PHYLLIS J. HAMILTON, District Judge.
Defendants' motion to dismiss the first amended complaint ("FAC") in the above-entitled action pursuant to Federal Rule of Civil Procedure 12(b)(6) came on for hearing before this court on May 18, 2016. Plaintiffs appeared by their counsel Glenn Ostrager, Paul Wexler, and Willem Jonckheer; and defendants appeared by their counsel Michael Swartz, Randall Adams, Roger Mead, and Steven Shatz. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby GRANTS the motion in part and DENIES it in part.
Plaintiff Stacey Greenfield brings this action derivatively 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"). FAC ¶ 15. Plaintiff seeks disgorgement of "short-swing" profits she alleges were recovered by Criterion Capital Management LLC ("Criterion Capital"), three individual members of Criterion Capital, and certain funds for which Criterion Capital acts as the investment adviser.
Criterion Capital is a California limited liability company with its principal place of business in San Francisco. FAC ¶ 3. It is a registered investment adviser ("RIA"). FAC ¶ 22. Named as defendants in addition to Criterion Capital are three individuals and six funds. The individual defendants are Christopher H. Lord ("Lord"), David Riley ("Riley"), and Tomoko Fortune ("Fortune"), each of whom resides in California and is a member and portfolio manager of Criterion Capital. FAC ¶¶ 10-12. Plaintiff asserts that "[t]rusts established by Lord, Riley, and Fortune own Criterion Capital." FAC ¶ 12.
The defendant funds are Criterion Capital Partners Master Fund, L.P. ("Partners Master Fund"); Criterion Capital Partners Master Fund GP, Ltd. ("Partners GP"); Criterion Horizons Master Fund, L.P. ("Horizons Master Fund"); Criterion Horizons Master Fund GP, Ltd. ("Horizons GP"); Criterion Vista Master Fund, L.P. ("Vista Master Fund"); and Criterion Vista Master Fund GP, Ltd. ("Vista GP"). FAC ¶¶ 4-9.
Partners Master Fund, Horizons Master Fund, and Vista Master Fund are Cayman Islands exempted limited partnerships. FAC ¶¶ 4, 6, 8. They are hedge funds ("Criterion Hedge Funds" or "Hedge Funds") which were allegedly established by Criterion Capital and the individual defendants in order to "manage their investments and generate substantial fees." FAC ¶ 13. Partners GP, Horizons GP, and Vista GP are Cayman Islands corporations, each serving as the general partner of the corresponding (Partners, Horizons, Vista) limited partnership. FAC ¶¶ 5, 7, 9. Criterion Capital is the investment adviser for each of the defendant limited partnerships, FAC ¶ 14, which hold title to various securities investments. According to plaintiff, however, Criterion Capital "controls" the holdings. FAC ¶ 22.
Section 16 of the Exchange Act includes two subsections — § 16(a) and § 16(b). Section 16(a) provides that "[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" § 12 of the Act, or who is "a director or an officer of the issuer of such security" must file certain statements/reports with the SEC. 15 U.S.C. § 78p(a)(1). Initial ownership statements are filed on SEC Form 3, and statements disclosing changes in beneficial ownership are filed on SEC Form 4.
Under § 16(b), 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) (emphasis added). Section 16(b) was enacted 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.
In the present case, none of the defendants is an officer or a director of Veeva, and thus the question of liability under § 16(b) turns in part on defendants' status as "beneficial owners of more than 10 percent of" a class of Veeva securities. Under SEC Rule 16a-1, 17 C.F.R. § 240.16a-1, in determining whether a person is "a "beneficial owner of more than ten percent of any class of equity securities registered pursuant to section 12 of the Act," the term "beneficial owner" means "any person who is deemed a beneficial owner pursuant to section 13(d) of the Act and the rules thereunder." 17 C.F.R. § 240.16a-1(a)(1).
While a "beneficial owner" can be an individual, § 13(d) of the Act also provides that "[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 the purposes of this subsection." 15 U.S.C. § 78m(d)(3) (emphasis added). SEC Rule 13d-5, which was promulgated to implement and clarify § 13(d), defines beneficial ownership by a "group" as follows:
17 C.F.R. § 240.13d-5(b)(1) (emphasis added).
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.
