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14-3800-cv

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

ROBERT LOWINGER,

Plaintiff-Appellant,

THOMAS E. NELSON, individually and behalf of all others similarly situated,

ROCK SOUTHWARD, Derivatively on Behalf of Himself & All Others Similarly

Situated,

(For Continuation of Caption See Reverse Side of Cover)

On appeal from the United States District Court

for the Southern District of New York

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,

AMICUS CURIAE

MICHAEL A. CONLEY

Deputy General Counsel

JOHN W. AVERY

Deputy Solicitor

NICHOLAS J. BRONNI

Senior Counsel

Securities and Exchange Commission

100 F. Street N.E.

Washington, D.C. 20549-9040

(202) 551-5117 (Bronni)

AVATAR SECURITIES, LLC, MEREDITH BAILEY, on behalf of themselves

and all others similarly situated, DMITRI BOUGAKOV, on behalf of themselves

and all others similarly situated, RYAN CEFALU, on behalf of themselves and all

others similarly situated, LORRAIN CHIN, FIRST NEW YORK SECURITIES

L.L.C., ATISH GANDHI, on behalf of themselves and all others similarly situated,

PHILLIP GOLDBERG, on behalf of themselves and all others similarly situated,

ERIC HAMRICK, on behalf of themselves and all others similarly situated,

STEVE JARVIS, JOE JOHNSON, on behalf of themselves and all others similarly

situated, NUHKET KAYAHAN, on behalf of themselves and all others similarly

situated, DAVID KENTON, on behalf of themselves and all others similarly

situated, DENNIS KUHN, on behalf of themselves and all others similarly

situated, BENJAMIN LEVINE, on behalf of themselves and all others similarly

situated, KATERHINE LOIACONO, on behalf of themselves and all others

similarly situated, CRYSTAL MCMAHON, on behalf of themselves and all others

similarly situated, GEORGE MICHALITSIANOS, on behalf of themselves and all

others similarly situated, RANDY TERESA MIELKE, on behalf of themselves

and all others similarly situated, JACINTO RIVERA, on behalf of themselves and

all others similarly situated, FAISAL SAMI, on behalf of themselves and all others

similarly situated, SANJEEV SHARMA, on behalf of themselves and all others

similarly situated, COLIN SUZMAN, on behalf of themselves and all others

similarly situated, T3 TRADING GROUP, LLC, VIJAY AKKARAJU, ALEXIS

ALEXANDER, as custodian for Chloe Sophie Alexander, BRIAN ROFFE

PROFIT SHARING PLAN, Individually and on behalf of all others similarly

situated, JOSE GALVAN, MARY GALVAN, ROBERT HERPST, Individually,

on behalf of all others similarly situated, SANJAY ISRANI, on behalf of

themselves and all others similarly situated, KBC ASSET MANAGEMENT N.V.,

and the EMPLOYEES’ RETIREMENT SYSTEM OF THE GOVERNMENT OF

THE VIRGIN ISLANDS (Collectively, the INSTITUTIONAL INVESTORS),

DOUGLAS M. LIGHTMAN, Individually and on behalf of all others similarly

situated, DENNIS PALKON, Individually and on behalf of all others similarly

situated, RICK POND, JACOB SALZMANN, Individually and on behalf of all

others similarly situated, MICHAEL SPATZ, MAREN TWINING, Individually

(For Continuation of Caption See Next Page of Cover)

and on behalf of all others similarly situated, GOLDRICH COUSINS P.C. 401(k)

PROFIT SHARING PLAN &TRUST, IRVING S. BRAUN, Individually,

EDWARD CHILDS, Derivately on Behalf of Himself and All Others Similarly

Situated, KATHY REICHENBAUM, Individually and on behalf of all others

similarly situated, JUN YAN, on behalf of herself and all others similarly situated,

ELBITA ALFONSO, VICKY JONES, PHYLLIS PETERSON, JERRY

RAYBORN, on behalf of themselves and all others similarly situated, EDWARD

VERNOFF, JUSTIN F. LAZARD, on behalf of himself and all others similarly

situated, SYLVIA GREGORCYZK, on behalf of herself and all others similarly

situated, PETER BRINCKERHOFF, GARRETT GARRISON, DAVID

GOLDBER, individually and on behalf of all others similarly situated, KEVIN

HYMS, individually and on behalf of all others similarly situated, RICHARD P.

