MICROBOT MEDICAL INC v. JOSEPH MONA (2024)

REPORT AND RECOMMENDATION TO HON. GEORGE B. DANIELS: MOTION TO VACATE AND DISMISS

This is a “short-swing profits” case in which Plaintiff Microbot Medical, Inc. (“Microbot”) sued Defendant Joseph Mona (“Mona”) under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), alleging that Mona was required to disgorge profits from his purchase and sale of securities during a period of less than six months when he became a beneficial owner of more than 10% of Microbot securities. On March 30, 2021, the Court granted Microbot's motion for judgment on the pleadings. (Dkt. 106.) Judgment was entered against Mona in the amount of $484,614.30 on March 31, 2021. (Dkt. 107.) Execution on the judgment was stayed, however, pending resolution of Mona's counterclaims. (See Dkt. 152 ¶ 4.) The Court dismissed those counterclaims with prejudice on August 22, 2023. (Dkt. 233.) That same day, the Clerk of Court entered judgment to that effect. (Dkt. 234.) On April 12, 2023, however, Mona filed a motion to vacate the monetary judgment and dismiss Microbot's claims based on lack of standing under Article III of the Constitution. (Dkt. 220.) For the reasons that follow, the motion should be denied.¹

LEGAL STANDARDS

A district court may relieve a party from a final judgment where, among other reasons, “the judgment is void.” Fed. R. Civ. P. 60(b)(4). “[A] void judgment is one so affected by a fundamental infirmity that the infirmity may be raised even after the judgment becomes final.” United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 270 (2010). One such infirmity is the absence of subject matter jurisdiction. See Lynonville Savings Bank & Trust Co. v. Lussier, 211 F. 3d 697, 700 (2d Cir. 2000) (“failure of subject matter jurisdiction is not waivable and may be raised at any time by a party or by the court sua sponte”); United National Insurance Co. v. Waterfront New York Realty Corp., 907 F. Supp. 663, 668 (S.D.N.Y. 1995) (“A judgment rendered by a court that lacks subject matter jurisdiction is void” under Fed. R. Civ. P. 60(b)(4) and must be vacated).

Under Article III of the Constitution a federal court's subject matter jurisdiction is limited to resolving “Cases” or “Controversies.” U.S. Const. art. III §§ 1-2; see Raines v. Byrd, 521 U.S. 811, 818 (1997) (“No principle is more fundamental to the judiciary's proper role in our system of government that the constitutional limitation of federal-court jurisdiction to actual cases or controversies”). To satisfy the “case or controversy” requirement of Article III, a plaintiff must have standing. See Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016) (“Standing to sue is a doctrine rooted in the traditional understanding of a case or controversy). Colloquially, standing means that a plaintiff has a “personal stake” in the dispute. Raines, 521 U.S. at 819. In legal terms, constitutional standing has three elements: (1) the plaintiff suffered an injury in fact, (2) the injury was likely caused by the defendant, and (3) the injury likely will be redressed by judicial relief. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). It is the plaintiff's burden to prove each element. Id. at 562.

Here, the issue for the instant motion is the “injury in fact” requirement. Injury in fact is defined as “an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Id. at 561 (internal citations and quotation marks omitted).

DISCUSSION

The Court begins with a brief description of the short-swing profit statute, § 16(b), followed by the relevant legal landscape of standing, and concludes by explaining why the motion to dismiss should be denied.

A. Section 16(b)

Section 16(b) requires directors, officers, and beneficial owners of more than ten percent of a company's stock to disgorge their profits “realized from the purchase and sale, or sale and purchase, of such stock occurring within a 6-month period.” Gollust v. Mendell, 501 U.S. 115, 117 (1991); see also 15 U.S.C. § 78p(b); Packer ex rel. 1-800-Flowers.com v. Raging Capital Management, LLC, 981 F.3d 148, 152 (2d Cir. 2020). The purpose of the statute, as stated therein, is 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.” 15 U.S.C. § 78p(b). The statute “was crafted as a blunt instrument to impose a form of strict liability” that “tak[es] the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great.”² Donoghue v. Bulldog Investors General Partnership, 696 F.3d 170, 174 (2d Cir. 2012) (internal citations, quotation marks, and brackets omitted). “In contrast to most of the federal securities laws,” however, “§ 16(b) does not confer enforcement authority on the Securities and Exchange Commission.” Id. (internal quotation marks omitted). Instead, the statute authorizes the issuer – or owner of the security, if the issuer fails to act diligently – to sue for relief and receive the disgorged profits. 15 U.S.C. § 78p(b); Bulldog, 696 F.3d at 174.

