United States District Court, N.D. California
ORDER GRANTING MOTION TO DISMISS SECOND AMENDED
PHYLLIS J. HAMILTON, UNITED STATES DISTRICT JUDGE
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
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)).
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
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).
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
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.
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).
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,
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.
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.
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
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
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
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
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 ...