Thus, under Rule 13d-5, which is incorporated in § 16(b) and Rule 16a-1, where there is such an agreement, the shares held by persons in such a group are aggregated to determine whether the group has a greater than ten percent beneficial ownership in the issuing corporation. If the aggregate number of shares beneficially owned by the group exceeds ten percent, each member of the group is deemed to be a greater than ten percent beneficial owner and is liable to disgorge profits from transactions by such group member effected within a less than six-month period.
Finally, while Rule 16a-1 defines "beneficial ownership" for purposes of § 16 by reference to § 13(d), the SEC has also exempted certain categories of institutions and persons who are not deemed to be beneficial owners even if they otherwise would be covered by § 13(d). Specifically, Rule 16a-1 provides that certain persons or entities are exempted from the category "beneficial owner of more than ten percent of any class of equity securities registered pursuant to section 12 of the Act" where the securities of such class are "
These exempted persons and entities include "[a]ny person
In promulgating Rule 16a-1, the SEC acknowledged that without such exemptions the listed institutions — which in the ordinary course of their business manage customer and fiduciary accounts — would be subject to liability under § 16(b) if they exercised either their voting or investment power over accounts that when aggregated held over ten percent of a class of equity securities.
Plaintiff alleges that she is the owner of Class A common stock in Veeva. FAC ¶ 1. She asserts further that the ten defendants collectively constitute a "group" (which plaintiff refers to throughout the FAC as "the Criterion Group") for purposes of determining beneficial ownership under § 13(d)(3) and § 16(b) of the Exchange Act. FAC ¶ 21. Plaintiff claims that at all relevant times, the Criterion Group was a greater than ten percent beneficial owner of Veeva's Class A common stock, and that it garnered short-swing profits disgorgeable to Veeva.
Plaintiff alleges that defendants' membership in the § 13(b) group is shown by the following: (a) Criterion Capital acknowledged in its Form ADV that it manages the three Hedge Funds; (b) Criterion Capital, directly or indirectly, controls the Hedge Funds' holdings in Veeva through a "master feeder structure" as alleged in FAC ¶ 14 — that is, each of the three Hedge Funds act as a "master feeder" through which the other three defendant Funds invest substantially all their assets, and Criterion Capital acts as the general partner of the Hedge Funds; (c) SEC filings were made collectively on behalf of all group members; and (d) Criterion Capital provides the defendant Funds with office space, utilities, and clerical and administrative services, including payment of the salaries of all personnel providing those services. FAC ¶ 22.
Plaintiff alleges that the Hedge Funds acted together with Criterion Capital, their common investment adviser, and an appointed agent, to manage the Hedge Funds' trading in Veeva's Class A common stock. FAC ¶ 23. She asserts that this "investment structure" establishes that the Hedge Funds were members of a group, and also that the Criterion Group members (
Plaintiff claims that between March 26 — September 12, 2014, while the Criterion Group was a greater than 10% beneficial owner of Veeva's Class A common stock, each of the Hedge Funds "purchased shares of Class A Common Stock at various times, purchasing a total of 3.6 million shares." FAC ¶ 24. Plaintiff asserts further that between September 30 — December 31, 2014, while the Criterion Group "was a greater than 10% beneficial owner," the Hedge Funds "each sold shares at various times, selling collectively approximately 1.1 million shares of Class A [c]ommon [s]tock."
Plaintiff asserts that had defendants reported these transactions as required by § 16(a), the profits they garnered from the purchase and sale of Class A common stock could easily be computed. However, plaintiff alleges, the Criterion Group was engaged in a "scheme to hide" the Hedge Funds' beneficial ownership to avoid proper accounting as well as disgorgement under § 16(b). FAC ¶ 25. Thus, she claims, it is not presently possible to "compute the precise amount of short-swing profits garnered by the Criterion Group from its short-swing trading of shares of Class A common stock."
Plaintiff alleges that pursuant to § 16(a) of the Exchange Act and Rule 16a-3, the Criterion Group was required to file an SEC Form 3 to alert the market when "it" first acquired more than ten percent of Class A common stock, and was then required to file an SEC Form 4 to report its purchases and sales of Class A common stock while "it" was a greater than ten percent holder. FAC ¶ 26. Plaintiff asserts that the Criterion Group did neither, and instead "devised a scheme to hide the true nature of their [sic] beneficial ownership."
As noted above, the definition of "beneficial owner" in Rule 16a-1(a)(1) permits certain institutions or persons to exclude from their 10% ownership calculations securities they beneficially own if certain conditions are met.
