     06-0784
     Roth v. Jennings


 1                         UNITED STATES COURT OF APPEALS

 2                             FOR THE SECOND CIRCUIT

 3                                    - - - - - -

 4                                 August Term, 2006

 5   (Argued: February 21, 2007                       Decided: June 6, 2007)

 6

 7                             Docket No. 06-0784-cv

 8   _________________________________________________________

 9   ANDREW E. ROTH, derivatively            on    behalf    of   METAL
10   MANAGEMENT, INC.,

11                                      Plaintiff-Appellant,

12                                 - v. -

13   T. BENJAMIN JENNINGS, EUROPEAN METAL RECYCLING, LTD.,
14   and METAL MANAGEMENT, INC.,

15                                 Defendants-Appellees.
16   _________________________________________________________

17   Before:    KEARSE, CABRANES, and KATZMANN, Circuit Judges.

18               Appeal from a judgment entered pursuant to Fed. R. Civ. P.

19   12(b)(6) in the United States District Court for the Southern

20   District   of   New   York,   Deborah    A.    Batts,    Judge,      dismissing   a

21   derivative action brought under § 16(b) of the Securities Exchange

22   Act of 1934, 15 U.S.C. § 78p(b), for disgorgement of short-swing

23   profits from stock sales made by one defendant as part of an alleged

24   "group" within the meaning of the Act.

25               Affirmed in part; vacated and remanded in part.

26                    PAUL D. WEXLER, New York, New York (Bragar Wexler &
27                    Eagel, New York, New York, Ostrager Chong Flaherty &
28                    Broitman, New York, New York, on the brief),for
29                    Plaintiff-Appellant.
 1                         ALLAN   T.   SLAGEL,   Chicago,   Illinois
 2                         (Heather A. Jackson, Shefsky & Froelich,
 3                         Chicago, Illinois, John J. Clarke, Jr.,
 4                         DLA Piper Rudnick Gray Cary, New York, New
 5                         York, on the brief), for Defendant-
 6                         Appellee Jennings.

 7                         THOMAS E. LYNCH, New York, New York
 8                         (Steven C. Bennett, Jones Day, New York,
 9                         New York, on the brief), for Defendant-
10                         Appellee European Metal Recycling, Ltd.




11   KEARSE, Circuit Judge:

12             Plaintiff Andrew E. Roth, suing derivatively on behalf of

13   nominal   defendant   Metal   Management,   Inc.   ("MMI"   or   "Metal

14   Management"), for disgorgement to MMI of "short-swing profits" under

15   § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or

16   "Act"), 15 U.S.C. § 78p(b), appeals from a final judgment of the

17   United States District Court for the Southern District of New York,

18   Deborah A. Batts, Judge, granting motions by defendants T. Benjamin

19   Jennings and European Metal Recycling, Ltd. ("EMR") (collectively

20   "defendants"), to dismiss the complaint for failure to state a claim

21   on which relief can be granted. The complaint alleged that Jennings

22   and EMR as a "group," within the meaning of the Act, owned more than

23   10 percent of MMI's outstanding stock; that within a period of less

24   than six months, Jennings purchased and sold MMI stock at a profit

25   of some $4.25 million; and that § 16(b) required the disgorgement of

26   that profit to MMI.     The district court granted both defendants'

27   motions to dismiss on the ground that the complaint was insufficient

28   to plead that defendants acted as a group, given the disclaimers of

29   group status in documents filed by defendants with the Securities


                                       - 2-
 1   and Exchange Commission ("SEC").                 The court ruled that the claim

 2   against EMR was also dismissable on the ground that the complaint

 3   did not allege that EMR itself had engaged in any short-swing

 4   transactions or received any pecuniary profit from the MMI stock

 5   transactions by Jennings.       For the reasons that follow, we affirm

 6   the dismissal of the claim against EMR, but we vacate the dismissal

 7   of the claim against Jennings and remand for further proceedings.



 8                                 I.     BACKGROUND



 9              For purposes of reviewing the dismissal of a complaint for

10   failure   to   state   a   claim,    we      accept    the   complaint's    factual

11   allegations, and all reasonable inferences that can be drawn from

12   those allegations in the plaintiff's favor, as true.                     See, e.g.,

13   Leatherman v. Tarrant County Narcotics Intelligence & Coordination

14   Unit, 507 U.S. 163, 164 (1993); Overton v. Todman & Co., 478 F.3d

15   479, 483 (2d Cir. 2007).       The following description is taken from

16   allegations in the complaint and from documents referred to in the

17   complaint which were filed by EMR or Jennings with the SEC pursuant

18   to SEC Rule 13d-1 and Schedule 13D, 17 C.F.R. §§ 240.13d-1(a),

19   240.13d-101 ("Schedule 13D" filings).




20   A.   The Parties and the Transactions in MMI Stock

21              Metal   Management       (or    "the     Company"),   which    describes

22   itself as one of the nation's largest full-service scrap metal

23   recyclers, is a publicly owned Delaware corporation headquartered in

                                               - 3-
 1   Chicago, Illinois.     EMR is a privately owned scrap metal processing

 2   company headquartered in the United Kingdom.            Jennings, an Illinois

 3   resident, is a former chairman and chief executive officer of MMI.

 4              On May 15 and May 21, 2003, EMR purchased a total of

 5   1,503,100 shares of MMI common stock in open-market transactions.

 6   These   shares   represented       approximately     14.8   percent   of   MMI's

 7   outstanding common stock.          (See Complaint ¶ 13.)       The Schedule 13D

 8   filed by EMR with respect to those transactions stated that

 9              EMR has taken certain actions that indicate that EMR
10              may be deemed to have the current intent to seek to
11              change or influence control of the Company, although
12              it has not formulated any specific plan or proposal
13              in this regard. . . .     Any such plan or proposal
14              that may be formulated could involve, among other
15              things, entering into one or more privately
16              negotiated   acquisitions   of  additional   Company
17              securities, open-market purchases, proposing a
18              business combination transaction with the Company,
19              making a tender offer for some or all of the Shares
20              or waging a proxy contest for control of the
21              Company.

22   (EMR Schedule 13D dated June 2, 2003, at 4 (emphases added).)

23              On    May   29    and    30,    2003,   Jennings,   in   open-market

24   transactions, purchased a total of 842,000 shares of MMI common

25   stock. (See Complaint ¶ 9.) These shares constituted approximately

26   8.3 percent of MMI's outstanding stock.            (See Jennings Schedule 13D

27   dated June 9, 2003, at 2.)         The per-share prices ranged from $10.95

28   to $11.55, for a total purchase price of $9,517,350; Jennings paid

29   for the shares by obtaining a $10 million loan from EMR.                   (See

30   Complaint ¶¶ 8, 9, 14.)        According to the terms of the EMR-Jennings

31   loan agreement, the loan was unsecured; the interest rate was

32   4 percent per annum.        (See Jennings Schedule 13D dated June 9, 2003,

33   Exhibit A; EMR Schedule 13D dated June 9, 2003, Exhibit I.)

                                               - 4-
 1             Roth's complaint alleged that "[t]he loan was made for the

 2   specific purpose of buying MMI securities in furtherance of EMR's

 3   and Jennings [sic] agreement to work together to effect a change of

 4   control or similar transaction involving MMI" (Complaint ¶ 8), and

 5   that Jennings and EMR therefore constituted a "group" within the

 6   meaning of § 13(d) of the Act for purposes of determining each

 7   entity's beneficial ownership of MMI stock under § 16 of the Act

 8   (e.g., id. ¶¶ 6, 7, 11).   The complaint alleged that under § 16(b),

 9   "each member of [the] Group is liable to pay to the issuer all

10   profits earned by that Group member in stock transactions effected

11   within a six-month period during which time the Group owned a

12   greater than 10% beneficial interest in the issuer's stock."      (Id.

13   ¶ 12.)

