Roth v. Russell

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

ORLANDO DIVISION

ANDREW E. ROTH,

Plaintiff,

Vv. Case No. 6:23-cv-722-JA-RMN

AUSTIN RUSSELL,

Defendant,

and LUMINAR

TECHNOLOGIES, INC.,

Nominal

Defendant.

ORDER

This case is before the Court on Defendant Austin Russell’s motion to

dismiss the amended complaint for failure to state a claim under Federal Rule

of Civil Procedure 12(b)(6). (Doc. 39). Having considered the parties’

submissions, the Court concludes that the motion must be granted.!

I. Facts?

“At all relevant times,” Russell was the Chairman of the Board of

1 The parties requested, and were granted, oral argument on the motion. (See

Docs. 46 & 53). However, after reviewing the parties’ submissions, the Court finds that

oral argument is unnecessary.

2 The facts are from the amended complaint (Doc. 11) and are taken as true at

this stage. Henley v. Payne, 945 F.3d 1320, 1326 (11th Cir. 2019).

Directors, “President, Chief Executive Officer [(CEO),] and controlling

stockholder” of Luminar Technologies, Inc. (Doc. 11 § 11). On July 1, 2021, he

sold 10,500,000 shares of common stock in Luminar for $21.00 per share. (/d.

{ 9). In December 2021, Luminar repurchased 15,263,761 shares of common

stock for, on average, $15.45 per share. (Id. 4] 10). Based on a document that

Russell filed with the Securities Exchange Commission (SEC) pursuant to 15

U.S.C. § 78m(d), he had an “approximate 28.3% indirect pecuniary interest” in

the repurchases. (Id. § 14).

If Russell’s July 2021 sales are matched with Luminar’s December 2021

repurchases, Russell “realized... profits of at least $23,974,026.21 that,”

allegedly, “are disgorgeable to” Luminar. (Id. § 15). On February 13, 2023,

Plaintiff Andrew E. Roth, a Luminar stockholder, demanded that Luminar sue

Russell to recover these profits. (Id. J 1, 21). But Luminar did not sue Russell.

(Ud. § 21). Accordingly, on April 20, 2023, Roth sued Russell under 15 U.S.C.

§ 78p(b) on Luminar’s behalf for Russell’s profits. (Doc. 1 at 2, 5). On May 3,

2023, Roth amended his complaint to correct a misspelling in the case caption.

(Compare id. at 1, with Doc. 11 at 1).

II. Rule 12(b)(6) Standard

In deciding motions to dismiss brought under Federal Rule of Civil

Procedure 12(b)(6), courts “accept the allegations in the complaint as true and

construe them in the light most favorable to the plaintiff.” Henley v. Payne, 945

F.3d 1320, 1326 (11th Cir. 2019). For a pleading to state a claim for relief, it

“must contain ...a short and plain statement of the claim showing that the

pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “[D]etailed factual

allegations” are not required, but “[t]hreadbare recitals of the elements of a

cause of action, supported by mere conclusory statements, do not suffice.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 555 (2007)). “To survive a [Rule 12(b)(6)] motion to dismiss, a

complaint must contain sufficient factual matter, accepted as true, to ‘state a

claim to relief that is plausible on its face.” Id. (quoting Twombly, 550 U.S. at

570). “A claim has facial plausibility when the plaintiff pleads factual content

that allows the court to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Jd. When complaints allege “violations of

securities laws,” courts may judicially notice “relevant SEC filings.” Thompson

v. RelationServe Media, Inc., 610 F.3d 628, 631 n.5 (11th Cir. 2010).

III. Discussion

Under 15 U.S.C. § 78p(b), “any profit realized by” a director, officer, or

principal stockholder (insider) of a company “from any purchase and sale, or any

sale and purchase, of any equity security” of the company “within any period of

less than six months... shall inure to and be recoverable by” the company,

“irrespective of any intention on the part of [the insider] in entering into such

transaction.” Id. This statute serves to “prevent|] the unfair use of information

which may have been obtained by [the insider] by reason of his relationship to”

the company. Id.; accord Feder ex rel. Ivax Corp. v. Frost, 220 F.3d 29, 36 (2d

Cir. 2000) (noting that the statute “is a prophylactic measure designed to deter

insider short-swing trading”). The statute acts as “a relatively arbitrary rule

capable of easy administration” and “imposes strict liability.” Reliance Elec. Co.

uv. Emerson Elec. Co., 404 U.S. 418, 422 (1972) (quoting Bershad v. McDonough,

428 F.2d 693, 696 (7th Cir. 1970)).

To state a claim under 15 U.S.C. § 78p(b), a plaintiff must plead that

“there was (1) a purchase and (2) a sale of securities (3) by an [insider] (4) within

a six-month period.” Gwozdzinsky ex rel. Revco D.S., Inc. v. Zell/Chilmark

Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998); see also Gund v. First Fla. Banks,

Inc., 726 F.2d 682, 687 (11th Cir. 1984) (“[The director, who directly conducted

the transactions,] has stipulated to every element of [15 U.S.C. § 78p(b)]

liability. It is undisputed that the transactions were sales and

purchases ... of... equity securities and that he is an insider with respect to

[the company that issued the securities]. The sales and purchases were never

separated by more than one day and were sometimes simultaneous.”).