EANNARINO, Individually and on behalf of all others similarly situated, PETER

MAMULA, Individually and on behalf of all others similarly situated,

KHODAYAR AMIN, on behalf of himself and all others similarly situated,

ELLIOT LEITNER, individually and on behalf of all others similarly situated,

BARBARA STEINMAN, on behalf of herself and all others similarly situated,

HOWARD SAVITT, on behalf of himself and all others similarly situated, CHAD

RODERICK, EUGENE STRICKER, individually and on behalf of all others

similarly situated, STEVE SEXTON, Individually and on behalf of all others

similarly situated, KEITH WISE, Individually and on behalf of all others similarly

situated, JONATHAN R. SIMON, JAMES CHANG, individually and on behalf of

all others similarly situated, SAMEER ANSARI, individually and on behalf of all

others similarly situated, DARRYL LAZAR, individually and on behalf of all

others similarly situated, MICHAEL LIEBER, individually and on behalf of other

members of the general public similarly situated, THOMA J. AHRENDTSEN,

AARON M. LEVINE, Individually, and on behalf of all others similarly situated,

KAREN CUKER, individually and on behalf of all others similarly situated,

BRIAN GRALNICK, individually and on behalf of all others similarly situated,

JENNIFER STOKES, Individually and On Behalf of All Others Similarly Situated,

VERNON R. DEMOIS, Jr., Individually and On Behalf of All Others Similarly

Situated, HAL HUBUSCHMAN, Derivately on Behalf of Facebook, Inc.,,

EDWARD SHIERRY, Individually and On Behalf of All Others Similarly

(For Continuation of Caption See Next Page of Cover)

Situated, JANIS FLEMING, WILLIAM COLE, Derivatively on Behalf of

Facebook, Inc., STEVE GRIFFIS, HOLLY MCCONNAUGHEY, Derivatively on

Behalf of Facebook Inc., GAYE JONES, Derivatively on Behalf of Facebook Inc.,

LIDIA LEVY, on behalf of herself and all others similarly situated,

Plaintiffs,

MORGAN STANLEY & CO. LLC, GOLDMAN SACHS & CO., FACEBOOK,

INC., a Delaware corporation, MORGAN STANLEY & CO. LLC,

Defendants-Appellees,

BARCLAYS CAPITAL INC., MERRILL LYNCH, PIERCE, FENNER & SMITH

INCORPORATED, ERSKINE B. BOWLES, JAMES W. BREYER, DAVID

SPILLANE, DAVID A. EBERSMAN, ALLEN & COMPANY LLC, BMO

CAPITAL MARKETS CORP., BLAYLOCK ROBERT VAN LLC, DONALD E.

GRAHAM, C.L. KING & ASSOCIATES, INC., REED HASTINGS, CABRERA

CAPITAL MARKETS, LLC, CASTLEOAK SECURITIES, L.P., PETER A.

THIEL, CITIGROUP GLOBAL MARKET, INC., MARK E. ZUCKERBERG,

COWEN AND COMPANY, LLC, CREDIT SUISSE SECURITES (USA) LLC,

SHERYL K. SANDBERG, DEUTSCHE BANK SECURITIES INC., CIPORA

HERMAN, E TRADE SECURITIES LLC, ITAU BBA USA SECURITIES, INC.,

LAZARD CAPITAL MARKETS LLC, LEBENTHAL & CO., LLC, LOOP

CAPITAL MARKETS LLC, M.R. BEAL & COMPANY, MACQUARIE

CAPITAL (USA) INC., MURIEL SIEBERT & CO., INC., OPPENHEIMER &

CO., INCORPORATED, PACIFIC CREST SECURITIES LLC, PIPER JAFFRAY

& CO., RBC CAPITAL MARKETS, LLC, RAYMOND JAMES &

ASSOCIATES, INC., SAMUEL A. RAMIREZ & COMPANY, INC., STIFEL,

NICOLAUS & COMPANY, INC., THE WILLIAMS CAPITAL GROUP, L.P.,

WELLS FARGO SECURITIES, LLC, WILLIAM BLAIR & COMPANY, L.L.C.,

GOLDMAN SACHS & CO., NASDAQOMX GROUP, INCORPORATED,

LAWRENCE CORNECK, Individually and on behalf of all others similarly

situated, JILL D. SIMON, CITIGROUP GLOBAL MARKETS INC., MERRILL

(For Continuation of Caption See Last Page of Cover)

LYNCH, PIERCE FENNER & SMITH INCORPORATED, ALLEN &

FACEBOOK (sic) LLC, WILLIAM BLAIR & FACEBOOK (sic) LLC, M.R.

BEAL & FACEBOOK (sic), COWEN AND FACEBOOK (sic) LLC, STIFEL

NICHOLAS & FACEBOOK (sic) INCORPORATED, SAMUEL A. RAMIREZ &

FACEBOOK (sic) INC, KEVIN HICKS, individually and on behalf of all others

similarly situated, LINH LUU, individually and on behalf of all others similarly

situated, HARVEY LAPIN, Individually and On Behalf of All Others Similarly

Situated, KING & ASSOCIATES, INC., DAVID E. (sic) EBERSMAN, NICK E.

TRAN, THE NASDAQ STOCK MARKET L.L.C., a Foreign Limited Liability

Company, NASDAQ STOCK MARKET, INCORPORATED, NASDAQ OMX

GROUP, INCORPORATED, UMA M. SWAMINATHAN, ROBERT

GREIFELD, ANNA M. EWING, J.P. MORGAN SECURITIES LLC, MORGAN

STANLEY & CO. LLC, MARC L. ANDREESSEN, FACEBOOK, INC., a

Delaware corporation,

Defendants.

TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................... ii

INTEREST OF THE COMMISSION.............................................................. 1

STATEMENT OF THE CASE ....................................................................... 2

Statutory and Regulatory Scheme ................................................. 4

Facts ....................................................................................... 10

1. To facilitate Facebook’s IPO, the Selling Shareholders and the

Underwriters executed typical lock-up agreements. .................. 10

2. The Underwriters advised investors that they might execute

transactions designed to facilitate Facebook’s IPO. ................... 11

3. Before the IPO, the Underwriters received nonpublic information

concerning Facebook’s revenue projections. ............................ 12

4. The Underwriters oversold Facebook’s IPO. ............................ 14

Procedural History ................................................................... 15

DISCUSSION ............................................................................................ 17

A Typical Lock-Up Agreement, Standing Alone, is Insufficient to Establish

a Group for Section 13(d) or Section 16(b) Purposes. ............................. 17

II.

Section 16(b)’s Short-Swing Profit Rule Does Not Apply to Sales and

Purchases Made Pursuant to a Bona Fide Underwriting........................... 23

CONCLUSION .......................................................................................... 28

CERTIFICATE OF COMPLIANCE WITH RULE 32(a) ................................. 29

TABLE OF AUTHORITIES

CASES

Foremost-McKesson, Inc. v. Provident Secs. Co., 423 U.S. 232 (1976) ..... 5, 25, 26

Gibbons v. Malone, 703 F.3d 595 (2d Cir. 2013)............................................... 6

Gollust v. Mendell, 501 U.S. 115 (1991) .......................................................... 6

Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305 (2d Cir. 1998) ............. 25

Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613

(2d Cir. 2002) ....................................................................................... 18

Levy v. Southbrook Int’l Invs., Ltd., 263 F.3d 10 (2d Cir. 2001)........................... 7

Morales v. Quintel Entm’t, Inc., 249 F.3d 115 (2d Cir. 2001)................... 5, 18, 20

Perine v. William Norton & Co., Inc., 509 F.2d 114 (2d Cir. 1974)............... 26, 27

Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418 (1972) ................... 6

Wellman v. Dickinson, 682 F.2d 355 (2d Cir. 1982) ............................. 18, 20, 21

STATUTES

Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq.

Section 13(d), 15 U.S.C. 78m(d) ................... 1, 3, 4, 7, 8, 17, 19, 20, 21, 22

Section 13(d)(3), 15 U.S.C. 78m(d)(3)...................................... 7, 8, 17, 18

Section 16(a), 15 U.S.C. 78p(a) ....................................................... 5, 24

Section 16(b), 15 U.S.C. 78p(b)........ 1, 2, 3, 4, 5, 7, 9, 17, 18, 19, 22, 23, 24

COMMISSION RULES

Rule 13d-3(a), 17 C.F.R. 240.13d-3(a) ................................................... 7

Rule 13-3(d)(4), 17 C.F.R. 240.13d-3(d)(4)................................ 4, 8, 9, 23

Rule 13d-5(b)(1), C.F.R. 240.13d-5(b)(1) ...................................... 3, 8, 18

Rule 16a-1, 17 C.F.R. 240.16a-1............................................................ 7

Rule 16a-7, 17 C.F.R. 240.16a-7................................... 4, 9, 23, 25, 26, 27

Rule 16a-10, 17 C.F.R. 240.16a-10 ............................................. 9, 23, 24

COMMISSION RELEASES

Amendments to Regulation M: Anti-Manipulation Rules Concerning

Securities Offering, Rel. Nos. 33-8511 & 34-50831, 69 Fed. Reg. 75774

(Dec. 17, 2004) ............................................................................ 9, 10, 26

Anti-Manipulation Rules Concerning Securities Offerings, Rel. Nos. 33-7375 &

34-38067, 62 Fed. Reg. 520 (Jan. 3, 1997) .............................................. 9

Ownership Reports and Trading by Officers, Directors, and Principal Stockholders,

Exchange Act Rel. No. 34-26333, 53 Fed. Reg. 49997

(Dec. 13, 1988)……………………………………………………. .4, 24, 25, 27

Ownership Reports and Trading by Officers, Directors and Principal Security

Holders, Exchange Act Rel. No. 34-28869, 56 Fed. Reg. 7242 (Feb. 21,

1991) .................................................................................... 6, 7, 8, 25

Ownership Reports and Trading by Officers, Directors and Principal Security

Holders, Exchange Act Release No. 34-37260, 61 Fed. Reg. 30376 (June 14,

1996)............................................................................................... 10, 25

LEGISLATIVE HISTORY

S. Rep. No. 73-1455 (1934)............................................................................ 6

S. Rep. No. 550, 90th Cong. 1st Sess. (1967).................................................... 21

iii

MISCELLANEOUS

Anita Indira Anand, The Efficiency of Direct Public Offerings, 7 J. SMALL &

EMERGING BUs. L. 433 (Fall 2003) ........................................................... 19

Brief of the Securities and Exchange Commission, Amicus Curiae, Morales v.