14             On July 14 and 15, 2003, Jennings sold 16,000 of his MMI

15   shares, at prices ranging from $18.6483 to $19.06 per share.      (See

16   Complaint ¶ 15.)   From August 19 through September 9, 2003, he sold

17   an additional 602,900 shares, at prices ranging from $18 to $18.59

18   per share.   (See id. ¶ 16.)     The complaint alleged that "[a]t all

19   relevant times during the period while Jennings purchased and sold

20   MMI common stock, the Group owned in excess of 10% of MMI's

21   outstanding common stock."     (Id. ¶ 13.)   It alleged that Jennings's

22   sales, which occurred less than six months after his purchases,

23   resulted in profits totaling at least $4,249,408.80, and that

24   Jennings and EMR are each "liable to the extent of its [sic]

25   pecuniary [interest] in the . . . disgorgeable profits."     (Id. ¶ 18;

26   see id. ¶ 20.)



                                        - 5-
 1   B.   The Motions To Dismiss and the District Court's Decision

 2              Jennings and EMR moved for dismissal pursuant to Fed. R.

 3   Civ. P. 12(b)(6) for failure to state a claim under § 16(b).      They

 4   attached to their respective motions several documents they had

 5   filed with the SEC--some of which were referred to in the complaint-

 6   -which described, inter alia, the loan agreement between EMR and

 7   Jennings, certain of their transactions in MMI stock, and their

 8   respective MMI holdings.   The loan agreement, in the form of a June

 9   9, 2003 letter from EMR to Jennings, signed as "[a]ccepted and

10   agreed to" by Jennings ("Loan Agreement") stated--in the version

11   attached to the Schedule 13D filed by EMR--as follows:

12                   This letter will evidence our legally binding
13              agreements effective as of June 2, 2003:

14                        (1) European Metal Recycling Ltd. ("EMR")
15                   has agreed to provide you with a bridge loan in
16                   an aggregate of up to U.S. $10,000,000 (the
17                   "Loan").

18                        (2)   The Loan shall be unsecured, shall
19                   accrue interest at the rate of Four Percent
20                   (4%) per annum, and shall be due and payable in
21                   full no later than ninety (90) days from the
22                   effective date hereof.

23                        (3) EMR hereby acknowledges that you have
24                   used proceeds of the Loan to purchase shares of
25                   Common Stock of Metal Management, Inc.      EMR
26                   hereby acknowledges and agrees that you
27                   currently are not, nor in the future shall you,
28                   be under any obligation to vote, retain or
29                   dispose of such shares as part of, nor
30                   otherwise to participate in any way in any
31                   plans or proposals of, any "group" within the
32                   meaning of the applicable federal and state
33                   securities laws in regard to the securities of
34                   Metal Management, Inc., including any "group"
35                   that may in the future involve EMR in any way.

36   (EMR Schedule 13D dated June 9, 2003, Exhibit I; see also Jennings

37   Schedule 13D dated June 9, 2003, Exhibit A (with slight linguistic

                                      - 6-
 1   differences from EMR's Exhibit I).)                 Jennings and EMR argued that

 2   the complaint failed sufficiently to allege that they were a group

 3   within the meaning of the pertinent securities laws and that the

 4   Loan Agreement and their other SEC filings showed that they had

 5   disclaimed group status.

 6              In a Memorandum and Order dated February 1, 2006, the

 7   district court agreed, granting both defendants' motions to dismiss.

 8   See 2006 WL 278135 (Feb. 2, 2006) ("District Court Opinion").                     The

 9   court found principally that defendants' SEC filings disclaimed

10   group   status,       and   it    held    that    notwithstanding    the   contrary

11   allegations      of    the       complaint,       defendants'    disclaimers   were

12   controlling.

13              The    court      began       its   discussion   by    noting   that    in

14   considering a motion to dismiss pursuant to Rule 12(b)(6), the court

15   is required to accept as true the factual allegations in the

16   complaint, draw all reasonable inferences in favor of the plaintiff,

17   and refrain from assessing the weight of the evidence that might be

18   offered in support of the complaint.                 The court noted that such a

19   motion should be granted "'only if, after viewing plaintiff's

20   allegations in this favorable light, "it appears beyond doubt that

21   the plaintiff can prove no set of facts in support of his claim

22   which would entitle him to relief."'"               District Court Opinion, 2006

23   WL 278135, at *3 (quoting Walker v. City of New York, 974 F.2d 293,

24   298 (2d Cir. 1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46

25   (1957)), cert. denied, 507 U.S. 961 (1993)).                The court also stated

26   that

27              consideration of a Rule 12(b)(6) motion is limited

                                                - 7-
 1             to the factual allegations in the complaint,
 2             documents attached to the complaint as exhibits or
 3             incorporated in it by reference, to matters of which
 4             judicial notice might be taken, or to documents
 5             either in plaintiff's possession or of which
 6             plaintiffs had knowledge and relied on in bringing
 7             suit.

 8   District Court Opinion, 2006 WL 278135, at *3.    It added that

 9             the Second Circuit has held that "when a district
10             court decides a motion to dismiss a complaint
11             alleging securities fraud, it may review and
12             consider public disclosure documents required by law
13             to be and which actually have been filed with the
14             SEC," as these are documents that should be noticed
15             by the Court. Cortec Indus., Inc.[ v. Sum Holding
16             L.P.], 949 F.2d [42, 47 (2d Cir. 1991)] (referencing
17             Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d
18             Cir. 1991)).

19   District Court Opinion, 2006 WL 278135, at *3.

20             As to the merits of the motions, the court noted that, in

21   order to show that Jennings's purchases, amounting to 8.3 percent of

22   MMI's shares, were subject to § 16(b), Roth was required to show

23   that EMR and Jennings constituted a "group" within the meaning of

24   the Act, that is, that they "'combined in furtherance of a common

25   objective.'" District Court Opinion, 2006 WL 278135, at *4 (quoting

26   Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 1982), cert.

27   denied, 460 U.S. 1069 (1983)).   The court stated that "[i]n order to

28   plead group activity sufficiently, Plaintiff is not required to

29   allege that a common objective of actual corporate control existed

30   among the defendants, but simply that the defendants acted together

31   in furtherance of a common objective with regard to acquiring,

32   holding, voting or disposing of securities of the issuer," although

33   "the concerted action of the group's members need not be expressly

34   memorialized in writing."   District Court Opinion, 2006 WL 278135,


                                      - 8-
 1   at *4 (internal quotation marks and brackets omitted).

 2              The court ruled, however, that Roth's complaint "d[id] not

 3   sufficiently allege such an agreed-upon common purpose" between EMR

 4   and Jennings.     Id. at *5.     Citing Schedule 13D filings by EMR and

 5   Jennings, respectively, the court observed that the Schedule 13D

 6   filed by Jennings in June 2003, which disclosed Jennings's purchases

 7   of MMI shares and the loan from EMR, stated (a) that "'[t]here are

 8   no arrangements or understandings between EMR and [Jennings] as to

 9   how [Jennings] would utilize the proceeds of the [L]oan,'" and (b)

10   that Jennings "'does not have any definite plans regarding an

11   extraordinary       corporate        transaction,   such    as    a    merger,

12   reorganization or liquidation involving [MMI] or a sale or transfer

13   of   a   material    amount     of    assets   of   [MMI]   or   any   of   its

14   subsidiaries.'"      District Court Opinion, 2006 WL 278135, at *1-*2

15   (quoting Jennings Schedule 13D dated June 9, 2003, at 3) (emphasis

16   ours).   The court noted also that EMR's Schedule 13D disclosing its

17   loan to Jennings stated that

18              [EMR]   has    no   contract,    arrangement[]   or
19              understanding of any kind with Mr. Jennings with
20              respect to the Common Stock [of MMI] owned by [EMR]
21              or by Mr. Jennings; . . . expressly disclaims any
22              direct or indirect beneficial ownership in the
23              Common Stock [of MMI] owned by Mr. Jennings; and
24              further disclaims any "group" status with Mr.
25              Jennings.

