United States District Court, D. Colorado
ORDER ADOPTING AND AFFIRMING FEBRUARY 17, 2015 RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
CHRISTINE M. ARGUELLO, District Judge.
In this securities action, shareholder-Plaintiff Aaron Rubenstein alleges that Defendants realized short-swing insider trading profits subject to disgorgement pursuant to Section 16(b) of the Securities Exchange Act of 1934 ("Section 16(b)") (as amended). 15 U.S.C. 78p(b). Specifically, the Complaint alleges that Defendants Very Hungry LLC ("Very Hungry"), a private investment company, and Scott J. Reiman ("Reiman"), individually and/or by and through Defendant Scott Reiman 1991 Trust (the "Reiman Trust, " and, collectively with Reiman, "the Reiman Defendants"), were "insiders" of Nominal Defendant Prospect Global Resources, Inc. ("Prospect.") Each of Plaintiff's claims relates to short-swing profits by Very Hungry and the Reiman Defendants resulting from the sale of common stock and warrants issued by Prospect. The Complaint includes three claims of Section 16(b) violations - the first claim is against Very Hungry; the second, against the Reiman defendants; and the third, against both Defendants.
This case was referred to United States Magistrate Judge Craig B. Shaffer pursuant to 28 U.S.C. § 636 and Fed.R.Civ.P. 72. (Doc. # 33.) On February 17, 2015, Judge Shaffer issued a Recommendation that Very Hungry LLC's Motion to Dismiss (Doc. # 10), and Scott J. Reiman and Scott Reiman 1991 Trust's Motion to Dismiss (Doc. # 11), be granted as to the third claim for relief, but denied as to claims one and two (Doc. ## 65, 73).
The Recommendation advised the parties that specific written objections were due within fourteen (14) days after being served with a copy of the Recommendation. (Doc. # 65.) Despite this advisement, no objections to Magistrate Judge Shaffer's Recommendation were filed by either party.
I. STANDARD OF REVIEW
A. Magistrate's Recommendation
"In the absence of timely objection, the district court may review a magistrate [judge's] report under any standard it deems appropriate." Summers v. Utah, 927 F.2d 1165, 1167 (10th Cir. 1991) (citing Thomas v. Arn, 474 U.S. 140, 150 (1985) (stating that "[i]t does not appear that Congress intended to require district court review of a magistrate's factual or legal conclusions, under a de novo or any other standard, when neither party objects to those findings.").
B. Federal Rule of Civil Procedure 12(b)(6)
Rule 12(b)(6) provides that a court may dismiss a complaint for "failure to state a claim upon which relief can be granted." See Fed.R.Civ.P. 12(b)(6). In deciding a motion under Rule 12(b)(6), the Court must "accept as true all well-pleaded factual allegations... and view these allegations in the light most favorable to the plaintiff." Casanova v. Ulibarri, 595 F.3d 1120, 1124 (10th Cir. 2010) ( quoting Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009)). However, a plaintiff may not rely on mere labels or conclusions, "and a formulaic recitation of the elements of a cause of action will not do." See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
To withstand a motion to dismiss, a complaint must contain sufficient allegations of fact to state a claim for relief that is not merely conceivable, but is also "plausible on its face." Id. at 570. As the Tenth Circuit explained in Ridge at Red Hawk, L.L.C. v. Schneider, "the mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." 493 F.3d 1174, 1177 (10th Cir. 2007). It is the plaintiff's burden to frame a complaint with enough factual matter - taken as true - to suggest that he or she is entitled to relief. Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008). Ultimately, the Court has a duty to determine whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed. Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
II. JUDGE SHAFFER'S RULING
In an oral ruling, Magistrate Judge Shaffer noted that Section 16(b) is a strict liability statute that applies irrespective of the intent of a beneficial owner. (Doc. # 73 at 5.) Section 16(b) is designed to "prevent the unfair use of information which may have been obtained" by company insiders by requiring that "any profit realized by [the insider] from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security)... within any period of less than six months... shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such [insider]." Roth v. Goldman Sachs Grp., Inc., 740 F.3d 865, 869 (2d Cir. 2014) (15 U.S.C. § 78p(b). Judge Shaffer explained that to prevail in an action under Section 16(b), a plaintiff must prove: (1) a purchase and (2) sale of non-exempt equity securities or derivative securities (3) by an insider of the issuer (4) within a less than six-month period (5) resulting in profit. (Doc. # 73 at 4-5.)
In its Motion to Dismiss, Very Hungry argued that its transactions with Prospect were exempt under Section 16(b) by virtue of SEC Rule 16b-3(d). That Rule exempts from Section 16(b) all transactions "involving an acquisition from the issuer, " so long as the transaction is approved by the issuer's board or its shareholders and is between the issuer and an officer or "director" of the issuer. See 17 C.F.R. § 240.16b-3(d)(1). This exemption can apply "to directors by deputization - i.e., directors designated by beneficial owners to sit on the boards of companies whose shares they beneficially own." Huppe v. WPCS Int'l Inc., 670 F.3d 214, 219 (2d Cir. 2012). Very Hungry argued that it was entitled to the exemption because Conway Schatz, one of its managers, served on Prospect's board of Directors, and therefore constituted a "director by deputization."
Very Hungry also argued that the Complaint failed to allege "matching" purchases and sales of derivative securities within the required six-month period, such that no liability arises under 16(b). The Reiman ...