Quintel Entm’t, Inc., No. 99-9374 (2d Cir.) (March 2000)……19, 20, 21, 22

Thomas Lee Hazen, 4 Treatise on the Law of Securities Regulation ........... 7, 8, 24

Initial Public Offerings: Lockup Agreements, Fast Answers, U.S. Securities &

Exchange Commission, available at http://www.sec.gov/

answers/lockup.htm (June 26, 2015)................................................ 11, 20

NYSE/NASD IPO Advisory Comm., Report & Recommendations of a committee

convened by the NYSE, Inc. & NASD at the request of the U.S. Securities

and Exchange Commission (May 2003), available at http://www.finra.org/

sites/default/files/Industry/p010373.pdf ........................................... 19, 20

John J. Jenkins, Recirculation of a Preliminary Prospectus: Statutory Basics and

Analytical Techniques for Resolving Recirculation Issues,55 BUS. L.J. 135

(Nov. 1999)...................................................................................... 19, 21

Peter J. Romeo and Alan L. Dye, Section 16 Treatise & Reporting Guide (4th ed.

2012).................................................................................... 23, 25, 26, 27

David A. Westenberg, Initial Public Offerings: A Practical Guide To Going

Public (1st ed. 2011) .......................................................................... 19, 21

14-3800-cv

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

ROBERT LOWINGER,

Plaintiff-Appellant,

MORGAN STANLEY & CO. LLC, GOLDMAN SACHS & CO., FACEBOOK,

INC., a Delaware Corporation, and J.P. MORGAN SECURITIES LLC,

Defendants-Appellees

On Appeal from the United States District Court

for the Southern District of New York

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,

AMICUS CURIAE

INTEREST OF THE COMMISSION

The Securities and Exchange Commission submits this brief as amicus

curiae in response to the invitation of the Court. The Commission has a strong

interest in ensuring that the rule determining beneficial ownership under Section

13(d) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C.

78m(d), and the rules governing short-swing profits under Section 16(b) of that

Act, 15 U.S.C. 78p(b), are properly interpreted and that their objectives are carried

out. The parties assert conflicting interpretations of those provisions, and the

Commission submits this brief setting forth its views.

STATEMENT OF THE CASE

Robert Lowinger appeals the district court’s dismissal of his complaint in

this matter arising out of the events surrounding Facebook, Inc.’s initial public

offering (“IPO”). Lowinger seeks to hold the IPO’s lead underwriters—Morgan

Stanley and Company LLC, J.P. Morgan Securities LLC, and Goldman Sachs and

Company (collectively, “the Underwriters”)—liable under Section 16(b) of the

Exchange Act for short-swing profits they allegedly received in connection with

their sales and purchases of shares in the offering. Section 16(b) provides for the

recovery by the issuer, in an action brought by the issuer or by a security holder of

the issuer, of profits realized by a statutory insider (an officer, director, or more

than ten percent beneficial owner) from the sale and purchase, or the purchase and

sale, of the securities of the issuer when both transactions take place within six

months.

The complaint alleges that the Underwriters were “beneficial owners” of

shares held by certain Facebook shareholders who were selling shares in the IPO

(the “Selling Shareholders”) because those shareholders and the Underwriters were

part of a “group” that was created by lock-up agreements entered into by the

Selling Shareholders and the Underwriters. The lock-up agreements prevented the

Selling Shareholders from selling additional shares for a period of time following

the IPO. Because the Selling Shareholders were beneficial owners of more than

ten percent of Facebook’s stock, the complaint asserts that the members of the

alleged group, including the Underwriters, were statutory insiders, and that the

Underwriters were, thus, subject to Section 16(b).

In order to prevail under this theory, Lowinger must establish that the lockup agreements, which are a standard feature of IPOs, were, on their own, sufficient

to create a group that would make the Underwriters beneficial owners of the shares

that are subject to the lock-up and, as a result, subject to Section 16(b). And even

if such standard lock-up agreements, on their own, could have that effect,

Lowinger would also have to establish that the Underwriters were ineligible for

certain exemptions from Section 16(b) for trades made by underwriters in

connection with a bona fide underwriting.