26   District Court Opinion, 2006 WL 278135, at *2 (quoting EMR Schedule

27   13D dated June 9, 2003, at 3) (other internal quotation marks

28   omitted) (emphasis ours).        And the court noted that

29              [t]he loan agreement signed by both Jennings and
30              EMR's managing director expressly states that
31              Jennings and EMR are in no way, either by the loan
32              of June 9, 2003 or at any time in the future, to be

                                             - 9-
 1                considered a "group" or part of any group that might
 2                include more than the Defendants. . . . EMR filed
 3                an amended 13D schedule after loaning money to
 4                Jennings, which further declared that the loan did
 5                not constitute group activity.

 6   District Court Opinion, 2006 WL 278135, at *5 (emphases added). The

 7   court   stated    that     defendants    had    thus   "filed   three     separate

 8   statements    with   the    SEC,   asserting    that   their    actions    do   not

 9   constitute group activity"; that their disclaimers conflicted with

10   the allegations of the complaint; and that the complaint did not

11   "explain the documents [that EMR and Jennings had] filed with the

12   SEC." Id.     The court accepted defendants' disclaimers as true.               See

13   id.

14                The district court rejected Roth's contention that, in

15   ruling on the Rule 12(b)(6) motions, the court should not rely on

16   defendants' disclaimers:

17                      Plaintiff contends that the disclaimer of group
18                status in the loan agreement and the subsequent
19                amended 13D schedules by both Defendants was meant
20                to circumvent liability even though the two were
21                acting in concert. However, "unadorned allegations"
22                based on "unmitigated speculation" that defendants
23                are acting as a group are inadequate to sustain a
24                Section 13(d) claim.[]     Segal v. Gordon, 467 F.2d
25                602, 608 (2d Cir. 1972).       In the instant case,
26                Defendants have filed three separate statements with
27                the SEC, asserting that their actions do not
28                constitute group activity. The express disclaimer
29                of   group    status   conflicts    with   Plaintiff's
30                allegations. Even interpreting the pleadings in a
31                light    most favorable    to   the   Plaintiff,   the
32                Defendants' statements, which have been submitted to
33                a government agency and made public, should not be
34                contradicted or taken as perjurious simply because
35                the Plaintiff, without evidence, says they are. See
36                Matusovsky v. Merrill Lynch, 186 F.Supp.2d 397, 400
37                [(S.D.N.Y. 2002)] (stating that if a plaintiff's
38                allegations    are   contradicted    by   a   document
39                considered in determining a Rule 12(b)(6) motion,
40                those allegations are insufficient to defeat the
41                motion); Rap[o]port v. Asia Elecs., 88 F.Supp.2d

                                             - 10-
 1                179, 184 (S.D.N.Y. 2000) (stating that when
 2                documents contain statements that contradict the
 3                allegations in the complaint, the documents control
 4                and the court need not accept as true the
 5                allegations contained in the complaint).

 6   District Court Opinion, 2006 WL 278135, at *5 (emphases added).

 7                In addition, the district court ruled that the complaint

 8   would be dismissable "[e]ven were this Court not to accept the truth

 9   of Defendants' statements in their SEC filings."                 Id.   The court

10   concluded that § 16(b) was inapplicable because other evidence

11   submitted by defendants indicated that EMR and Jennings could not be

12   considered to have been a group at the time of Jennings's sales.

13   Citing the language in § 16(b) that "[t]his subsection shall not be

14   construed to cover any transaction where such beneficial owner was

15   not such both at the time of the purchase and sale, or the sale and

16   purchase, of the security . . . involved," 15 U.S.C. § 78p(b), the

17   court concluded that "for traders to constitute a 'group', the

18   Exchange Act requires that their coordinated activity persist during

19   the time of purchase and during the time of sale of the securities,"

20   District   Court   Opinion,   2006    WL     278135,   at   *6    (emphasis   in

21   original).     The court noted that, according to documents submitted

22   by defendants, EMR had offered in August 2003 to buy Jennings's

23   shares at a below-market price and that Jennings had declined that

24   offer and sold shares on the open market.         See id. at *5 (citing EMR

25   Schedule 13D dated August 12, 2003, Exhibit 1 (EMR letter offering

26   to pay Jennings $13.50 per share)).          The court found that

27                [s]uch transactions do not reflect two group members
28                acting in concert to effectuate a common objective
29                with regard to acquiring, holding, voting or
30                disposing of securities of the issuer. . . . Had
31                Defendants held a common purpose, Jennings likely

                                          - 11-
 1             would have accepted EMR's offer.       While group
 2             members need not march in lock step to qualify as a
 3             "group", . . . marching in opposite directions
 4             certainly counsels against concluding that Jennings
 5             acted with EMR as a "group". Jennings' refusal of
 6             EMR's offer contradicted precisely what one would
 7             have expected of him had he been acting in concert
 8             with EMR.

 9   District Court Opinion, 2006 WL 278135, at *5 (internal quotation

10   marks and brackets omitted) (emphases added); see id. ("[t]his

11   evidence does not in any way approximate an instance of group

12   activity, and belies allegations of any common objective shared by

13   the Defendants" (emphasis added)); id. at *6 (in selling his shares

14   on the open market, "Jennings did not act in concert with EMR at the

15   time of sale; he did the opposite").    The court concluded that,

16             [a]ccordingly, EMR's shares cannot be aggregated
17             with Jennings' to constitute the more than ten
18             percent ownership required to warrant Section 16(b)
19             liability.    Neither EMR nor Jennings may be
20             considered part of a "group."

21                  Because the Complaint does not sufficiently
22             aver that Defendants acted as a group at the time
23             Jennings sold his MMI shares, because public SEC
24             filings indicate that Defendants never intended to
25             act as a group, and because Jennings alone did not
26             own ten percent of a class of MMI's equity
27             securit[ies],    Jennings'   Motion    to  Dismiss
28             Plaintiff's Complaint is hereby GRANTED.

29   Id. (emphases added).

30             The court ruled that the claim against EMR should be

31   dismissed on the additional ground that the complaint did not allege

32   that EMR had made any sales of its own shares or had any direct or

33   indirect pecuniary interest in the shares sold by Jennings.

34             Judgment was entered dismissing the complaint, and this

35   appeal followed.



                                     - 12-
 1                                 II.     DISCUSSION



 2                On appeal, Roth contends principally that the district

 3   court erred in concluding that the complaint failed to state a claim

 4   on which relief can be granted against Jennings, arguing that the

 5   complaint sufficiently pleaded that EMR and Jennings acted as a

 6   group for the purpose of Jennings's acquisition of MMI shares, that

 7   defendants' disclaimers of group activity were not entitled to

 8   evidentiary weight in the consideration of Rule 12(b)(6) motions,

 9   and that Jennings's sales of his shares were not a basis for

10   concluding that the "group" provisions no longer applied.                   For the

11   reasons that follow, we agree.



12   A.   Section 16(b)

13                Section 16 of the Exchange Act, with respect to any

14   company whose securities are registered on a national securities

15   exchange,    imposes   certain      obligations    and   restrictions       on   the

16   company's officers, directors, and "[e]very person who is directly

17   or indirectly the beneficial owner of more than 10 percent of any

18   class of any equity security (other than an exempted security),"

19   15 U.S.C. § 78p(a)(1).      "[D]efining directors, officers, and [such]

20   beneficial    owners   as   those    presumed     to   have   access   to    inside

21   information," Foremost-McKesson, Inc. v. Provident Securities Co.,

22   423 U.S. 232, 243 (1976) ("Foremost-McKesson"), Congress enacted

23   § 16(b) of the Act, which provides, in pertinent part, as follows:

24                     (b) Profits from purchase and sale of security
25                within six months.   For the purpose of preventing
26                the unfair use of information which may have been

                                            - 13-
 1              obtained by such beneficial owner, director, or
 2              officer by reason of his relationship to the issuer,
 3              any profit realized by him from any purchase and
 4              sale, or any sale and purchase, of any equity
 5              security of such issuer (other than an exempted
 6              security) . . . within any period of less than six
 7              months, . . . shall inure to and be recoverable by
 8              the issuer, irrespective of any intention on the
 9              part of such beneficial owner, director, or officer
10              in entering into such transaction of holding the
11              security . . . purchased or of not repurchasing the
12              security . . . sold for a period exceeding six
13              months. . . .       This subsection shall not be
14              construed to cover any transaction where such
15              beneficial owner was not such both at the time of
16              the purchase and sale, or the sale and purchase, of
17              the security . . . .