Even when insiders do not purchase and sell their companies’ stocks

directly, they may be liable for indirect stock purchases and sales. See Arnold S.

Jacobs, Section 16 of the Securities Exchange Act § 2:62 (West Feb. 2023)

(accounting for the situation in which the insider directly sells shares and, less

than six months later, indirectly—through “another person or entity’—

purchases shares). Purchases and sales conducted by insiders’ close family

members may be attributed to the insiders. See 17 C.F.R. § □□□□□□□□□□□□□□□□□□□□□

(creating a rebuttable presumption that transactions by “members of [an

insider]’s immediate family sharing the same household” are attributable to the

insider); Whittaker v. Whittaker Corp., 639 F.2d 516, 519, 523-24 (9th Cir. 1981)

(attributing “transactions involving securities for [a] mother’s account” to her

adult son because through “a broad general power of attorney,” he had “control

over the securities” and the “unfettered ability to use the money for his own

benefit”), abrogated on other grounds by Credit Suisse Sec. (USA) LLC □□□

Simmonds, 566 U.S. 221, 227-28 (2012); Whiting v. Dow Chem. Co., 523 F.2d

680, 681-82 (2d Cir. 1975) (attributing sales conducted by an insider’s spouse to

the insider); B.T. Babbitt, Inc. v. Lachner, 332 F.2d 255, 257 (2d Cir. 1964)

(accepting the parties’ stipulation that a sale conducted by the insider’s spouse

was attributable to the insider); Bershad, 428 F.2d at 695-96 (affirming

summary judgment against an insider and his spouse when each bought and

sold shares of the company’s stock). Purchases and sales conducted by insiders’

agents and alter egos may also be attributed to the insiders. See 17 C.F R.

§ 240.16a-1(a)(2)(ii)(B) (attributing to an insider a transaction by a general or

limited partnership in which the insider is a general partner); Blau v. Lehman,

368 U.S. 403, 409-10 (1962) (recognizing that a business entity that acts

through another person can itself be an insider); Feder, 220 F.3d at 34

(attributing to an individual and a partnership wholly controlled by him sales

conducted by a corporation of which he was a director and was, together with

the partnership, a principal stockholder).

Roth plausibly alleges that Russell was a director, an officer, and a

principal stockholder of Luminar and thus an insider three times over under 15

U.S.C. § 78p(b). (Doc. 11 FF 11, 14; Doc. 39 at 4; Doc. 41-3 at 1); see 15 U.S.C.

§ 78c(a)(7) (defining “director” as “any director of a corporation or any person

performing similar functions with respect to any organization, whether

incorporated or unincorporated”); 17 C.F.R. § 240.16a-1(f) (defining “officer” to

include the president of the company issuing the stock); 17 C.F.R. § 240.16a-

1(a)(1) (defining a principal stockholder, or “a beneficial owner of more than ten

percent of any class of equity securities” in the company, as “any person who is

deemed a beneficial owner pursuant to [15 U.S.C. § 78m(d)] and the rules

thereunder,” subject to exceptions). Roth further alleges that Russell directly

sold Luminar stock on July 1, 2021, and indirectly bought Luminar stock

through Luminar’s December 2021 repurchases of its own stock. (Doe. 11 □ 9-

11). If Luminar’s repurchases are attributable to Russell, then “there was (1) a_

purchase and (2) a sale of securities (3) by an [insider] (4) within a six-month

period.” Gwozdzinsky, 156 F.3d at 308. If they are not, then the amended

complaint fails to state a claim under 15 U.S.C. § 78p(b) because it alleges no

other purchase by Russell occurring within six months of his July 1, 2021 sale.

(See Doc. 11).