B. Bulldog

In Bulldog, an investor in stock of a company called Invesco sued Bulldog to recover short-swing profits under § 16(b) after Invesco failed to bring suit. 696 F.3d at 173. Bulldog moved to dismiss for lack of standing, arguing that the plaintiff did not allege any actual injury to the issuer, Invesco, from Bulldog's short-swing trades. Id. The district court denied the motion, and the Second Circuit affirmed.

In so affirming, the Court explained that “pursuant to § 16(b), when a stock purchaser chooses to acquire a 10% beneficial ownership stake in an issuer, he becomes a corporate insider and thereby accepts the limitation that attaches to his fiduciary status: not to engage in any short-swing trading in the issuer's stock.” Id. at 177 (internal quotation marks and brackets omitted). “[A]fter all,” the Court reasoned, “[a] corporate issuer ․ has an interest in maintaining a reputation of integrity, an image of probity, for its § 16(b) insiders and in insuring the continued public acceptance and marketability of its stock.” Id. at 177-78 (internal quotation marks omitted). To protect that interest, § 16(b) confers on issuers, in addition to officers and directors, a legal right that:

makes 10% beneficial owners “constructive trustees of the corporation,” with a fiduciary duty not to engage in short-swing trading of the issuer's stock at the risk of having to remit to the issuer any profits realized from such trading. It is the invasion of this legal right, without regard to whether the trading was based on inside information, that causes an issuer injury in fact and that compels our recognition of plaintiff's standing to pursue a § 16(b) claim here.

Id. at 179 (quoting Gratz v. Claughton, 187 F.2d 46, 48 (2d Cir. 1951)) (internal citations and brackets omitted).

C. TransUnion

In 2021, the Supreme Court decided TransUnion LLC v. Ramirez, 594 U.S. 413, 141 S. Ct. 2190 (2021), which addressed standing under a different statute, the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. There, a class of plaintiffs sued TransUnion, alleging that TransUnion had inaccurately identified them as matches to persons on a list believed to be threats to national security. 141 S. Ct. at 2201. TransUnion, plaintiffs claimed, violated the FCRA by failing to use reasonable procedures to ensure accuracy of their credit files and by not providing plaintiffs with their complete credit files or a summary-of-rights document as required by the statute. Id. at 2200-01. With respect to the last two claims, the gravamen boiled down to one claim: that TransUnion had sent two separate mailings rather than one complete mailing. Id. at 2213.

Justice Kavanaugh authored the majority opinion for a five-to-four split. In doing so, he set forth “fundamental standing principles” about what makes a harm sufficiently “concrete” for purposes of Article III. Id. at 2207-10. Invoking the Court's earlier Spokeo decision, Justice Kavanaugh opined that determining whether a harm is sufficiently concrete requires assessing “whether the alleged injury to the plaintiff has a ‘close relationship’ to a harm ‘traditionally’ recognized as providing a basis for a lawsuit in American courts.” Id. at 2204 (citing Spokeo, 578 U. S. at 341). Expanding on that precept, Justice Kavanaugh stated that “[t]hat inquiry asks whether plaintiffs have identified a close historical or common-law analogue for their asserted injury” but “does not require an exact duplicate in American history and tradition.” TransUnion, 141 S. Ct. at 2204.