18   15 U.S.C. § 78p(b).

19                   The general purpose of Congress in enacting
20              § 16(b) is well known. See Kern County Land Co.[ v.
21              Occidental Petroleum Corp., 411 U.S. 582, 591-92
22              (1973)]; Reliance Electric Co. [v. Emerson Electric
23              Co., 404 U.S. 418, 422 (1972)], and the authorities
24              cited therein.    Congress recognized that insiders
25              may   have   access  to   information  about   their
26              corporations not available to the rest of the
27              investing public. By trading on this information,
28              these persons could reap profits at the expense of
29              less well informed investors. In § 16(b) Congress
30              sought to "curb the evils of insider trading [by] .
31              .    .    taking the profits out of a class of
32              transactions in which the possibility of abuse was
33              believed to be intolerably great."          Reliance
34              Electric Co., supra, at 422.

35   Foremost-McKesson, 423 U.S. at 243 (emphasis added).

36              Profits resulting from purchase-and-sale, or sale-and-

37   repurchase, transactions within a period of less than six months are

38   commonly known as "short-swing" transactions, see, e.g., id. at 234;

39   SEC Rule 16a-1(a)(3), 17 C.F.R. § 240.16a-1(a)(3).           As indicated by

40   the "irrespective of any intention" clause in § 16(b), that section

41   is   a   strict-liability   provision;          it   "requires   the   inside,

42   short-swing   trader   to   disgorge      all    profits   realized    on   all


                                       - 14-
 1   'purchases' and 'sales' within the [six-month] period, without proof

 2   of actual abuse of insider information, and without proof of intent

 3   to profit on the basis of such information," Kern County Land Co. v.

 4   Occidental Petroleum Corp., 411 U.S. 582, 595 (1973) (emphasis

 5   added); see, e.g., Foremost-McKesson, 423 U.S. at 251 ("Section

 6   16(b) imposes a strict prophylactic rule with respect to insider,

 7   short-swing trading.").

 8             The Exchange Act also recognizes that the abuses it

 9   targets may be accomplished by persons acting not individually but

10   in combination with others.   See, e.g., 15 U.S.C. § 78m(d)(3).   With

11   respect to § 16, SEC Rule 16a-1(a)(1) provides that, "[s]olely for

12   purposes of determining whether a person is a beneficial owner of

13   more than ten percent of any class of equity securities," the term

14   "beneficial owner" means, with exceptions not pertinent here, "any

15   person who is deemed a beneficial owner pursuant to section 13(d) of

16   the Act and the rules thereunder."       17 C.F.R. § 240.16a-1(a)(1).

17   Section 13(d) of the Act provides, in pertinent part, that

18             [w]hen two or more persons act as a partnership,
19             limited partnership, syndicate, or other group for
20             the purpose of acquiring, holding, or disposing of
21             securities of an issuer, such syndicate or group
22             shall be deemed a "person" for the purposes of this
23             subsection.

24   15 U.S.C. § 78m(d)(3) (emphases added).      And SEC Rule 13d-5(b)(1)

25   promulgated thereunder provides, with exceptions not pertinent here,

26   that

27             [w]hen two or more persons agree to act together for
28             the purpose of acquiring, holding, voting or
29             disposing of equity securities of an issuer, the
30             group formed thereby shall be deemed to have
31             acquired beneficial ownership, for purposes of
32             sections 13(d) and (g) of the Act, as of the date of

                                      - 15-
 1             such agreement, of all equity securities of that
 2             issuer beneficially owned by any such persons.

 3   17 C.F.R. § 240.13d-5(b)(1) (emphases added).    Accordingly, under

 4   § 13(d)(3) and this Rule, if two or more entities agree to act

 5   together for any of the listed purposes, a "group" is "thereby"

 6   formed.

 7             Thus, "the touchstone of a group within the meaning of

 8   Section 13(d) is that the members combined in furtherance of a

 9   common objective." Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir.

10   1982) ("Wellman"), cert. denied, 460 U.S. 1069 (1983).   Although a

11   common purpose to acquire control of the issuing company would be an

12   indicium of collective action within the meaning of § 13(d), it is

13   not an essential.

14             [T]he agreement required by § 13(d)(3) need not be
15             an agreement to gain corporate control or to
16             influence corporate affairs. . . .        The plain
17             language of § 13(d)(3) demands only an agreement
18             "for the purpose of acquiring, holding, or disposing
19             of securities," 15 U.S.C. § 78m(d)(3), and Rule 13d-
20             5 is similarly satisfied by that sort of agreement,
21             17 C.F.R. § 240.13d-5(b)(1).

22   Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 124-25 (2d

23   Cir. 2001).   Further, evidence that group members "might not always

24   make identical investment decisions" does "not preclude existence of

25   agreement."   Id. at 127 (internal quotation marks omitted).

26             Importantly, for purposes of this case, the actors need

27   not have combined for all of the purposes listed in § 13(d)(3) or

28   Rule 13d-5(b)(1).   Acquiring, holding, and disposing of are listed

29   in the disjunctive.    Hence, "[a]ll that is required is that the

30   members of the group have combined to further a common objective

31   with regard to one of those activities."     Morales v. Freund, 163

                                     - 16-
 1   F.3d 763, 767 n.5 (2d Cir. 1999) (emphasis added); see, e.g.,

 2   Morales v. Quintel Entertainment, Inc., 249 F.3d at 124; Wellman,

 3   682 F.2d at 363.

 4               The questions of (a) whether two or more persons "act[ed]"

 5   as a group or agreed to act together, and (b) whether their purpose

 6   was the acquisition, holding, or disposition of an issuer's equity

 7   securities are questions of fact.             See, e.g., Morales v. Quintel

 8   Entertainment, Inc., 249 F.3d at 124.               If they in fact so acted or

 9   agreed to so act, the legal consequences are specified in § 13(d)(3)

10   and Rule 13d-5(b)(1):      If the persons agreed to act together for the

11   purpose of purchasing an issuer's shares, a "group" was "thereby"

12   formed, 17 C.F.R. § 240.13d-5(b)(1); if they acted as a "group,"

13   they must be treated as a single person, 15 U.S.C. § 78m(d)(3)

14   ("shall be deemed a 'person'"); and each person in the group "shall

15   be deemed" to be the beneficial owner "of all equity securities of

16   that issuer beneficially owned by any" member of the group, 17

17   C.F.R. § 240.13d-5(b)(1).

18               An agreement to act together for the purpose of acquiring,

19   holding, or disposing of shares need not be unconditional in order

20   to support a finding that the actors constituted a group within the

21   meaning of those provisions.         See, e.g., Wellman, 682 F.2d at 363.

22   Nor need    the   group   "be   committed      to    acquisition,    holding,     or

23   disposition on any specific set of terms."                Id.; see, e.g., Morales

24   v. Freund, 163 F.3d at 767 n.5.          And, "[o]f course, the concerted

25   action of the group's members need not be expressly memorialized in

26   writing."    Wellman, 682 F.2d at 363.         The formation of such a group

27   "may   be   formal   or   informal    and     may    be    proved   by   direct   or

                                           - 17-
 1   circumstantial evidence."      Morales v. Quintel Entertainment, Inc.,

 2   249 F.3d at 124; see also id. at 125-26 (sworn statements by

 3   defendants, alleged group members, that the members "never 'agreed'

 4   among themselves to acquire [the] stock" are insufficient to support

 5   the granting of summary judgment in favor of the defendants where

 6   there is circumstantial evidence from which "a reasonable trier of

 7   fact could discredit the . . . sworn statements and infer instead

 8   that" the defendants entered into an agreement with one another,

 9   "with an agreed purpose to acquire [the] stock").