The district court addressed only the first issue and dismissed the complaint

on the grounds that the lock-up agreements did not make the Underwriters

beneficial owners of the shares held by the Selling Shareholders. Lowinger

appealed and, following briefing and oral argument, this Court invited the

Commission to address two questions touching on both issues:

(1) “[w]hether, in the context of an IPO, a ‘lock-up’ agreement between an

underwriter and shareholders to restrict the sale of an issuer’s stock

immediately following the initial public offering constitutes an agreement

‘to act together for the purpose of acquiring, holding, voting or disposing of

equity securities,’ [Exchange Act Rule 13d-5(b)(1),] 17 C.F.R. § 240.13d5(b)(1), such that the parties to the agreement may” be treated as members

of a group for purposes of determining beneficial ownership of the securities

under Exchange Act Sections 13(d) and 16(b); and

(2) “[w]hether an underwriter who, in connection with an initial public

offering, (a) obtains but does not disclose material non-public information

about an issuer and (b) profits based on open-market trades in the stock of

the issuer before and after that information becomes public, has not

‘acquire[d] securities through his participation in good faith in a firm

commitment underwriting,’ [Exchange Act Rule 13d-3(d)(4),] 17 C.F.R.§

240.13d-3(d)(4), or has not ‘participat[ed] in good faith’ in the business of

distributing securities, [Exchange Act Rule 16a-7, 17 C.F.R.] § 240.16a7[.]”

As discussed below, the Commission believes that:

(1) although the creation of a “group” for purposes of Sections 13(d) and

16(b) depends on the specific facts and circumstances of any given case, a

typical lock-up agreement executed between shareholders and underwriters

as part of an underwritten public offering, standing alone, would not be

sufficient to establish such a group; and

(2) an underwriter is entitled to rely on the exemptions provided by

Exchange Act Rules 13d-3(d)(4) and 16a-7, even though the underwriter has

obtained material non-public information, so long as the underwriter’s

purchases and sales are made in connection with the underwriter’s

participation in a bona fide underwritten public offering.

Statutory and Regulatory Scheme

“Section 16 of the Exchange Act was designed both to provide the public

with information on securities transactions and holdings of corporate officers,

directors, and principal shareholders, and to deter those individuals from profiting

on short-term trading in the securities of their corporations while in possession of

material, non-public information.” Ownership Reports & Trading by Officers,

Directors, and Principal Stockholders, Exchange Act Rel. No. 34-26333, 53 Fed.

Reg. 49997, 49998 (Dec. 13, 1988) (“Proposing Release”).

Section 16(a) requires officers, directors, and “beneficial owner[s] of more

than 10 percent of any class of” registered securities to file disclosure statements

with the Commission. 15 U.S.C. 78p(a)(1).

Section 16(b) provides for the recovery by the issuer, in an action brought by

the issuer or on behalf of the issuer by a security holder, of profits realized by those

same individuals from the sale and purchase, or the purchase and sale, of the

securities of the issuer when both the purchase and sale, or the sale and purchase,

take place within a period of less than six months. 1 Congress intended that section

to “prevent[] the unfair use of information which may have been obtained by [an

insider] by reason of his relationship to the issuer.” 15 U.S.C. 78p(b). And it

classifies “directors, officers and beneficial owners as those presumed to have

access to inside information.” Foremost-McKesson, Inc. v. Provident Secs. Co.,

423 U.S. 232, 243 (1976); accord Morales v. Quintel Entm’t, Inc., 249 F.3d 115,

121 (2d Cir. 2001) (Section 16(b) reaches those “presumed to have access to

confidential corporate information not generally available to other participants in

the public market”); Ownership Reports and Trading by Officers, Directors and

Section 16(b) does not “cover any transaction where such beneficial owner was

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

security . . . involved.”

Principal Security Holders, Exchange Act Rel. No. 34-28869, 56 Fed. Reg. 7242,

7244 (Feb. 21, 1991) (“Adopting Release”) (“Section 16, as applied to ten percent

holders, is intended to reach those persons who can be presumed to have access to

inside information because they can influence or control the issuer as a result of

their equity ownership.”); see also S. Rep. No. 73-1455, at 55 (1934) (“beneficial

owners” language prevents “the unscrupulous employment of inside information

by large stockholders who, while not directors and officers, exercised sufficient

control over the destinies of their companies to enable them to acquire and profit

by information not available to others”).

To prevent insiders from abusing their position, Section 16(b) “imposes a

form of strict liability . . . rendering them liable to suits requiring them to disgorge

their profits even if they did not trade on inside information or intend to profit on

the basis of such information.” Gollust v. Mendell, 501 U.S. 115, 122 (1991);

accord Gibbons v. Malone, 703 F.3d 595, 599 (2d Cir. 2013) (Section 16(b)

“operates mechanically, with no required showing of intent to profit” but “offers

merely the prophylactic remedy of disgorgement.” (internal quotation marks

omitted)). In fact, as the Supreme Court has observed, “the only method Congress

deemed effective to curb the evils of insider trading was a flat rule taking the

profits out of a class of transactions in which the possibility of abuse was believed

to be intolerably great.” Reliance Electric Co. v. Emerson Electric Co., 404 U.S.