Plaintiff alleges that the Criterion Group employed a "shell game" to funnel beneficial ownership from the Hedge Funds (which she asserts are subject to § 16) to Criterion Capital, an RIA. She claims that this "artificial conveyance" was designed so that the Criterion Group could claim an exemption for those shares because they purportedly were now beneficially owned by an exempt entity (an RIA); and that it also enabled the Criterion Group to claim that the individual defendants did not have beneficial ownership because they are exempt as "control persons" of Criterion Capital. Thus, plaintiff alleges, this "ploy" was designed to make beneficial ownership of millions of shares of Veeva stock "disappear from regulatory oversight." But, plaintiff contends, this "scheme" is ineffective for at least two reasons. FAC ¶ 28.
First, plaintiff asserts, case law holds that conveyances, such as "the Criterion Group's attempt to divest itself of beneficial ownership of the Class A Common Stock by conveying ownership to Criterion Capital," are ineffective. She claims that relying on such "contrived divestitures," hedge fund managers who have established a small group of hedge funds to acquire greater than 10% beneficial ownership positions, with presumed access to inside information, have used these "artifices" to evade their § 13(d) and § 16(a) reporting obligations and to conceal their short-swing trading and profits, but that courts have held that a purchaser cannot avoid § 16(b) liability by "delegating voting and investment authority to a third party." FAC ¶ 29. She alleges that in the present case, the Hedge Funds' "effort to avoid §§ 16(a) and (b) to convey away all of their beneficial ownership of Class A Common Stock to Criterion Capital, their investment adviser, does not shield the funds from liability."
Second, plaintiff alleges, notwithstanding any such attempted delegation of beneficial ownership, the Criterion Group would still be liable because the "key group members" — individual defendants Lord, Riley and Fortune — are not entitled to an exemption. Plaintiff asserts that because Lord, Riley and Fortune are the sole members and portfolio managers of Criterion Capital and made all of the trading decisions relating to the Class A Common Stock, they "control" not only exempt members of the Criterion Group such as Criterion Capital, but also the non-exempt members of the Group. As such, plaintiff contends, they have beneficial ownership of all of the Criterion Funds' holdings in Veeva's equity securities and cannot rely on a control person exemption. FAC ¶ 30.
In a section entitled "The Criterion Group Deceives the Marketplace," plaintiff alleges that the Criterion Group not only tried to "hide" its beneficial ownership by transfers to an exempt entity of its own creation, but also ignored its obligations to make timely filings and amendments as required. Plaintiff asserts that the Criterion Group filed its initial Schedule 13G on April 4, 2014, reporting a "Date of Event Which Requires Filing of this Statement" of March 26, 2014. According to plaintiff, this initial Schedule 13G reported beneficial ownership of 15.8%. Thus, plaintiff alleges, the Criterion Group "kept the investing public in the dark" as it amassed a huge stake in Veeva in "brazen violation" of the Williams Act.
Plaintiffs claim that the Criterion Group continued to "keep the investing public in the dark" as it continued to amass an even larger stake in Veeva, filing an Amendment No. 1 to its Schedule 13G on April 17, 2014, reporting beneficial ownership of 19.9% and reporting a "Date of Event Which Requires Filing of this Statement" of April 3, 2014. Plaintiffs assert that because the triggering date was April 3, 2014, the Criterion Group delayed its filing by two full weeks, in clear violation of the requirement to file its amendment "promptly" (citing SEC Rule 13d-2(d) and SEC Release 34-39538 at n.14 (Jan. 12, 1998)). FAC ¶ 32.
Plaintiff asserts that because the Criterion Group became a greater than ten percent beneficial owner of Veeva's Class A Common Stock at least as early as March 26, 2014, the Criterion Group was obligated to file an initial Form 3 under § 16(a) of the Exchange Act within 10 days and, thereafter, to file Forms 4 to report any transactions in the Class A Common Stock within two business days of any such transactions. Plaintiff contends that the Criterion Group failed to make any Form 3 or Form 4 filings. FAC ¶ 33.
Finally, plaintiff asserts, the Criterion Group was required under Rule 13d-2(d) to file an amendment to its Schedule 13G filing promptly to report any 5% change in its beneficial ownership. However, plaintiff contends, the Criterion Group filed its Amendment No. 2 to its Schedule 13G on April 10, 2015 reporting that it had completely divested its ownership stake, again (according to plaintiff) "keeping the investing public in the dark," after its most recent filing of its Amendment No. 3 to Schedule 13G, filed on February 17, 2015 had reported beneficial ownership of 10.7%. FAC ¶ 34.