10   B.   Rule 12(b)(6)

11              In considering a motion under Fed. R. Civ. P. 12(b)(6) to

12   dismiss a complaint for failure to state a claim on which relief can

13   be granted, the district court is normally required to look only to

14   the allegations on the face of the complaint.      If, on such a motion,

15   "matters outside the pleading are presented to and not excluded by

16   the court," the court should normally treat the motion as one for

17   summary judgment pursuant to Fed. R. Civ. P. 56.         Fed. R. Civ. P.

18   12(b); see, e.g., Global Network Communications, Inc. v. City of New

19   York, 458 F.3d 150, 154-55 (2d Cir. 2006) ("Global").          In any event,

20   a ruling on a motion for dismissal pursuant to Rule 12(b)(6) is not

21   an occasion for the court to make findings of fact.              See, e.g.,

22   Leonard F. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d

23   Cir. 1999).

24              In   certain   circumstances,   the   court   may    permissibly

25   consider documents other than the complaint in ruling on a motion

26   under Rule 12(b)(6).      Documents that are attached to the complaint

                                        - 18-
 1   or incorporated in it by reference are deemed part of the pleading

 2   and may be considered.   See, e.g., Pani v. Empire Blue Cross Blue

 3   Shield, 152 F.3d 67, 71 (2d Cir. 1998), cert. denied, 525 U.S. 1103

 4   (1999).   In addition, even if not attached or incorporated by

 5   reference, a document "upon which [the complaint] solely relies and

 6   which is integral to the complaint" may be considered by the court

 7   in ruling on such a motion.   Cortec Industries, Inc. v. Sum Holding

 8   L.P., 949 F.2d 42, 47 (2d Cir. 1991) ("Cortec") (emphases added),

 9   cert. denied, 503 U.S. 960 (1992); see, e.g., Global, 458 F.3d at

10   156.

11             This principle has its greatest applicability in cases

12   alleging fraud.   See, e.g., Cortec, 949 F.2d at 47-48; Kramer v.

13   Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) ("Kramer").   When

14   a complaint alleges, for example, that a document filed with the SEC

15   failed to disclose certain facts, it is appropriate for the court,

16   in considering a Rule 12(b)(6) motion, to examine the document to

17   see whether or not those facts were disclosed.   See, e.g., id.    Or

18   when the complaint alleges that such a document made a particular

19   representation, the court may properly look at the document to see

20   whether that representation was made.      See, e.g., id. at 775.

21   Consideration of such documents filed with the SEC is appropriate

22   with respect to a nondisclosure or misrepresentation claim because

23   "no serious question as to their authenticity can exist," and

24   because the court is to consider them on a Rule 12(b)(6) motion

25   "only to determine what the documents stated," and "not to prove the

26   truth of their contents." Kramer, 937 F.2d at 774 (emphases added).

27             Similarly, where public records that are integral to a

                                      - 19-
 1   fraud complaint are not attached to it, the court, in considering a

 2   Rule 12(b)(6) motion, is permitted to take judicial notice of those

 3   records. See, e.g., id.; Brass v. American Film Technologies, Inc.,

 4   987 F.2d 142, 150 (2d Cir. 1993).           If the court takes judicial

 5   notice, it does so in order "to determine what statements [they]

 6   contained"--but "again not for the truth of the matters asserted."

 7   Kramer, 937 F.2d at 774 (emphases added); see, e.g., Liberty Mutual

 8   Insurance Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d

 9   Cir. 1992).

10               A decision that a complaint fails to state a claim on

11   which relief can be granted is a ruling of law, see, e.g., De Jesus

12   v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir.), cert. denied, 519

13   U.S. 1007 (1996); McCall v. Pataki, 232 F.3d 321, 322 (2d Cir.

14   2000), and we review such a decision de novo, see, e.g., Gregory v.

15   Daly, 243 F.3d 687, 691 (2d Cir. 2001).      In our review, we, like the

16   district court, "must accept as true all of the factual allegations

17   set   out   in   plaintiff's   complaint,   draw   inferences   from   those

18   allegations in the light most favorable to plaintiff, and construe

19   the complaint liberally."       Id. (internal quotation marks omitted).

20   And whatever documents may properly be considered in connection with

21   the Rule 12(b)(6) motion, the bottom-line principle is that "once a

22   claim has been stated adequately, it may be supported by showing any

23   set of facts consistent with the allegations in the complaint."

24   Bell Atlantic Corp. v. Twombly, 2007 WL 1461066, at *11 (U.S. May

25   21, 2007) ("Twombly").




                                         - 20-
 1   C.   The Claim Against Jennings

 2         1.   Sufficiency of the Allegation of "Group" Action

 3               Because Jennings apparently owned no MMI stock just prior

 4   to the May 2003 purchases he made with the loan from EMR, he was not

 5   a statutory insider to whom § 16 applied unless he and EMR--which

 6   already owned 14.8 percent--acted as a group for the purpose of

 7   Jennings's acquisition, holding, or disposition of MMI shares.                 The

 8   district court, in ruling that the complaint did not sufficiently

 9   allege that EMR and Jennings had acted as a group, did not properly

10   apply the above principles.

11               The district court correctly noted that SEC filings may

12   properly be considered in ruling on a Rule 12(b)(6) motion to

13   dismiss a complaint alleging claims of fraud.               But this is not a

14   fraud   case.     It    is,   rather,    a   §   16(b)    action    seeking   the

15   disgorgement of short-swing profits, for which an insider is to be

16   held strictly liable. Defendants' submissions of their Schedule 13D

17   filings    thus   presented     material     that   was    inappropriate      for

18   consideration     on   Rule   12(b)(6)   motions    to    dismiss    a   §   16(b)

19   complaint that contained no allegation of a failure to disclose or

20   of a factual misrepresentation.

21               Further, even if there had been allegations of fraud,

22   defendants' SEC filings could not properly be considered for the

23   truth of their contents.          The district court's view that "the

24   Defendants' statements, which have been submitted to a government

25   agency and made public, should not be contradicted or taken as

26   perjurious simply because the Plaintiff, without evidence, says they

27   are," District Court Opinion, 2006 WL 278135, at *5--although a

                                          - 21-
 1   possible argument to a jury--was not an appropriate rationale for

 2   ruling on a motion under Rule 12(b)(6).

 3               The cases cited by the district court for the proposition

 4   that "if a plaintiff's allegations are contradicted by a document

 5   considered in determining a Rule 12(b)(6) motion, those allegations

 6   are insufficient to defeat the motion," id. (citing Matusovsky v.

 7   Merrill Lynch, 186 F.Supp.2d 397, 400 (S.D.N.Y. 2002)) (emphases

 8   ours), i.e., that "when documents contain statements that contradict

 9   the allegations in the complaint, the documents control and the

10   court need not accept as true the allegations contained in the

11   complaint," District Court Opinion, 2006 WL 278135, at *5 (citing

12   Rapoport v. Asia Electronics Holding Co., 88 F.Supp.2d 179, 184

13   (S.D.N.Y. 2000)) (emphasis ours), are not applicable to the present

14   case.    Matusovsky was a case in which the plaintiff claimed that a

15   general release he had signed was without consideration, whereas the

16   signed release itself recited the consideration he received; and the

17   cited discussion in Rapoport concerned a fraud claim alleging that

18   a prospectus failed to disclose certain facts.             These cases fall

19   squarely within the principle that the contents of the document are

20   controlling     where   a   plaintiff    has   alleged   that    the   document

21   contains, or does not contain, certain statements.              As we noted in

22   Kramer, however, such documents may properly be considered only for

23   "what" they contain, "not to prove the truth" of their contents.