Russell contends that Luminar’s repurchases are not attributable to him

for three reasons. (See Doc. 39 at 7—11).3 First, Russell argues that the “plain

language” of 15 U.S.C. § 78p(b) “distinguishes between the corporate insider

who can be liable under the statute” and the company issuing the stock, which

cannot be liable, and that the statute “predicates liability on trades” conducted

by the insiders, not the company. (Doc. 39 at 8, 11). Second, says Russell, the

repurchases cannot be attributed to him because Luminar conducted them “at

the direction of its majority independent board of directors,” and holding him

liable for such an “involuntary” transaction would “plainly violate” the statute’s

intent by “creat[ing] liability ...where there was no potential ...to abuse

insider information.” (Jd. at 8-11). And third, Russell asserts that Roth’s theory

of liability “would cause every insider, regardless of their level of stock

ownership, who sold stock in the months before a corporate repurchase to

become retroactively liable under” the statute—an outcome that “would be

absurd, unfair to investors,” and contrary to the statute’s intent. (Ud. at 11

3 Russell also argues that the amended complaint fails to state a claim under 15

U.S.C. § 78p(b) because it does not allege that he made any profit from the sale and

purchase of the Luminar stock. (Doc. 39 at 12-15). However, according to the amended

complaint, “Russell realized short-swing profits of at least $23,974,026.21” through the

July and December 2021 transactions. (Doc. 11 {| 15). The Court accepts this allegation

as true at the motion-to-dismiss stage. See Henley, 945 F.3d at 1326.

(emphasis omitted)).

Roth does not address Russell’s third argument but responds to the other

two. (See Doc. 47). As to the first argument, Roth contends that by the “plain

and unambiguous language” of 17 C.F.R. § 240.16a-1(a)(2), Russell has

“beneficial ownership” of Luminar’s repurchases through his “indirect pecuniary

interest” in them. (Doc. 47 at 10-13). As to the second argument, Roth maintains

that because Russell was Luminar’s “controlling shareholder, CEO, and

Chairman of the Board,” the repurchases were conducted with his approval; that

the repurchases were voluntary; and that in any event, Russell’s “affirmative

defense that he did not have control over the. . . repurchases . . . is not properly

determined” on a motion to dismiss for failure to state a claim. Ud. at 14-15 &

n.7). Roth adds that “[a]s a controlling shareholder, Russell had an obvious

opportunity to profit from the use of inside information through his ownership

interest in [Luminar]’s repurchases” and that “such potential abuse of inside

information is exactly the kind of conduct that the statute was designed to

prevent.” Cd. at 2).

This case presents the extraordinary situation in which the 15 U.S.C.

§ 78p(b) plaintiff, on behalf of the company that issued the equity security, seeks

to attribute to the insider a transaction conducted by that very company. The

Court could find no other cases presenting that situation.

In the more common situation in which the plaintiff seeks to attribute to

the insider a transaction conducted by a different company, persuasive

authority supports that courts should determine whether the insider “was a

beneficial owner of the... stock sold” or purchased by that company by

referring to the SEC’s definition of “beneficial owner.” Feder, 220 F.3d at 34; see

17 C.F.R. § 240.16a-1(a)(2) (defining “beneficial owner” for 15 U.S.C. § 78p(b)

purposes as “any person who, directly or indirectly, ... has or shares a direct or

indirect pecuniary interest in the equity securities,” subject to exceptions, and

defining “pecuniary interest in any class of equity securities” as “the

opportunity, directly or indirectly, to profit or share in any profit derived from a

transaction in the subject securities”). This definition is intentionally broad: at

its most sweeping, it makes a securities transaction attributable to an insider

whenever the insider indirectly shares an indirect opportunity to share in any

profit from the transaction. 17 C.F.R. § 240.16a-1(a)(2).

As a result, Roth’s theory of liability proves too much. Simply by virtue of

being an insider of the company that issues the security, the 15 U.S.C. § 78p(b)

defendant will almost always be a beneficial owner of the stock sold and

purchased by that company because directors, officers, and principal

stockholders almost always at least indirectly share indirect opportunities to

share in the profits from such transactions. Under Roth’s theory, then, every

time a company that issues an equity security conducts a sale or purchase in

that security, every insider in that company is deemed to conduct the

transaction himself under 15 U.S.C. § 78p(b). The statute does not say as much,

and if Congress wanted to make every security transaction conducted by a

company attributable to its insiders under 15 U.S.C. § 78p(b), it could have done

so in plain terms. See United States v. Steele, 147 F.3d 1316, 1318 (11th Cir.

1998) (en banc) (“[W]e must presume that Congress said what it meant and

meant what it said.”). Instead, the statute uses the term “issuer” to refer to the

company issuing the security and the phrase “such beneficial owner, director, or

officer” to refer to the insider liable for “any profit realized by him from any

purchase and sale, or any sale and purchase, of any equity security of such

issuer.” 15 U.S.C. § 78p(b). “We generally seek to respect Congress’[s] decision

to use different terms to describe different categories of people or things.”

Mohamad v. Palestinian Auth., 566 U.S. 449, 456 (2012). And the statute

establishes that the issuer and the insider are different persons when it states

its purpose: “preventing the unfair use of information which may have been

obtained by such beneficial owner, director, or officer by reason of his

relationship to the issuer.” Id. It does not make sense to think of the insider as

obtaining information “by reason of his relationship to” himself; rather, the —

relationship with which the statute is concerned is that between the insider and

the company of which he is a director, officer, or principal stockholder.

Russell’s argument that Roth’s theory of liability “would cause every

insider... who sold stock in the months before a corporate repurchase to

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become retroactively liable under” the statute also has merit. (Doc. 39 at 11

(emphasis omitted)). Roth has no answer for this argument. (See Doc. 47). And

the Court agrees that under Roth’s theory, insiders who sold their company’s

stock for themselves less than six months before the company repurchased its

own stock would be strictly liable for any profits they made from the pair of

transactions, unless an exception applied. See 15 U.S.C. § 78p(b); Reliance Elec.,

404 U.S. at 422. This outcome seems unfair and likely to interfere with not only

the insiders’ but also their company’s plans to buy and sell the company’s stock.

See In re Chapman, 166 U.S. 661, 667 (1897) (encouraging courts to construe

statutes, “if possible, so as to avoid an unjust or an absurd conclusion”).

Roth relies heavily on the SEC’s amicus brief in Feder to support his

position. (See Doc. 47 at 2-4, 9-15). But Feder did not involve, and the SEC did

not address in its brief, the extraordinary situation that this case presents. See

Feder, 220 F.3d 29; (Doc. 49-10). In fact, the SEC seems not to be operating in

accordance with Roth’s theory. The SEC recently updated its disclosure

requirements related to issuer repurchase programs. See Share Repurchase

Disclosure Modernization, 88 Fed. Reg. 36002 (June 1, 2023) (codified at 17

C.F.R. pts. 229, 232, 240, 249, 274). In its report about the amendments to the

disclosure regulations, the SEC did not refer directly to 15 U.S.C. § 78p(b) at all,

though it did directly mention related subsection 15 U.S.C. § 78p(a) eight times.

See Share Repurchase Disclosure Modernization, 88 Fed. Reg. 36002. In the

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report, the SEC discussed comments “ask[ing] [it] to prohibit corporate insider

trading before, during, and after buyback announcements and execution.” Jd. at

36021. It noted numerous studies about the relationship between insider share

transactions and announcements and executions of corporate share

repurchases, id. at 36033-35, including “a recent study” about “actual share

repurchases ... that occur prior to insider sales,” id. at 36034 n.421. And it

amended the disclosure regulations to require issuers to report “[a]ny policies

and procedures relating to purchases and sales of the issuer’s securities during

a repurchase program by the officers and directors, including any restriction on

such transactions.” Id. at 36053. If the SEC viewed issuer repurchases as insider

purchases for 15 U.S.C. § 78p(b) purposes, surely it would have referred to 15

U.S.C. § 78p(b) somewhere in its comprehensive report. Under Roth’s theory, 15

U.S.C. § 78p(b) prohibits insiders from buying or selling issuer shares within six

months of the issuer’s repurchase of its own stock, and this prohibition would

directly relate to the topics discussed in the report. The absence of any mention

of 15 U.S.C. § 78p(b) from the report suggests that the SEC does not endorse

Roth’s theory.

The parties’ submissions make clear that Roth’s theory depends on

attributing Luminar’s repurchases to Russell. (See, e.g., Doc. 39 at 7-8 (“The

[amended clomplaint does not, and cannot, allege that... Russell made a

matching sale and purchase of Luminar stock within a six-month period.

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Instead, [Roth] argues that Luminar’s December 2021 stock repurchases can b

attributed to... Russell as a controlling stockholder.” (emphasis omitted)), 1

(arguing that the amended complaint’s dismissal should be with prejudic

because further amendment would be futile); Doc. 47 at 6-7 (discussing only th

July 1, 2021 sale and December 2021 repurchases as “Russell’s [s]hort-[s] □□□□

[tlransactions” (emphasis omitted))). Roth does not seek leave to amend. (Se

Doc. 47). And “[a] district court is not required to grant a plaintiff leave to ament

his complaint sua sponte when the plaintiff, who is represented by counsel

never filed a motion to amend nor requested leave to amend before the distric

court.” Wagner v. Daewoo Heavy Indus. Am. Corp., 314 F.3d 541, 542 (11th Cir

2002) (en banc). Accordingly, because Luminar’s repurchases cannot be

attributed to Russell, the amended complaint will be dismissed with prejudice.

IV. Conclusion

Accordingly, it is ORDERED that Russell’s motion to dismiss (Doe. 39) is

GRANTED. The amended complaint (Doc. 11) is DISMISSED with

prejudice. The oral argument set for November 14, 2023, is CANCELLED

This case is dismissed, and the Clerk is DIRECTED to close this case.

DONE and ORDERED in Orlando, Florida, on October AT, 2093. □

JOHNANTOOND—

United States District Judge

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Copies furnished to:

Counsel of Record

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