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From Securities Regulation Daily, September 9, 2013

Short-swing liability may apply to Royal Bank of Scotland defendants in swap agreement case

By Amanda Maine, J.D.

A federal court denied a motion to dismiss a Section 16(b) short-swing profits complaint because the defendants had not demonstrated that the transactions at issue were exempt from Section 16(b) or that they did not implicate the concerns that animate Section 16(b) (Wagner v. The Royal Bank of Scotland Group, September 5, 2013, Crotty, P.).

Background. Lyondellbasell Industries, N.V. (LBI) had two outstanding classes of SEC-registered shares, Class A ordinary shares and Class B ordinary shares. The Class B shares were structured to automatically convert into Class A shares upon the occurrence of certain specified events. During the relevant time period, more than 10 percent of outstanding Class A shares were held by each of Royal Bank of Scotland N.V. (RBS NV), RBS Holdings B.V., and RFS Holdings N.V. (the RBS defendants), which subjected them to Exchange Act Section 16(b)’s short swing profits rule. Under Section 16(b), profit realized by a beneficial owner or company insider from the purchase and sale, or sale and purchase, of the company’s securities within a period of less than six months must be returned to the company. Section 16(b) was enacted for the purpose of preventing the unfair use of information that may have been obtained by insiders or principal stockholders.

Swap agreements. RBS NV entered into several swap agreements with various counterparties in October 2010. Many of the swap agreements related to equity baskets containing LBI’s Class B shares. LBI shareholder Jeff Wagner alleged that the transactions were equivalent to purchasing the same quantity of Class B LBI shares, which, in turn, were equivalent to purchasing LBI Class B shares. Wagner filed suit against the defendants, alleging that the RBS defendants earned more than $1.3 million from these transactions by using the “lowest-in, highest-out” method for computing realized profits. These alleged short-swing profits violated Section 16(b), according to Wagner.

Summary judgment not appropriate. The defendants moved for summary judgment, maintaining that the transactions at issue are exempt for Section 16(b) and that they do not implicate Section 16(b)’s “animating concerns.” The defendants argued that a Form 4 indicating changes in beneficial ownership was filed more than six months after the transactions. The court noted that, while it may take judicial notice of documents filed with the SEC, it is only to determine what the documents stated and not to prove the truth of their contents. The RBS defendants’ attempt to rely on the Form 4 statements to establish the truth of the matters asserted is impermissible for a motion of summary judgment and should be a matter for the jury, according the court.

The court also found unpersuasive the defendants’ argument that the reach of Section 16(b) should not be extended to these transaction because “they are far afield from trading on inside information and do not implicate the concerns that animate Section 16(b).” The court, citing precedent that “Section 16(b) should be applied without further inquiry if there is ‘at least the possibility’ of speculative abuse of inside information,” noted that, at the present stage, the defendants have not demonstrated that no possibility exists. Rejecting both of these arguments, the court denied the RBS defendants’ motion to dismiss.

The case is No. 12 Civ. 8726 (PAC).

Attorneys: James Austen Hunter for Jeff Wagner. Amelia Temple Redwood Starr (Davis Polk & Wardwell L.L.P) for The Royal Bank of Scotland Group PLC, RFS Holdings B.V., RBS Holdings N.V. and The Royal Bank of Scotland N.V.

Companies: RBS Group, PLC.; RBS Holdings N.V.; RFS Holdings B.V.; The Royal Bank of Scotland N.V.

MainStory: TopStory BeneficialOwnership FormsFilings FraudManipulation NewYorkNews Swaps

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