24               In the present case, the gravamen of the complaint was

25   simply   that   defendants     were   subject    to   strict    liability   for

26   Jennings's profits on his short-swing transactions as members of a

27   group that owned more than 10 percent of MMI's shares.            The district

                                           - 22-
 1   court's ruling that the complaint failed to state a claim that EMR

 2   and   Jennings       constituted     a     group     because    of      defendants'

 3   "disclaimer[s] of group status" in their Schedule 13D filings with

 4   the SEC, District Court Opinion, 2006 WL 278135, at *5, was flawed

 5   for   several    reasons.       First,       it    improperly       considered   the

 6   representations in defendants' filings for the truth of their

 7   assertions that there were no current agreements or understandings

 8   between Jennings and EMR as to how Jennings would vote or dispose of

 9   his   shares    in   the   future.       Even     assuming   that    those   factual

10   assertions were relevant, they raised issues of fact that should not

11   have been determined at the pleading stage.

12              Second, the court apparently assumed that defendants'

13   representations, which used the present tense as to their current

14   understandings with respect to Jennings's future obligations, also

15   meant that they had had no past understanding, when EMR made the

16   loan to Jennings, that the purpose of the loan was to fund his

17   purchase of MMI shares.       The Schedule 13D filings did not, however,

18   actually state that there had not been such an agreement with regard

19   to Jennings's acquisition of the shares.              For example, EMR's June 9

20   Schedule 13D acknowledged that Jennings had used the loan to fund

21   his May 29-30 purchases of MMI shares and stated that EMR "has" no

22   understanding with respect to the MMI shares "owned" by Jennings.

23   Jennings's June 9 Schedule 13D made similar use of the present

24   tense, stating there "are" no agreements as to how he would use the

25   proceeds of the EMR loan.       Thus, even if it had been appropriate to

26   consider defendants' SEC filings for the truth of their assertions,

27   their representations would not have warranted rulings in their

                                              - 23-
 1   favor, for they did not actually assert that EMR had not agreed to

 2   make   the   loan   to   Jennings    for     the    purpose    of   the    MMI   stock

 3   acquisition.

 4                Third, in disclaiming "group" status, defendants were in

 5   effect attempting to disclaim the legal effects of their conduct.

 6   The district court's acceptance of and reliance on defendants'

 7   "express[] state[ment]s that Jennings and EMR are in no way, either

 8   by the loan of June 9, 2003 or at any time in the future, to be

 9   considered a 'group,'" as a disclaimer that was "control[ling],"

10   District Court Opinion, 2006 WL 278135, at *5, gave no recognition

11   to the terms of § 13(d)(3) and Rule 13d-5(b)(1).                If in fact EMR and

12   Jennings acted together for the purpose of Jennings's acquiring MMI

13   shares, EMR and Jennings "thereby," under those provisions of law,

14   "formed" a "group," regardless of their attempted disclaimers of the

15   legal effect of such joint action.

16                Finally,    looking    at    the      "group"    allegations     in   the

17   complaint, i.e., that EMR's loan to Jennings was made for the

18   purpose of allowing him to buy MMI shares in furtherance of an EMR-

19   Jennings agreement "to work together to effect a change of control

20   or similar transaction involving MMI" (Complaint ¶ 8), and at the

21   documents to which the complaint referred, we cannot agree with the

22   district court's view that the "group" allegations were "unmitigated

23   speculation" or "unadorned" allegations made "without evidence,"

24   District Court Opinion, 2006 WL 278135, at *5 (internal quotation

25   marks omitted). Leaving aside the principle that "[t]he pleading of

26   additional    evidence,"    beyond       what      is   required    to    enable   the

27   defendant to respond, "is not only unnecessary, but in contravention

                                              - 24-
 1   of proper pleading procedure," Geisler v. Petrocelli, 616 F.2d 636,

 2   640 (2d Cir. 1980); see, e.g., 2A Moore's Federal Practice -- Civil

 3   §   8.04[1][b][5]   (3d   ed.   2007),      the   complaint's   allegation   of

 4   collaboration between EMR and Jennings was hardly "unadorned" or an

 5   "unmitigated speculation." That allegation was accompanied by other

 6   allegations, and by references to defendants' respective June 2003

 7   Schedule 13D filings, that included the following:

 8         -   On May 21, 2003, EMR completed its accumulation of
 9         1,503,100 shares of MMI's stock, or 14.8 percent of the
10         outstanding shares (see Complaint ¶ 13; EMR Schedule 13D
11         dated June 2, 2003, at 2, 5).

12         - In connection with its May 2003 purchases, EMR stated
13         that it might "seek to change or influence control of" MMI
14         by, inter alia, "waging a proxy contest for control of the
15         Company" (EMR Schedule 13D dated June 2, 2003, at 4).

16         -   On May 29 and 30, 2003, Jennings, in open-market
17         purchases, acquired 842,000 shares of MMI's stock (see
18         Complaint ¶ 9), which constituted 8.3 percent of MMI's
19         stock (see Jennings Schedule 13D dated June 9, 2003, at
20         2).

21         -   Jennings paid for his May 29-30 purchases with a
22         $10 million loan from EMR (see Complaint ¶ 8).

23         -   The rate of interest on EMR's loan to Jennings,
24         according to the Loan Agreement, was 4 percent per annum
25         (which we judicially notice was below the then-current
26         prime rate, see, e.g., Wall Street Journal, Nov. 8, 2002,
27         at C12 (prime rate 4.25%); id. June 27, 2003, at C11, and
28         June 30, 2003, at C15 (prime rate cut from 4.25% to 4.00%
29         effective June 27, 2003)).

30         - EMR's $10 million loan to Jennings was unsecured (see
31         Jennings Schedule 13D dated June 9, 2003, Exhibit A; EMR
32         Schedule 13D dated June 9, 2003, Exhibit I).

33              Although we do not suggest that Roth was required to

34   adduce such evidence at the pleading stage, see, e.g., Twombly, 2007

35   WL 1461066, at *8 ("a complaint attacked by a Rule 12(b)(6) motion

36   to dismiss does not need detailed factual allegations"), we note


                                         - 25-
 1   that on this record, no rational factfinder would be compelled to

 2   believe that EMR and Jennings had had no agreement with respect to

 3   Jennings's acquisition of his shares.                Given evidence that EMR

 4   acquired a 14.8 percent stake in MMI and stated that it might

 5   attempt to gain control of MMI, that within days of its acquisition

 6   of that 14.8 percent EMR made a cheap and unsecured loan of

 7   $10 million to Jennings, that Jennings was MMI's former chairman and

 8   CEO, and that Jennings used the EMR loan to acquire 8.3 percent of

 9   MMI's stock, a rational factfinder could instead easily infer that

10   EMR and Jennings acted together for the purpose of Jennings's

11   purchase of shares in MMI.      And upon such a finding, § 13(d)(3) and

12   Rule 13d-5(b)(1) would require that EMR and Jennings be treated as

13   a group, with each being deemed to own the total of their holdings

14   of MMI stock.

15              In sum, the district court erred in accepting defendants'

16   SEC filings for the truth of their contents, in inferring that those

17   contents were sufficient and controlling, and in concluding that the

18   complaint itself did not allege facts sufficient to show that EMR

19   and Jennings constituted a group, within the meaning of the Exchange

20   Act, for the purpose of having Jennings purchase shares of MMI.



21        2.   The Duration of the Group

22              The    remaining   question        is   whether    the   complaint   was

23   nonetheless properly dismissed on the ground that § 16(b) was

24   inapplicable because EMR and Jennings were no longer a "group"--on

25   the theory that their interests had diverged--when Jennings sold his

26   shares.     The    district   court     answered       this    question   in    the

                                           - 26-
 1   affirmative.   Because the final sentence of § 16(b) states that

 2             [t]his subsection shall not be construed to cover
 3             any transaction where such beneficial owner was not
 4             such both at the time of the purchase and sale, or
 5             the sale and purchase, of the security,

 6   15 U.S.C. § 78p(b) (the "exemptive provision"), the court reasoned

 7   that two or more persons are not to be considered a group unless

 8   they pursued a common purpose in selling the issuer's stock, see

 9   District Court Opinion, 2006 WL 278135, at *5-*6.     In light of the

10   language of § 13(d)(3) and Rule 13d-5(b)(1), and the purpose of

11   § 16(b), we disagree with this interpretation.