418, 422 (1972); see also Thomas Lee Hazen, 4 Treatise on the Law of Securities

Regulation, §13.2 (“The legislative history reveals congressional recognition of

such a great potential for abuse of inside information so as to warrant the

imposition of strict liability.”).

Although beneficial owners of more than ten percent of an issuer’s stock are

subject to Section 16(b), Congress did not define beneficial owner. See Levy v.

Southbrook Int’l Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001). Instead, Congress left

that task to the Commission, which adopted Exchange Act Rule 16a-1, 17 C.F.R.

240.16a-1. Under that provision, the term means “any person who is deemed a

beneficial owner pursuant to section 13(d) of the [Exchange] Act and the rules

thereunder.” 17 C.F.R. 240.16a-1(a); see also Adopting Release, 56 Fed. Reg. at

7244.

Section 13(d) requires any person acquiring beneficial ownership of five

percent or more of a corporation’s common stock to disclose certain information.

See 15 U.S.C. 78m(d). Exchange Act Rule 13d-3(a) thereunder describes a

“beneficial owner” as “any person who, directly or indirectly, through any

contract, arrangement, understanding, relationship, or otherwise has or shares: (1)

Voting power . . . ; and/or (2) Investment power which includes the power to

dispose, or to direct the disposition of, such security.” 17 C.F.R. 240.13d-3(a).

Further, under Section 13(d)(3), “[w]hen two or more persons act as a partnership,

limited partnership, syndicate, or other group for the purpose of acquiring, holding,

or disposing of securities of an issuer,” that group is deemed a single person for

purposes of Section 13(d). 15 U.S.C. 78m(d)(3); see also Hazen, 4 Treatise on the

Law of Securities Regulation, §13.1 (“Under section 13(d), a group of persons

acting together will count as one person for the purpose of computing the

ownership threshold.”). Thus, “[w]hen two or more persons agree to act together

for the purpose of acquiring, holding, voting or disposing of equity securities of an

issuer, the group formed thereby shall be deemed to have acquired beneficial

ownership, for purposes of Sections 13(d) . . . of all equity securities of that issuer

beneficially owned by any such persons.” Exchange Act Rule 13d-5(b)(1), 17

C.F.R. 240.13d-5(b)(1). For purposes of Section 16, the group itself would not be

a separate person, but in determining status as a ten percent holder, the securities

beneficially owned by the group must be included in the calculation by each

individual member of the group. See Adopting Release, 56 Fed. Reg. at 7245 n.

54.

Commission rules implementing Sections 13 and 16 also contain exceptions

to the beneficial ownership requirements for good-faith underwriting. Rule 13d3(d)(4) provides that “[a] person engaged in business as an underwriter of

securities who acquires securities through his participation in good faith in a firm

commitment underwriting . . . shall not be deemed to be the beneficial owner of

such securities until” forty days after it is acquired. 17 C.F.R. 240.13d-3(d)(4).

And under Rule 16a-7 (together with Rule 16a-10), purchases and sales “made in

connection with the distribution of a substantial block of securities” are exempt

from Section 16(b) liability when “[t]he person effecting the transaction is engaged

in the business of distributing securities and is participating in good faith, in the

ordinary course of such business” and the security involved is “purchased in good

faith . . . for the purpose of stabilizing the market price of securities . . . being

distributed or to cover an over-allotment or other short position created in

connection with such distribution.” 17 C.F.R. 240.16a-7; see 17 C.F.R. 240.16a10 (making securities transactions exempted from Section 16(a) reporting by Rule

16a-7 likewise exempt from Section 16(b)’s short-swing profit rule).

Other regulations also “permit underwriters and syndicate members to

conduct [certain] stabilizing transactions” designed to “prevent[ ] or retard[] a

decline in the market price of a security to facilitate an offering.” AntiManipulation Rules Concerning Securities Offerings, Rel. Nos. 33-7375 & 3438067, 62 Fed. Reg. 520, 535 (Jan. 3, 1997); accord Amendments to Regulation

M: Anti-Manipulation Rules Concerning Securities Offerings, Rel. Nos. 33-8511

& 34-50831, 69 Fed. Reg. 75774, 75779 n.58 (Dec. 17, 2004) (“Regulation M

Release”). The Commission has also explained that underwriting agreements

typically “allow[] the managing underwriter to ‘oversell’ the offering, i.e.,

establish a short position beyond the number of shares to which the underwriting

commitment relates.” Id. at 75780. To cover the syndicate short positions,

underwriters may exercise what is commonly called an overallotment or “Green

Shoe” option that allows them to purchase additional shares from the issuer at the

public offering price, or they may cover “by purchasing shares in the market once

secondary trading begins.” Id. Such activities “facilitate public offerings and do

not lend themselves to the speculative abuse Section 16 was designed to prevent.”

Ownership Reports and Trading by Officers, Directors and Principal Security

Holders, Exchange Act Release No. 34-37260, 61 Fed. Reg. 30376, 30383 (June

14, 1996) (“Amending Release”); see also Regulation M Release, 69 Fed. Reg.