Plaintiff asserts two causes of action — a claim under § 16(b) against "the Criterion Group" (
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint.
The allegations in the complaint "must be enough to raise a right to relief above the speculative level."
A motion to dismiss should be granted if the complaint does not proffer enough facts to state a claim for relief that is plausible on its face.
Although the court generally may not consider material outside the pleadings when resolving a motion to dismiss for failure to state a claim, the court may consider matters that are properly the subject of judicial notice.
Finally, in actions alleging fraud, "the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). "[A]llegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged "so that they can defend against the charge and not just deny that they have done anything wrong."
Defendants seek dismissal of the FAC for failure to state a claim, and for failure to allege fraud with particularity as required by Rule 9(b). The elements of a claim under § 16(b) are (1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than 10 percent of any one class of the issuer's securities (4) within a 6-month period (5) resulting in profit.
In their motion, defendants argue that the FAC is deficient with regard to pleading the first four elements of a § 16(b) claim. Defendants make four main arguments, the first three of which relate to whether the FAC adequately alleges a purchase and sale by a beneficial owner of more than 10 percent of any one class of Veeva securities, and the fourth of which relates to whether the FAC adequately alleges a purchase and sale within six months.
In their first main argument, defendants assert that Criterion Capital and the three individual defendants are outside the reach of § 16(b) — and cannot be considered "beneficial owners" — because they are exempt under the RIA exemption and the control-person exemption, respectively. They argue that plaintiff does not allege that Criterion Capital did not hold the securities for third parties or in customer or fiduciary accounts, and that there is no allegation that Criterion had any intention to control Veeva. They note further that by its terms, the RIA exemption applies to "any person registered as an investment adviser" under § 203 of the Investment Adviser Act, and argue that there is no dispute that Criterion Capital is a registered investment advisor.
With regard to the control-person exemption, defendants assert that the exemption applies to any "control person" provided the aggregate amount held by the control person does not exceed one percent of the securities of the subject class. Moreover, they assert, the individual defendants are control persons of Criterion Capital, but not of the Hedge Funds, as Criterion Capital's Form ADV shows that each of those funds is controlled by its own general partner, governed by a board of independent directors.
In opposition, plaintiff argues she does not bear the burden of establishing in the complaint that the Rule 16a-1 exemptions do not apply, because the exemptions are affirmative defenses. In addition, with regard to Criterion Capital, plaintiff asserts that the RIA exemption does not apply because Criterion Capital held Veeva securities for its own benefit, and not exclusively for the benefit of third parties, or, alternatively, because the question whether Criterion Capital held the Veeva securities for the benefit of third parties is a question of fact that cannot be resolved on a 12(b)(6) motion.
With regard to the individual defendants, plaintiff asserts that they do not meet the requirements of the control-person exemption because the exemption requires that the control person of the RIA not hold more than 1% of the outstanding class of securities, and any determination of whether the individual defendants satisfy the requirements of this exemption necessitates discovery and a full factual record.
The question whether plaintiff has adequately pled that the exemptions do not apply is relevant to the present Rule 12(b)(6) motion. Plaintiff alleges in the FAC that the "Criterion Group" employed a "shell game" to "funnel beneficial ownership from the investments funds . . . to Criterion Capital, a registered investment advisor," and to "divest itself of beneficial ownership of Class A [c]ommon [s]tock by conveying ownership to Criterion Capital," so that Criterion Capital "could claim an exemption for those shares because they purportedly were now beneficially owned by an exempt entity[,]" which also "enabled the Criterion Group to claim that the individual defendants did not have beneficial ownership because they are exempt as `control persons' of Criterion Capital." See FAC ¶¶ 28-29.
Even though the exemptions may technically be affirmative defenses, they can also be viewed as elements of the claim because they relate to the definition of "beneficial owner of more than ten percent of any class of equity securities registered pursuant to section 12 of the Act," and thus must be adequately pled. In addition, it is the rule in the Ninth Circuit that when an affirmative defense is obvious on the face of the complaint, a defendant can raise that defense in a motion to dismiss.