Justice Kavanaugh then devoted considerable discussion to concreteness of claims made under federal statutes. He acknowledged that Congress may “elevate” to a statutory right those “harms that exist in the real world,” but that Congress “may not simply enact an injury into existence.”³ Id. at 2205 (internal quotation marks and omitted). As particularly relevant here, Justice Kavanaugh wrote that “this Court has rejected the proposition that ‘a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.’ ” Id. (quoting Spokeo, 578 U.S. at 341). In other words, “[f]or standing purposes, ․ an important difference exists between (i) a plaintiff's statutory cause of action to sue a defendant over the defendant's violation of federal law, and (ii) a plaintiff's suffering concrete harm because of the defendant's violation of federal law.” TransUnion, 141 S. Ct. at 2206. In short, a plaintiff who can establish that a defendant violated a federal statute but cannot demonstrate that the plaintiff suffered a concrete harm does not have constitutional standing.

Turning to the specific claims before the Court, Justice Kavanaugh determined that the plaintiffs who claimed TransUnion failed to follow reasonable procedures fell into two groups – those whose misleading credits reports were disseminated to third parties, and those whose reports were not disseminated. The Court held that the former group had standing because the injury they suffered bore a “close relationship” to a traditionally recognized harm, namely the tort of defamation. Id. at 2208. The latter group, however, did not have standing because “there is no historical or common-law analog where the mere existence of inaccurate information, absent dissemination, amounts to concrete injury.” Id. at 2209 (internal quotation marks omitted).

With respect to the two other claims at issue – failure to provide a complete credit file and a statement of rights – the Court held that no plaintiffs had standing. Justice Kavanaugh noted that the two claims were intertwined and amounted to no more than a claim that plaintiffs had received the required information in two mailings rather than one and thus were “formatted” incorrectly. Id. at 2213. He then noted that plaintiffs did not demonstrate any harm “at all from the formatting violations” – not even that any plaintiff, other than the named plaintiff, had even looked at the mailings or that, if they looked at what was sent, they would have tried to prevent dissemination of a misleading report. Id. (emphasis in original).

D. The Second Circuit's Maddox Decisions

The Second Circuit had occasion to consider the “before-and-after” impact of TransUnion in Maddox v. Bank of New York Mellon Trust Co., N.A., 997 F.3d 436 (2d Cir. 2021) (“Maddox I”), opinion withdrawn and superseded on rehearing, 19 F.4th 58 (2d Cir. 2021) (“Maddox II”). In that case, plaintiffs sued a lender for delay in recording a satisfaction of mortgage in violation of two New York state laws governing satisfactions of mortgage. The New York law provides a private right of action to mortgagors to collect an escalating cash penalty if the satisfaction is filed more than thirty days after the mortgage is paid off, up to $1,500 for delay exceeding ninety days. N.Y. R.P.L. § 275; Maddox I, 997 F.3d at 444-45.

In assessing standing, the Court did not focus on the statute's monetary penalties. Instead, consistent with earlier Supreme Court precedent, and what would be reiterated in TransUnion, the Court looked to historical analogs for the statutory injury and remedy. The Court noted that “a lender's delay in recording the satisfaction of a mortgage typically creates a cloud on title of real estate,” and an action to clear clouded title was a remedy traditionally recognized under New York common law. Id. at 446. The Court further reasoned that such delays are similar to reputational based harms because they create “the false appearance that the borrower has not paid his debt,” which harms the borrower's reputation by making him look less creditworthy. Id. at 446-47. Those findings supported standing.

But the Court's decision ultimately rested on analyses that were rejected in TransUnion. First, the Second Circuit focused on the distinction between statutory “procedural” rights, for which mere violation alone may not provide standing, and statutory “substantive” rights, for which a violation may provide standing. Id. at 446-52. Second, the Court held that even if only a procedural right, the delay plaintiffs alleged would be sufficient to confirm standing because the delay gave rise to “a material risk” of concrete harm. Id. at 448.

In the wake of TransUnion, the Second Circuit withdrew its decision in Maddox I and issued Maddox II. In that decision, the Second Circuit adhered to its earlier findings that the delay in recording satisfaction can give rise to harms such as cloud on title and false appearance of debt posing reputational harm that “is well established as actionable at common law.” 19 F.4th at 65. But the court found that the plaintiffs “did not allege such harms.” Id. at 64. Applying TransUnion, the Court explained that the mere existence of the recorded mortgage without satisfaction was merely “nebulous risk of future harm” and akin to the undisseminated misleading credit reports that were insufficient to confer standing in TransUnion. Id. at 65. In closing, the Court noted that the plaintiffs still could pursue the statutory monetary penalties but that they would have to do so in state court. Id. at 66.