75774, 75779-80.

Facts 2

1. To facilitate Facebook’s IPO, the Selling Shareholders and the

Underwriters executed typical lock-up agreements.

Facebook’s May 18, 2012 IPO was underwritten by a syndicate of “more

than two dozen banks and investment firms” led by the Underwriters. Complaint,

¶ 14 (A-18). 3 Before the IPO, the Selling Shareholders—who in the aggregate

owned more than 10 percent of Facebook’s common stock—executed so-called

Because this appeal concerns a motion to dismiss, the facts alleged in the

complaint are assumed to be true.

“A-” refers to the Joint Appendix filed by the parties along with the relevant page

numbers.

lock-up agreements with the Underwriters. Id. at ¶¶ 16-17 (A-19). Such

agreements are common because they prevent pre-IPO shares from flooding and

destabilizing the market for newly issued shares. See Initial Public Offerings:

Lockup Agreements, Fast Answers, U.S. Securities & Exchange Commission,

available at http://www.sec.gov/answers/lockup.htm (June 26, 2015).

The lock-up agreements here were likewise intended “to control the supply

of Facebook shares available to the market, which, in turn was expected to provide

support for the trading price of Facebook common stock.” Complaint, ¶ 16 (A-19).

Specifically, the agreements prohibited the Selling Shareholders from “sell[ing] or

otherwise dispos[ing] of any Common Stock or securities convertible into or

exchangeable into Common Stock” for a specified period without co-lead

underwriter Morgan Stanley’s consent. Id. at ¶¶ 15, 17 (A-19). The agreements

were disclosed in Facebook’s Prospectus and Registration Statement. See

Facebook Prospectus, Form 424 B4, pg. 163 (A-46); Amend. No. 5 to Form S-1

Registration Statement, pg. A-1 to B-5) (May 3, 2012) (A-73-82); see also In re

Facebook, Inc., IPO Secs. & Derivative Litig., 986 F. Supp.2d 544, 548-49

(S.D.N.Y. 2014).

2. The Underwriters advised investors that they might execute

transactions designed to facilitate Facebook’s IPO.

Facebook’s Prospectus and Registration Statement additionally advised that,

“[i]n order to facilitate [the IPO], the underwriters may engage in transactions that

stabilize, maintain or otherwise affect the price of the Class A common stock.”

Amend. No. 8 to Form S-1, pg. 166 (May 16, 2012) (A-43). As noted above, such

underwriter transactions are permissible. See supra at pp. 9-10. Also consistent

with market practices, Facebook advised investors that “the underwriters may sell

more shares than they are obligated to purchase under the underwriting agreement,

creating a short position” and cover those positions by exercising a Green Shoe

option or “by purchasing shares in the open market.” Amend. No. 8 to Form S-1,

pg. 166 (A-43). The offering documents also disclosed that the Underwriters’

transactions might “raise or maintain the market price of the . . . stock above

independent market levels or prevent or retard a decline in [the] market price.”

Amend. No. 8 to Form S-1, pg. 166 (A-43).

3. Before the IPO, the Underwriters received nonpublic information

concerning Facebook’s revenue projections.

In connection with the IPO, the Underwriters had access to nonpublic

information concerning Facebook. See Complaint, ¶¶ 19, 22-32 (A-20-23). In

March and April 2012, Facebook shared with the Underwriters its “internal

revenue forecasts of $1.1 to 1.2 billion for 2Q12 and $5 billion for fiscal year

2012.” Id. at ¶ 20 (A-20). That information was “incorporated into materials used

by the Underwriters to market the Facebook IPO to investors in a road show

commenced on May 7, 2012.” Id. at ¶¶ 20-21 (A-20).

That same day, due to increased mobile usage and “‘certain product

decisions’ made by Facebook,” the company “revised its revenue estimates

downward” to the “low end of the $1.1 to $1.2 billion range” and projected that the

2012 estimate would “be 3% to 3.5% lower than the previously forecasted $5

billion.” Complaint, ¶ 22 (A-20-21). Facebook immediately shared those

concerns with Morgan Stanley. Id. at ¶¶ 22-24. (A-20-21).

On May 9, Facebook amended its Registration Statement, advising potential

investors as follows:

Based upon our experience in the second quarter of 2012 to

date, the trend we saw in the first quarter of [daily active users]

increasing more rapidly than the increase in number of ads

delivered has continued. We believe this trend is driven in part

by increasing usage of Facebook on mobile devices where we

have only recently begun showing an immaterial number of

sponsored stories in News Feed, and in part due to certain pages

having fewer ads per page as a result of product decisions.

Complaint, ¶ 25 (A-20-21). As the district court explained, “[s]imilar to the

consolidated complaint filed in the securities class action” before that court, the

complaint here “alleges this disclosure was false and misleading because it failed

to sufficiently disclose ‘that these factors had already materially impaired

Facebook’s revenue.’” In re Facebook, Inc., IPO Secs. & Derivative Litig., 986 F.