The court finds, for the reasons argued by defendants, that the FAC fails to allege facts sufficient to create a plausible inference that the RIA exemption does not apply to Criterion Capital, and that the control-person exemption does not apply to the individual defendants.
In their second main argument, defendants contend that the FAC does not adequately allege the existence of a § 13(d) "group" for purposes of determining "beneficial ownership." Defendants argue that the facts that plaintiff claims support the allegation that defendants constituted a "group" simply describe a relationship between Criterion Capital and the three Hedge Funds — primarily a relationship between an investment adviser and its client(s) — not a relationship among all the defendants; that apart from the fraud-based allegations, the complaint alleges no facts showing an "an agreement" for the purpose of "acquiring, holding, or disposing of" Veeva securities; and that as for the fraud-based allegations — which amount to an assertion of a fraudulent conspiracy — the facts are not pled with particularity as required by Rule 9(b).
In the FAC, plaintiff alleges that all ten defendants collectively constitute the "Criterion Group," for purposes of determining "beneficial ownership" under § 13(d)(3) and § 16(b) of the Exchange Act. FAC ¶ 21. Plaintiff claims that the "Criterion Group" is a greater than ten percent beneficial owner of Veeva's Class A common stock, and that it garnered short-swing profits disgorgeable to Veeva. FAC ¶ 21. Plaintiff asserts that certain "facts" support the claim that the ten defendants are members of a § 13(d) "group."
As indicated above in the "Factual Background" section, those facts are that Criterion Capital manages the Hedge Funds; that Criterion Capital controls the Hedge Funds' holdings in Veeva through a "master feeder structure;" that SEC filings were made collectively on behalf of all "group" members; that the Hedge Funds purchased and sold shares of Veeva Class A common stock at the same time; that Lord, Riley, and Fortune are members and portfolio managers of Criterion Capital; and that Criterion Capital provides the Hedge Funds with office space, utilities, and research, clerical, and administrative services, including payment of the salaries of all personnel providing those services. FAC ¶ 22.
Plaintiff asserts that this "investment structure" — the Hedge Funds acting together through Criterion Capital, their common investment adviser, and an appointed agent, to manage the Hedge Funds' trading in Veeva's Class A common stock — "establishes" that the Hedge Funds are members of a "group" and also that the Criterion Group members (i.e., all defendants) have beneficial ownership of Veeva's equity securities for purposes of disgorgement of their short-swing profits. FAC ¶ 23.
Plaintiff does not allege that each of the defendants purchased and sold shares of Veeva Class A common stock within a six-month period — just that the Hedge Funds did so. See FAC ¶ 24. However, plaintiff nonetheless asserts that because "all purchases and sales for each of the Criterion Group members were directed by Lord, Riley, and Fortune," and because of the "investment structure" alluded to in ¶ 23, plus the "facts" alleged in ¶ 22, a group consisting of the ten defendants "was formed and was operative" within the meaning of § 13(d) and § 16(b).
The FAC also includes a series of allegations suggesting the existence of a fraudulent conspiracy. Among these fraud-based allegations are the assertions,
In opposition, plaintiff asserts that "courts are reluctant to dismiss such claims before discovery." Plaintiff also argues that the facts plausibly allege that all ten defendants were members of a "group," based on the nature of the various relationships among them. As for the allegations of fraud, plaintiff contends that Rule 9(b) does not apply because the "fraud" allegations do not "permeate" the complaint, and can easily be stricken or severed. At the hearing, plaintiff's counsel presented the court with a marked-up copy of the FAC with some portions of the "fraud" allegations highlighted, and asserted that those allegations could essentially be disregarded without affecting the substance of the complaint.
Although the FAC is far from clear, the gist of plaintiff's claim appears to be that Criterion Capital (the investment advisor of the Hedge Funds) was a limited liability company, and its members were the three individual defendants; that the individual defendants "controlled" the purchases and sales by the Hedge Funds; that the Hedge Funds "acted together" with Criterion Capital (their investment adviser) and the individual defendants (who were the members and portfolio managers of the Hedge Funds); and that Criterion Capital was also the investment manager for the "feeder funds," and caused the "feeder funds" to invest all their assets in the Hedge Funds.