12             As discussed in Part II.A. above, the stated purpose of

13   § 16(b) is "preventing the unfair use of information which may have

14   been obtained by [an insider] by reason of his relationship to the

15   issuer," 15 U.S.C. § 78p(b).     Section 16(b) itself contains no

16   provision as to who is an insider.      The provisions delineating who

17   is an insider by reason of size of stock ownership are §§ 16(a) and

18   13(d) of the Act and SEC Rules 16a-1(a)(1) and 13d-5(b)(1).     Thus,

19   § 16(a) of the Act deems insiders to include any person who is

20   directly or indirectly the beneficial owner of more than 10 percent

21   of any class of the issuer's stock.     SEC Rule 16a-1(a)(1) provides

22   that more-than-10-percent owners include any person who is deemed a

23   beneficial owner of more than 10 percent by reason of § 13(d) of the

24   Act and the rules thereunder.   And § 13(d)(3) and Rule 13d-5(b)(1)

25   provide that if any two or more persons act together for the purpose

26   of acquiring, holding, or disposing of shares of an issuer, each

27   actor is deemed to be the beneficial owner of the total number of

28   shares owned by all of them.


                                     - 27-
 1                  The disgorgement provision of § 16(b) simply dictates the

 2   consequences when an insider profits from short-swing transactions.

 3   However, because § 16(b) "was designed to prevent a corporate

 4   director or officer or the beneficial owner of more than 10 per

 5   cent[]    of    a   corporation    from    profiteering     through   short-swing

 6   securities      transactions      on   the    basis   of   inside   information,"

 7   Foremost-McKesson, 423 U.S. at 234 (internal quotation marks and

 8   footnote omitted), the exemptive provision was needed to be sure

 9   that a person who was an insider solely by reason of his beneficial

10   ownership of more than 10 percent of the issuer's stock would be

11   held strictly liable for short-swing profits only if he was an

12   insider at the time of both his purchase and his sale (or sale and

13   repurchase).        If he was not an insider at both of those times, there

14   is no presumption that he was privy to inside information at both

15   times.     Accordingly, the exemptive provision means that "in a

16   purchase-sale sequence, a beneficial owner must account for profits

17   only if he was a beneficial owner [of more than 10 percent] before

18   the purchase," id. at 250 (internal quotation marks omitted); and it

19   means that a sale made after a former beneficial owner of more than

20   10 percent has already reduced his holdings to 10 percent or below

21   is exempted from § 16(b) by the phrase "at the time of . . . sale,"

22   Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 419-20

23   (1972).    The exemptive provision in § 16(b) does not purport to

24   define insider status; it merely says that, for the disgorgement

25   provision to apply, the short-swing trader must have insider status

26   "at the time of" both of his transactions.

27                  Under § 13(d)(3) and Rule 13d-5(b)(1), which delineate the

                                               - 28-
 1   insider status of joint actors, if two or more persons act together

 2   for the purpose of acquiring, holding, "or" disposing of shares of

 3   an   issuer,   they    are   deemed    a   group,   and   each   is   deemed   the

 4   beneficial owner of all the shares beneficially owned by all of the

 5   collaborators. Because the statute and the Rule list those purposes

 6   in the disjunctive, a group is formed as a matter of law if those

 7   persons act for any one of the listed purposes.

 8              The district court thus erred in holding that "for traders

 9   to constitute a 'group', the Exchange Act requires that their

10   coordinated activity persist during the time of purchase and during

11   the time of sale of the securities," District Court Opinion, 2006 WL

12   278135,   at   *6     (emphasis   in   original).         That   ruling   gave   a

13   conjunctive reading to provisions that are disjunctive.

14              In sum, §§ 16 and 13(d) and the rules thereunder mean that

15   where, as alleged here, two persons acted together for the purpose

16   of acquiring the stock of an issuer, and collectively those persons

17   owned more than 10 percent of that stock both before any transaction

18   leading to a short-swing profit and at the time of the matching

19   short-swing transaction, the final sentence of § 16(b) provides them

20   no exemption.       All of the joint actors in such circumstances are

21   deemed to be insiders and are presumed to have access to insider

22   information.

23              These provisions appropriately address the Congressional

24   concern that such short-swing sales may have been based on access to

25   inside information.       In the present case, for example, evidence of

26   EMR's cheap, unsecured loan of $10 million to Jennings for his

27   purchase of MMI stock, following close on the heels of EMR's own

                                            - 29-
 1   acquisition of a 14.8 percent stake in MMI, would, as discussed

 2   above, permit an inference that EMR and Jennings acted together in

 3   order to allow Jennings to purchase his 842,000 shares in MMI, and

 4   require the legal conclusion that EMR and Jennings were thereby a

 5   group.   Thus, both EMR itself, which owned 14.8 percent of MMI's

 6   stock, and Jennings as its collaborator would be presumed to have

 7   access to inside information.     Jennings's decision to sell the

 8   majority of his shares on the open market could well have been based

 9   on inside information.   For example, in May, EMR had purchased its

10   14.8 percent stake in MMI at prices below $11 a share (see EMR

11   Schedule 13D dated June 2, 2003, at 5), and it disclosed that it

12   might seek control of MMI through, inter alia, additional open-

13   market purchases or a tender offer (see id. at 4).   By mid-July, the

14   market price of MMI shares had risen to more than $19 a share.   (See

15   Jennings Schedule 13D dated July 18, 2003, at 5.)     However, "[o]n

16   September 8, 2003 EMR and MMI signed a 'standstill agreement,'"

17   District Court Opinion, 2006 WL 278135, at *3, pursuant to which MMI

18   agreed to make certain information available to EMR and EMR agreed

19   that it would, inter alia, neither purchase nor "make any proposal

20   to acquire" any more MMI shares before June 15, 2004 (MMI Form 8-K

21   dated September 9, 2003, Exhibit 10.1, at 4).   Prior to the public

22   announcement of this standstill agreement, Jennings sold thousands

23   of his MMI shares.   A shareholder in his position could well have

24   reasoned that the imminent MMI-EMR agreement removing EMR as a

25   potential open-market buyer of, or a potential tender offeror for,

26   MMI shares for the better part of year made it attractive for him to

27   sell shares before the standstill agreement was made known to the

                                     - 30-
 1   rest of the investing public.        That type of trading on the basis of

 2   advance information is the sort of conduct that Congress sought to

 3   deter   by    enacting   §   16(b)    and    making   short-swing   profits

 4   automatically disgorgeable "without proof of actual abuse of insider

 5   information, and without proof of intent to profit on the basis of

 6   such information," Kern, 411 U.S. at 595.

 7                Thus, taking the allegations of the present complaint as

 8   true, we cannot agree with the district court's ruling that, as a

 9   matter of law, § 16(b) permits an insider--here, the owner of 14.8

10   percent of an issuer's stock--to fund the purchase of up to 10

11   percent more of such stock by an ally, and permits the ally to make

12   profits on short-swing sales of those shares and not disgorge those

13   profits to the issuer. We conclude that the district court's ruling

14   is contrary to the language and intent of the Exchange Act.

15                Finally, even if we agreed with the district court's

16   interpretation of § 16(b) as inapplicable unless EMR and Jennings

17   were a "group" both at the time Jennings acquired his MMI shares and

18   at the time he sold, we would nonetheless be constrained to vacate

19   the dismissal of the claim against Jennings because the court, in

20   concluding that defendants were not a group at the time of those

21   sales, impermissibly made findings of fact.            And, again without

22   suggesting that detailed factual allegations were required at the

23   pleading stage, we note that the present record would easily permit

24   a rational factfinder draw to factual inferences contrary to those

25   drawn by the court.