Supp.2d at 547 (quoting Complaint, ¶ 26 (A-22)).

“[I]mmediately after” filing that amendment, Facebook called “select

investment bankers and their securities analysts, including the Underwriters” and

advised them that Facebook believed it was “going to come in the lower end of

[the] $1.1 to $1.2 [billion] range for Q2 based upon the trends we described in the

disclosure.” Complaint, ¶¶ 27, 30 (internal quotation marks and emphasis omitted)

(A-22-23). Thereafter, the Underwriters “revised their Facebook 2Q12 estimates,”

and according to a report cited in the complaint, shared that information with “only

a few ‘major clients[.]’” Id. at ¶¶ 31, 38 (A-23, 25). Others—including retail

investors—did not learn those facts until the market closed on the day of the IPO.

Id. at ¶¶ 33-34, 36 (A-24-25).

4. The Underwriters oversold Facebook’s IPO.

Due to significant retail investor demand, between “May 17 and 18, 2012,

the underwriters sold 484,418,657 shares of Common Stock to the public at prices

ranging from $38 to $42.05 per share, including 63 million shares in short sales

pursuant to their over-allotment or [Green Shoe] option.” Complaint, ¶¶ 33-34 (A24).

After trading closed on May 18, “[r]eports of the decline in Facebook’s

expected revenues began to emerge” and investors became aware that the

Underwriters “had cut their revenue estimates in advance of the IPO.” Complaint,

¶ 36 (A-25). On May 21, the first trading day thereafter, Facebook’s stock price

declined to “$34.03 on extremely high volume reflecting a decline of more than

10% from the” IPO price. Id. at ¶ 37 (A-25). The next day, the decline continued

and Facebook’s stock “closed at $31 per share, again on extremely high volume.”

Id. at ¶ 39 (A-26).

During that period, the Underwriters declined to exercise their Green Shoe

option to cover their short positions. See Complaint, ¶¶ 37, 41-42 (A-25-26).

Instead, the Underwriters purchased shares on the secondary market “at prices

lower than $38.00 per share.” Id. at ¶ 41 (A-26). As a result, the Underwriters

“made a profit of about $100 million with the bulk of that profit being made on”

May 21. Id. at ¶ 42 (A-26).

Procedural History

The events surrounding the Facebook IPO have spawned multiple lawsuits

that have been consolidated in the district court. See In re Facebook, Inc., 986 F.

Supp.2d at 547.

This action was filed on June 12, 2013, after Facebook declined to seek

recovery under Section 16(b) of the Underwriter’s alleged short-swing profits.

Complaint, ¶ 49 (A-28). The complaint alleges that through the lock-up

agreements, the Underwriters and Selling Shareholders agreed “to act together for

the purpose of acquiring, holding, voting or disposing of [Facebook’s] Common

Stock.” Id. at ¶ 18 (A-19). As a result, the complaint claims, the Underwriters and

Selling Shareholders became a group, with each member deemed to beneficially

own each other member’s Facebook stock and rendering them all insiders subject

to Section 16(b)’s short-swing profits rule. Id. at ¶¶ 15-18 (A-19-20). It further

alleges that the Underwriters were not engaged in a good-faith underwriting

because, among other things, they possessed material inside information. See id. at

¶¶ 19-35 (A-20-24). The complaint seeks to require the Underwriters to disgorge

to Facebook “about $100 million” in short-swing profits. See id. at ¶ 42 (A-26).

The Underwriters moved to dismiss the complaint for failure to state a claim.

See In re Facebook, Inc., 986 F. Supp.2d at 546. They argued that they did not

form a group and, in any event, were exempt from Section 16(b) liability because

their purchases and sales were in connection with a good-faith underwriting.

On May 2, 2014, the district court granted the motion to dismiss on the

grounds that the complaint failed to sufficiently allege that the Underwriters and

Selling Shareholders formed a group. Id. at 555. The group allegation rested

entirely on the lock-up agreements, and the district court found those agreements

insufficient to establish a group because the Selling Shareholders and Underwriters

had not agreed to jointly acquire, hold, vote, or dispose of stock. Id. at 552-54. To

the contrary, the district court observed, while the agreements committed the

Selling Shareholders to abstain from selling shares, the Underwriters “were under

no reciprocal agreement.” Id. at 552. Indeed, the Underwriters were obliged to—

and did—sell Facebook stock. See id. The district court also found that “[b]ecause

lock-up agreements are standard industry practice,” on their own they are

“insufficient to establish a Section 16(b) group.” Id. at 553. The district court

declined to reach the alternative argument that the Underwriters’ transactions were

exempt as part of a good-faith underwriting. Id. at 554. Later, the district court

denied Lowinger’s motion for reconsideration. See In re Facebook, Inc., IPO Secs.

& Derivative Litig., 43 F. