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Sand v. Biotechnology Value Fund, L.P.

United States District Court, N.D. California

July 25, 2017

BRIAN B. SAND & ZACHARY B. SAND JOINT TRUST, Plaintiff,
v.
BIOTECHNOLOGY VALUE FUND, L.P., et al., Defendants.

          ORDER GRANTING IN PART WITH PREJUDICE AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

          RICHARD SEEBORG, United States District Judge.

         I. INTRODUCTION

         This is an action under section 16(b) of the Securities and Exchange Act of 1934 for disgorgement of “short-swing profits” that plaintiff Brian B. Sand & Zachary B. Sand Joint Trust alleges defendants may have realized from purchases and sales of stock of Oncothyreon, Inc., of which plaintiff is a shareholder. Defendants are Mark N. Lampert and a number of inter-related entities plaintiff contends, to one degree or another, Lampert controls. Liability in this action is predicated on, among other things, a showing that defendants, either individually as part of a group, owned beneficially more than 10 percent of Oncothyreon's outstanding common stock. Defendants move to dismiss plaintiff's claim for the second time, their first motion having been granted with leave to amend due to, among other things, plaintiff's failure to allege sufficiently 10 percent beneficial ownership on the part of any defendant. Because plaintiff has significantly repaired its complaint through amendment, defendants' motion is largely denied. It is granted with prejudice, however, with respect to certain defendants for whom plaintiff still fails to allege adequately more than 10 percent beneficial ownership.

         II. BACKGROUND

         As noted, defendants in this action are Mark N. Lampert and a number of entities with which he is involved in some capacity. Lampert is the sole officer and director of defendant BVF, Inc., which, in turn, is the general partner of defendant BVF Partners, LP. The Oncothyreon stock at issue is directly owned by four of the five remaining defendants, described as hedge funds. They are (1) Biotechnology Value Fund, L.P. (“BV Fund 1”); (2) Biotechnology Value Fund II, L.P. (“BV Fund 2”); (3) Investment 10, L.L.C. (“I10”), and; (4) MSI BVF SPV, LLC (“MSI”). Defendant Magnitude Capital, LLC (“Magnitude”) is also a hedge fund, [1] of which MSI is a sub-fund or “fund of a fund.” BVF Partners serves as the general partner of BV Fund 1 and BV Fund 2.[2] BVF Partners is not alleged to be the general partner of either I10 or MSI. Rather, as to those two entities, BVF Partners allegedly serves as investment advisor. Magnitude is alleged to have delegated management authority of MSI to BVF Partners.

         Although plaintiff refers to all defendants collectively as “the BVF entities, ” certain distinctions must be drawn. Accordingly, this order will hereafter refer to Lampert, BVF, Inc., and BVF Partners collectively as “the BVF defendants.” The two funds for which BVF Partners serves as the general partner, BV Fund 1 and BV Fund 2, will be referred to collectively as “the BV Funds.”

         Defendants' first motion to dismiss was granted with leave to amend on March 3, 2017. The order granting the motion held that the BVF defendants were entitled to an exemption under 17 C.F.R. § 240.16a-1(a)(1) precluding them from being treated as beneficial owners of Oncothyreon stock, and that they were therefore entitled to dismissal from the action. The order likewise held the four hedge fund defendants' Oncothyreon stock holdings could not be aggregated for purposes of section 16(b) liability because plaintiff had not sufficiently alleged the hedge funds had entered into an agreement regarding Oncothyreon stock such that they could be treated as a group under SEC Rule 13d-5, 17 C.F.R. § 240.13d-5(b)(1). Without the benefit of group treatment, plaintiff could not aggregate the fund defendants' Oncothyreon stock holdings such that any defendant could be considered the beneficial owner of more than 10 percent of the stock.

         On March 17, 2016, plaintiff filed a First Amended Complaint which attempts to bolster both plaintiff's allegations regarding agreement among the four hedge fund defendants that would expose them to “group” treatment under SEC Rule 13d-5, and plaintiff's allegations that the BVF defendants are “activist investors” not entitled to the 17 C.F.R. § 240.16a-1(a)(1) exemption. The new “activist investors” allegations include: that BVF Partners claims on its website to be “committed to working with its portfolio companies as partners in their success”; that various articles have, since 2011, described BVF Partners as an activist investor; that Lampert openly adopted an activist approach toward Oncothyreon in December 2015, which resulted in his taking a seat on the company's Board of Directors, and in the resignation of its CEO; and that in a January 2017 prospectus supplement, Oncothyreon reported “BVF, an affiliate of Mr. Lampert . . . may significantly influence our business decisions.” Compl. ¶ 19-26. Defendants now move to dismiss plaintiff's First Amended Complaint, arguing it suffers from the same deficiencies as does the initial complaint.

         III. LEGAL STANDARD

         “A pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . .” Fed.R.Civ.P. 8(a)(2). “[D]etailed factual allegations” are not required, but a complaint must provide sufficient factual allegations to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. v. Twombly, 550 U.S. 544, 555, 570 (2007)) (internal quotation marks omitted). “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.

         Federal Rule of Civil Procedure 12(b)(6) provides a mechanism to test the legal sufficiency of the averments in a complaint. Dismissal is appropriate when the complaint “fail[s] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). A complaint in whole or in part is subject to dismissal if it lacks a cognizable legal theory or the complaint does not include sufficient facts to support a plausible claim under a cognizable legal theory. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When evaluating a complaint, the court must accept all its material allegations as true and construe them in the light most favorable to the non-moving party. Iqbal, 556 U.S. at 678. Legal conclusions, however, need not be accepted as true and “[t]hreadbare recitals of elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. When a plaintiff has failed to state a claim upon which relief can be granted, leave to amend should be granted unless “the complaint could not be saved by any amendment.” Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002) (citation and internal quotation marks omitted).

         IV. DISCUSSION

         Section 16 of the Exchange Act includes two subsections: section 16(a) and section 16(b). Section 16(a) imposes reporting requirements on “[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” section 12 of the Act, or who is “a director or an officer of the issuer of such security.” 15 U.S.C. § 78p(a)(1). Under section 16(b), the section at issue in this action, 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). For the purposes of section 16(b), “‘beneficial owner' shall mean any person who is deemed a beneficial owner pursuant to section 13(d) of the Act and the rules thereunder, ” subject to certain exemptions. See Exchange Act Rule 16a-1(a)(1), 17 C.F.R. § 240.16a-1(a)(1). Exchange Act Rule 13d-3(a), in turn, defines beneficial owner as “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (1) Voting power which includes the power to vote, or to direct the voting of, [a] security; and/or, (2) Investment power which includes the power to dispose, or to direct the disposition of, [a] security.” 17 C.F.R. § 240.13d-3(a).

         A. Lampert, BVF, Inc., and BVF Partners

         Plaintiff alleges, and defendants do not dispute, that the BVF defendants meet the broad definition of “beneficial owner” articulated in Rule 13d-3(a) because - through BVF Partners' role as general partner of the BV Funds and investment advisor of MSI and I10 - they shared voting and dispositive power over the shares of Oncothyreon common stock owned by the four fund defendants. Plaintiff also alleges and defendants do not dispute that those holdings exceeded 10 percent of the outstanding common stock. Nevertheless, the first order of dismissal held the BVF defendants were, according to Rule 16a-1, exempt from the ...


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