Encapsulating its rationale, the Court stated: “In sum, TransUnion established that in suits for damages plaintiffs cannot establish Article III standing by relying entirely on a statutory violation or risk of future harm: ‘No concrete harm; no standing.””⁴ Id. (quoting TransUnion, 141 S. Ct. at 2214).

E. Section 16(b) Cases After TransUnion

Since TransUnion, a handful of district courts have rendered decisions on the question of whether the Supreme Court's decision effectively overrules Bulldog. Those decisions reflect a split of opinion, including between two Second Circuit district courts.

In Packer ex rel. 1-800-Flowers.com, Inc. v. Raging Capital Management, LLC, 661 F. Supp.3d 3 (E.D.N.Y. 2023), the court determined that Bulldog could not be reconciled with TransUnion and granted the defendants’ motion to dismiss for lack of standing. The case began when a shareholder acting derivatively on behalf of the company 1-800-Flowers.com sued a beneficial owner of more than ten percent of the company's stock for disgorgement of short-swing profits under § 16(b). The court found that the plaintiff had not pointed to or articulated any actual reputational harm flowing from the defendant's breach of § 16(b). 661 F. Supp.3d at 14. The court emphasized that it was not holding that a plaintiff could never establish standing under § 16(b) but rather only that the plaintiff had not made the necessary showing in that specific case. Id. at *17. Packer currently is on appeal to the Second Circuit, where it has been fully briefed. See No. 23-367 (2d. Cir. March 15, 2023).

A few months after Packer, Judge Denise L. Cote in this District disagreed with Packer and held that Bulldog remained sound law.⁵ See Avalon Holdings Corp. v. Gentile, No. 18-CV-7291, 2023 WL 4744072, at *3 (S.D.N.Y. July 25, 2023). Judge Cote explained that “[j]ust as the Supreme Court did in TransUnion, the Second Circuit in Bulldog analyzed the harm suffered by a § 16(b) plaintiff and reasoned that it was akin to the common law injury of breach of trust arising from the 10% beneficial owner's fiduciary duty to the issuer. Bulldog, therefore, is entirely compatible with TransUnion.” Id. at *6. At the same time, Judge Cote noted that the Avalon plaintiff had not merely relied on “barebones allegations of a statutory violation” but also had alleged indicia of actual injury including dramatic fluctuations in stock prices.⁶ Id.

Less than a month later, a court in the District of Colorado followed Avalon and the pre-TransUnion reasoning of Bulldog to find standing in a § 16(b) case. Revive Investing LLC v. Armistice Capital Master Fund, Ltd., No. 20-CV-2849, 2023 WL 5333768, at *7 (D. Col. Aug. 18, 2023). The court found persuasive the theory of injury set forth in Bulldog and agreed with Avalon, “that ‘the harm suffered by a § 16(b) plaintiff ․ [is] akin to the common law injury of breach of trust arising from the 10% beneficial owner's fiduciary duty to the issuer.’ ” Id. at *7 (quoting Avalon, 2023 WL 4744072, at *6). Elaborating on the injury incurred, the court explained:

the law of trusts analogized to in Bulldog is deeply rooted in the common law. Courts in this country have long held that “[i]t is a well-settled principle of equity, that wherever a trustee, or one standing in a fiduciary character, deals with the trust estate for his own personal profit, he shall account to the cestui que trust for all the gain which he has made.” Barney v. Saunders, 57 U.S. 535, 543 (1853).

Revive, 2023 WL 5333768, at *7; see also Arnold S. Jacobs, An Analysis of Section 16 of the Securities Exchange Act of 1934, 32 N.Y.L. Sch. L. Rev. 209, 344-45 (1987) (“The issuer's recovery of an insider's profit has common law antecedents. ․ The legislative history and the Second Circuit support this common law analogy”). The court also noted that “the analogue between Section 16(b) and a breach of fiduciary duty claim has been recognized long before Bulldog.” Revive, 2023 WL 5333768, at *7 (citing cases). The court thus concluded that the plaintiff had standing by virtue of adequately alleging short-swing trading by a ten percent beneficial owner in violation of § 16(b). Id. at *8.

F. Application

The Court is persuaded that Microbot has standing in this case for reasons set forth in Bulldog, Avalon, and Revive. This conclusion is consistent with TransUnion.

Section 16(b) allows an issuer, such as Microbot here, to sue an insider who engaged in short-swing trading while more than a ten percent beneficial owner, in this instance Mona, and recover the insider's short-swing profits. The treatment of insiders as fiduciaries is rooted in common law history and tradition, as is the creation of a constructive trust for the fruits of the breach of the fiduciary's duty. See Bulldog, 696 F.3d at 179 (§ 16(b) confers on issuers a legal right that makes 10% beneficial owners “constructive trustee[s] of the corporation”); Morrissey v. Curran, 650 F.2d 1267, 1282 (2d Cir. 1981) (“At common law, an accounting surcharging a trustee for breach of his fiduciary duty was a readily available remedy”); Gratz, 187 F.2d at 51 (“the statute makes the fiduciary a constructive trustee for any profits he may make”); Revive, 2023 WL 5333768, at *7 (observing that “the law of trusts analogized to in Bulldog is deeply rooted in the common law” and that it “is a well-settled principle of equity” that one “standing in a fiduciary character” is equitably accountable for any personal profits) (citing Barney, 57 U.S. at 543). Certainly Microbot has a personal stake in recovering the proceeds from a constructive trust created for its benefit. Put differently, Microbot incurs a concrete injury while deprived of the constructive trust's holdings. Microbot therefore has Article III standing.

A claim under § 16(b) is markedly different than claims under other statutes for which the courts, such as TransUnion, have found lack of standing. See, e.g., Mumin v. Miller & Milone, P.C., No. 21-CV-1553, 2022 WL 16857108, at *3 (S.D.N.Y. 2022) (Daniels, J.) (dismissing claims under Fair Debt Collections Practices Act (“FDCPA”) and stating that “[d]istrict courts following TransUnion and Maddox have uniformly held that, absent specific evidence of reputational or monetary harm in FDCPA and FCRA cases, plaintiffs lack constitutional standing”). None of those, to this Court's knowledge, entail any analog to a breach of fiduciary duty for which a constructive trust is created.

To be clear, it is not the breach of fiduciary duty alone that equates to injury in fact. (Cf. Pl. Mem. at 3 (asserting that “a breach of fiduciary duty is, in itself and standing alone, Article III injury in fact”).⁷ ) There are no doubt many instances where a defendant breaches a fiduciary duty without reaping profits that would otherwise be subject to disgorgement pursuant to principles of equity and constructive trust. See Yukos Capital S.A.R.L. v. Feldman, 977 F.3d 216, 245 (2d Cir. 2020) (affirming award of nominal damages for breach of fiduciary duty). Nor is the relevant injury under § 16(b) necessarily based on “imminent or actual reputational disparagement” as Plaintiffs argue. (Pl. Mem. at 8-10.) Rather, concrete injury inheres in the issuer's deprivation of proceeds of a constructive trust containing the profits gained from a fiduciary's breach of their duty.

In support of his motion, Mona cites to Kendall v. Employees Retirement Plan of Avon Products, 561 F.3d 112 (2d Cir. 2009). (Def. Reply at 3.⁸ ) But that decision actually supports a finding of standing here. In Kendall, a plaintiff brought a class action against her retiree benefit plan administrator, alleging that the administrator breached its duty to comply with its fiduciary obligation under the Employee Retirement Income Security Act (“ERISA”). The court distinguished the claims asserted from those where other “plaintiffs could point to an identifiable and quantifiable pool of assets to which they had colorable claims” and concluded that plaintiffs failed to allege an injury in fact required to confer standing because, while “[t]he statute does impose a general fiduciary duty to comply with ERISA,” plaintiffs “must still allege some injury in the form of a deprivation of a right as a result of a breach of fiduciary duty conferred by ERISA.” Id. at 120-21; see also Thole v. United States Bank N.A., 140 S. Ct. 1615, 1619 (2022) (holding plaintiff did not have standing to assert ERISA claim with respect to a defined benefit plan, because, unlike participants in a defined-contribution plan, “plan participants possess no equitable or property interest” in the defined-benefit plan).