26                The district court's rationale for concluding that EMR and

27   Jennings were not a "group" at the time Jennings sold his shares on

                                          - 31-
 1   the open market was that EMR had offered on August 12, 2003, to buy

 2   826,000   shares   of   MMI    stock   from    Jennings,    and    that   Jennings

 3   rejected that offer and instead sold 602,900 shares on the open

 4   market.   The court found that if Jennings and EMR "held a common

 5   purpose," Jennings "likely" would have accepted EMR's offer to

 6   purchase his shares, and that "Jennings' refusal of EMR's offer

 7   contradicted precisely what one would have expected of him had he

 8   been acting in concert with EMR," District Court Opinion, 2006 WL

 9   278135, at *5 (emphases added).         What Jennings's purposes had been,

10   what he was "likely" to have done, and what decisions he "would have

11   [been] expected" to make, are questions of fact as to which the

12   court should not have made findings in making its legal ruling on

13   whether Roth had pleaded a claim that could entitle him to relief.

14              Moreover,     the     district      court's     assessment     of   the

15   "likel[ihood]" that Jennings's interests and those of EMR were no

16   longer aligned does not appear to take into account facts indicated

17   by the record, even as it exists at this stage.                   For example, in

18   inferring that Jennings was no longer interested in the control of

19   MMI, the court does not appear to have taken into account the fact

20   that the Schedule 13D filed by Jennings with respect to his sale of

21   602,900 shares through September 9, 2003, stated that, after those

22   sales, Jennings still owned 423,100 shares of MMI's outstanding

23   stock (see Jennings Schedule 13D dated September 10, 2003, at 3)--a

24   statement forcing the mathematical inference that Jennings had

25   acquired additional shares of MMI after his initial purchase of

26   842,000 shares in May and before his sale of 602,900 shares.

27   Accordingly, the record showed that despite selling most of the

                                            - 32-
 1   shares he had bought in May, Jennings remained the owner of a

 2   substantial block of MMI stock--approximately 4 percent.               (See id.)

 3   Thus, despite the district court's surmise, Roth may well be able to

 4   prove that Jennings continued to have a control-seeking interest

 5   aligned with that of EMR.

 6                Further, although the district court mentioned that the

 7   price at which EMR offered to buy "826,000 of the [MMI] shares" then

 8   owned by Jennings (EMR Schedule 13D dated August 12, 2003, Exhibit

 9   1), was below the then-market price, the court did not quantify the

10   disparity.      EMR offered to buy those shares for $13.50 a share.

11   (See id.)      However, in the weeks before and after EMR's offer, MMI

12   shares sold on the open market for more than $18 a share.                      (See

13   Jennings Schedule 13D filings dated July 18, 2003, at 5, and

14   September 10, 2003, at 6.)        We cannot uphold the ruling that the

15   complaint was legally insufficient on the basis of the court's

16   theory that, had EMR and Jennings had a common purpose, Jennings

17   would "likely" have sold 826,000 shares to EMR for $13.50 a share,

18   thereby   forgoing    an   additional     profit   of   more   than    $4.50    per

19   share--a total of more than $3.7 million.

20                Indeed, the fact that EMR's offering price was so much

21   lower   than    the   market   price   could   allow    Roth   to     prove    that

22   Jennings's decision to reject EMR's offer and instead make open-

23   market sales bespoke his continued interest, rather than a loss of

24   interest, in achieving control of MMI.         Attachments to the Schedule

25   13D filings suggest that Jennings needed to sell at least some of

26   his MMI shares in order to repay the loan given him by EMR.              Yet, as

27   a matter of common sense, it seems likely that the more MMI stock

                                            - 33-
 1   Jennings owned, the greater his chances of sharing in MMI's control.

 2   The total price that EMR offered for 826,000 shares, at $13.50 per

 3   share, was little more than the gross amount that Jennings received,

 4   according to his September 10, 2003 Schedule 13D, for selling just

 5   602,900 shares on the open market.         Thus, by selling 602,900 shares

 6   on the open market, Jennings grossed roughly the same amount of

 7   money, but he was able to keep 223,100 shares of MMI stock, or more

 8   than 2 percent of its outstanding shares, that he otherwise would

 9   have lost.     The district court's inference that Jennings's sale of

10   826,000 shares to EMR was "what one would have expected" if Jennings

11   wished to share in the control of MMI was thus questionable and

12   certainly was not a proper basis for a Rule 12(b)(6) dismissal.

13                In sum, even if the disgorgement provision of § 16(b) were

14   inapplicable unless EMR and Jennings had a common purpose at the

15   time Jennings sold his shares, the complaint should not have been

16   dismissed on the premise that Roth could not show such a purpose.



17   D.   The Claim Against EMR

18                The district court dismissed Roth's claim against EMR on

19   the alternative ground that the complaint did not allege either that

20   EMR had engaged in any short-swing transactions in MMI securities or

21   that EMR had received, directly or indirectly, any profit from the

22   sale of Jennings's shares.      Roth contends that the district court

23   also erred in dismissing his claim against EMR on this ground.         We

24   disagree.

25                Section 16(b) requires an insider to disgorge "'any profit

26   realized by him' from short-swing transactions."          Blau v. Lehman,

                                        - 34-
 1   368 U.S. 403, 414 (1962) (quoting § 16(b)) (emphasis in Blau).                 Roth

 2   "concedes that the complaint does not specifically allege that EMR

 3   has a pecuniary interest in any of Jennings' profits" (Roth reply

 4   brief on appeal at 10); but he argues that the "highly unusual

 5   transaction by which EMR financed Jennings' trades in MM[I] stock,

 6   followed by a merger offer, certainly gives rise to a presumption

 7   that EMR derived some pecuniary benefit from Jennings' purchases and

 8   sales" (Roth brief on appeal at 28 (emphasis added)).               It may well

 9   be that EMR improved its prospects for an eventual merger by funding

10   Jennings's purchases of MMI shares.             But what is required for the

11   imposition of strict liability on EMR is that EMR itself have

12   realized    profits   from       short-swing      transactions.          No    such

13   "presumption" (id.) arises from EMR's loan to Jennings; and no such

14   allegation appears in the complaint. The complaint's assertion that

15   "[e]ach member of the Group is liable to the extent of its [sic]

16   pecuniary    [interest]     in    the    foregoing    disgorgeable       profits"

17   (Complaint ¶ 18 (emphasis added)) does not constitute an allegation

18   that EMR in fact realized any such profits.

19               Nor does Roth suggest that he should have been given leave

20   to file an amended complaint in order to allege that EMR shared in

21   Jennings's short-swing profits.          Rather, urging that he should have

22   been given an opportunity for discovery (Roth brief on appeal at

23   28), Roth asks, "Is it not possible, maybe even probable, that there

24   was some    understanding    between       Jennings   and   EMR   that   was    not

25   revealed in the SEC filings?" (Roth reply brief on appeal at 11

26   (emphases added)).    This is a far cry from any suggestion that Roth

27   would be able to file a pleading consistent with the Rule 11

                                             - 35-
 1   requirement that a complaint's factual assertions "have evidentiary

 2   support or, if specifically so identified, are likely to have

 3   evidentiary support after a reasonable opportunity for further

 4   investigation or discovery," Fed. R. Civ. P. 11(b)(3) (emphasis

 5   added).

 6               "[W]hen the allegations in a complaint, however true,

 7   could not raise a claim of entitlement to relief, this basic

 8   deficiency   should   .   .   .   be   exposed   at   the   point   of   minimum

 9   expenditure of time and money by the parties and the court."

10   Twombly, 2007 WL 1461066, at *9 (internal quotation marks omitted).

11   The allegations of Roth's complaint, taken as true, show no basis

12   for entitlement to relief against EMR.



13                                     CONCLUSION



14               We have considered all of the parties' contentions on this

15   appeal and, except as indicated above, have found them to be without

16   merit.    So much of the judgment as dismissed the complaint against

17   EMR is affirmed.   So much of the judgment as dismissed the complaint

18   against Jennings is vacated, and the matter is remanded for further

19   proceedings with respect to the claim against him.




                                            - 36-
