16a-1(a)(1)(v), (vii). Additionally, to be exempt, a control person may not own more than 1% of the outstanding shares of the relevant issuer, either directly or indirectly by subsidiaries or affiliates. See Rule 16a-1(a)(1)(vii).

         Section 13(d) also provides that in certain circumstances, where shares are beneficially owned by more than one person or entity, those persons or entities may be considered together as a "group, " and the shares will be aggregated for purposes of determining whether § 16's ten-percent beneficial-ownership threshold is reached. That is, “[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 purposes of” determining beneficial ownership. 15 U.S.C. § 78m(d)(3). Congress intended this provision to prevent insiders from evading the disclosure requirement by pooling their voting or other interests in the securities of the issuer. Dreiling, 578 F.3d at 1002.

         “[C]ourts have concluded that the key 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.” Id. (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)) (emphasis added). Thus, Rule 13d-5 expressly requires an "agreement" as a condition to formation of a "group." Id. at 1003 (citation omitted).

         Plaintiff, an investor who holds shares of Veeva Class A common stock, filed this suit after Veeva rejected her demand to bring suit directly against the defendants. SAC ¶¶ 6, 53. Plaintiff seeks disgorgement of "short-swing" profits which she alleges were recovered by the “Criterion defendants.” Plaintiff asserts that these defendants acted together as a “group” to realize short-swing profits in trading Veeva Class A common stock, in violation of § 16(b). SAC ¶¶ 1, 18, 27-33.

         The Criterion defendants are Criterion Capital Management, LLC ("Criterion Capital"); three individual members of Criterion Capital - Christopher H. Lord, David Riley, and Tomoko Fortune; three hedge funds organized as Cayman Islands exempted limited partnerships - Criterion Capital Partners Master Fund, L.P. (“Partners Master Fund”), Criterion Horizons Master Fund, L.P. (“Horizons Master Fund”), and Criterion Vista Master Fund, L.P. (“Vista Master Fund”) (collectively, the “Master Funds”), allegedly established by Criterion Capital and the three individual defendants; and three Cayman Islands corporations, each serving as the general partner of the corresponding limited partnership Master Funds - Criterion Master Partners Master Fund GP, Ltd. (“Partners GP, ” general partner of Partners Master Fund), Criterion Horizons Master Fund GP, Ltd. (“Horizons GP, ” general partner of Horizons Master Fund), and Criterion Vista Master Fund GP, Ltd. (“Vista GP, ” general partner of Vista Master Fund. See SAC ¶¶ 8-16.

         Criterion Capital is a California limited liability company, and is registered as an investment adviser (or “RIA”) with the SEC. SAC ¶ 8. The individual defendants are members and portfolio managers of Criterion Capital, SAC ¶ 16, but neither the individual defendants nor Criterion Capital serves as a general partner (or as a director of a general partner) of any of the Master Funds. SAC ¶¶ 10, 12, 14, 15. Each of the three defendant general partners is managed by the same group of directors - nonparties Philip Cater, John Ackerley, and Darren Stainrod. SAC ¶ 15.

         During the relevant time period, Criterion Capital and the Master Funds were parties to investment management agreements ("standard IMAs"), pursuant to which the Master Funds held title to various securities investments that Criterion Capital held in "discretionary" accounts. See SAC ¶¶ 2, 17-18, 27, 29. Pursuant to those contracts, Criterion Capital had "discretionary" authority over the Master Funds' assets, including the Veeva securities at issue in this litigation, and made all the investment decisions on behalf of the Master Funds. See Criterion Capital's 3/31/2015 Form ADV, Declaration of Michael E. Swartz (“Swartz Decl.”), Exh. C. However, Criterion Capital and its members held only 2%, 5%, and 12%, of the respective Master Funds. SAC ¶ 20. That is, 98% of the investors in the Partners Master Fund were unrelated to Criterion Capital; 95% of the investors in the Horizons Master Fund were unrelated to Criterion Capital; and 88% of the investors in the Vista Master Fund were unrelated to Criterion Capital.

         The SAC also includes allegations relating to certain entities through which investors could invest capital in the Master Funds - the six "Feeder Funds." According to plaintiff, each Master Fund is associated with a "Domestic Feeder Fund" (organized as a Delaware limited partnership) and an "Offshore Feeder Fund" (organized as a Cayman Islands exempted company). SAC ¶¶ 17, 22, 25. Plaintiff alleges that the Feeder Funds invest "substantially all" their assets in the Master Funds that respectively bear their common names, SAC ¶ 25 & Exh. A. Plaintiff does not allege that the Feeder Funds hold title to any securities or that they make any investment decisions. Criterion Capital allegedly serves as investment adviser to the Feeder Funds. SAC ¶ 22. There is no allegation that this structure is illegal; moreover, the Feeder Funds are not parties to this lawsuit, and are not alleged to be the beneficial owners of any Veeva securities.

         Criterion Capital also allegedly serves as the general partner of the Domestic Feeder funds, which are limited partnerships. SAC ¶ 26. According to plaintiff, this means that the members of Criterion Capital (i.e., the three individual defendants) and the Domestic Feeder Funds were "affiliates" of each other. Id. However, defendants assert in their motion to dismiss that the Feeder Funds simply serve as the entry point for investors into the Master Funds.

         The original complaint was filed on June 24, 2015, in the U.S. District Court for the Southern District of New York. On August 3, 2015, pursuant to stipulation, the case was ordered transferred to this district. Defendants filed a motion to dismiss on November 19, 2015. In response, on December 9, 2015, plaintiff filed the FAC. On February 1, 2016, defendants filed a motion to dismiss the FAC, for failure to state a claim, and for failure to allege fraud with particularity.

         In the FAC, plaintiff asserted claims under § 16(b) against Criterion Capital, the three individual defendants, the three Master Funds, and the three general partners of the Master Funds. They alleged that the Criterion defendants collectively constituted a “group” (“the Criterion Group”) for purposes of determining “beneficial ownership” under § 13(d)(3) and § 16(b), and which they alleged was a greater than ten percent beneficial owner of Veeva's Class A common stock; and that defendants had, in essence, structured Criterion Capital and the various funds as part ...

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