Nevertheless, to say that the Hedge Funds "acted together" with Criterion Capital, and that the individual defendants "directed" the purchases and sales is not sufficient to support a claim that all ten defendants constituted a "group" for purposes of determining beneficial ownership. Notably, apart from the fraud-based allegations, discussed below, plaintiff does not allege an "agreement" among the purported members of the "group," much less assert that the defendants "agree[d] to act together for the purpose of acquiring, holding, voting, or disposing of" Veeva's securities. And as for the fraud-based allegations, they are insufficient to support the claim because they are not pled with particularity. It is true that the question whether there actually was such an agreement is a question of fact, but the FAC fails to allege facts sufficient to support a plausible inference that there was an agreement in the first instance.
In their third main argument, defendants assert that the Veeva Class A and Class B shares should be considered together when determining ownership percentage. According to defendants, apart from the fact that the Class A shares are a low-voting power form of stock, and the Class B shares are a high-voting power form of stock, the shares are otherwise identical and should be considered in the same "class." They also argue because the Class B shares (primarily owned by officers, directors, and other insiders) have 10 times the voting power of the Class A shares (shares generally offered to the public), a stockholder that held 10 percent of Class A shares would have less than 1% voting power in Veeva, and could not be said to have any influence over Veeva's operations, and thus not be considered an "insider."
In response, plaintiff contends that Class A is one "class" of equity stock and Class B is a separate "class" of equity stock — and that § 16(b) refers to "class" of securities and does not suggest that it is appropriate to combine "classes" of securities. Plaintiff also asserts that the two classes are not otherwise identical, as the Class A stock is publicly traded (i.e., is "registered" under § 12), while the Class B is not, and in addition (as defendants have acknowledged) the two classes have different voting rights. Finally, plaintiff contends, because the "Criterion Group" was the beneficial owner of as much as 19.9% of the Class A stock, and so could have had a material impact on the value of management's equity compensation as well as on the value of the Class B common stock, it is incorrect to presume that the "Criterion Group" was not an "insider."
The court interprets § 16(b) as requiring that the "beneficial owner" be the owner of 10 percent or more of a single class of the issuer's stock. The court finds further that the Class A stock and the Class B stock are two different classes of stock. Thus, the allegations are sufficient for pleading purposes.
In their fourth main argument, defendants assert that the complaint does not state a claim under § 16(b) because plaintiff does not allege specific matching purchases and sales within a six-month period.
In response, plaintiff argues that that information is not available because the "Criterion Group" did not file the § 16(a) disclosures it was required to file as a 10 percent beneficial owner, and that information about details of purchases and sales is therefor available only from the defendants.
As detailed above, plaintiff alleges that during a five-and-a-half month period (March 26, 2014, to September 12, 2014), the three Hedge Funds purchased shares of Veeva's Class A common stock "at various times," and that during a six-and-a-half month period (September 30, 2014, to April 10, 2014), the three Hedge Funds sold their "entire stake" of shares of Veeva's Class A common stock "at various times." FAC ¶ 24.
While it is true that the complaint does not allege specific purchases that match sales, which occurred within six months of each other, the court nevertheless finds the allegations sufficient for pleading purposes.
The motion is GRANTED in part and DENIED in part. In accordance with the foregoing, the court will permit leave to amend to allege facts sufficient to allow the court to draw the reasonable inference that the RIA and control-person exemptions do not apply, and that all ten defendants formed a § 13(d) "group" for purposes of determining ten percent beneficial ownership of Veeva's Class A common stock.
The court is not persuaded that the "fraud" allegations do not permeate the complaint and are easily severable, and it is not clear what will remain once the allegations of fraud are excised. Nevertheless, based on the representation by plaintiff's counsel that plaintiff is not asserting a claim of fraud, leave to amend is granted to delete all references to fraud or deceit, including (but not limited to) allegations in FAC ¶¶ 19, 25-26, 28-29, 31-32, and 34 that defendants were engaging in a "shell game;" that they were involved in a "scheme" to "hide" the true extent of their beneficial ownership and to "keep[] the investing public in the dark;" that they "used . . . artifices to evade" their reporting requirements and "hide their trading in Veeva common stock and avoid disgorgement of their profits;" and that they were engaged in a "ploy . . . designed to make beneficial ownership of millions of shares of Veeva stock simply disappear from regulatory oversight."
Any amended complaint shall be filed no later than August 2, 2016. No new claims or parties may be added without agreement of the defendants or leave of court.
Finally, the court GRANTS defendants' request to stay discovery until after the pleadings are settled.