That is precisely what is at stake here: deprivation of Microbot's right to disgorgement of insider profits. Far from “transform[ing] something that is not remotely harmful into something that is,” TransUnion, 141 S. Ct. at 2205 (internal quotation marks omitted), § 16(b) recognizes an injury that has well-established historical roots grounded in the common law.

CONCLUSION

For the foregoing reasons, Defendant's motion to vacate the judgment and dismiss the case for lack of standing should be denied. To the extent not discussed above, the Court has considered Defendant's arguments and found them to be without merit.

DEADLINE FOR FILING OBJECTIONS AND APPELLATE REVIEW

Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Any party shall have fourteen (14) days to file a written response to the other party's objections. Any such objections and responses shall be filed with the Clerk of the Court, with courtesy copies delivered to the Chambers of the Honorable George B. Daniels, United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, at United States Courthouse, 500 Pearl Street, New York, New York 10007. Any request for an extension of time for filing objections must be addressed to Judge Daniels. Failure to file timely objections will result in a waiver of the right to object and will preclude appellate review.

SO ORDERED.

FOOTNOTES

1.   On November 30, 2023, Mona moved to stay enforcement of the money judgment against him pending this Court's decision on the instant motion to vacate. (Dkt. 241.) By separate order, the Court denies Mona's motion to stay enforcement.

2.   As a strict-liability statute, § 16(b) is indeed a “blunt instrument.” The statute imposes liability on persons, such as day traders for example, who, rather than trading on insider information, may have errantly surpassed ten percent ownership and then engaged in assorted buy and sell transactions within months, weeks, days, or even minutes. Nonetheless, Congress has determined that such persons are to be treated as insiders.

3.   Expressing a similar concern for undue expansion of Congressional power, Justice Kavanaugh opined, “if the law of Article III did not require plaintiffs to demonstrate a ‘concrete harm,’ Congress could authorize virtually any citizen to bring a statutory damages suit against virtually any defendant who violated virtually any federal law.” TransUnion, 141 S. Ct. at 2206.

4.   The Second Circuit also has applied TransUnion to find that “testers” without concrete plans to make use of services offered through defendants’ websites did not have standing to sue for the websites’ alleged non-compliance with Americans With Disabilities Act. See Harty v. West Point Realty, Inc., 28 F.4th 435, 443-44 (2d Cir. 2022); Laufer v. Ganesha Hospitality LLC, No. 21-995, 2022 WL 2444747, at *2 (2d Cir. July 5, 2022).

5.   Coincidentally, Judge Cote authored the District Court opinion in Bulldog, which the Second Circuit affirmed. See Donoghue v. Morgan Stanley High Yield Fund, No. 10-CV-3131, 2010 WL 2143664 (S.D.N.Y. May 27, 2010).

6.   Shortly after issuing her decision in Avalon, Judge Cote relied on the reasoning of that decision to uphold standing in another § 16(b) case. See Safe and Green Holdings Corp. v. Shaw, No. 23-CV-2244, 2023 WL 5509319, at *2 (S.D.N.Y. Aug. 25, 2023).

7.   “Pl. Mem.” refers to Plaintiff's Memorandum Of Law In Opposition To Defendant's Motion To Dismiss For Lack Of Standing filed on May 16, 2023 at Dkt. 227.

8.   “Def Reply” refers to Defendant's Reply Memorandum Of Law In Support Of Defendant's Motion To Dismiss For Lack Of Standing filed on May 24, 2023 at Dkt. 228.

ROBERT W. LEHRBURGER UNITED STATES MAGISTRATE JUDGE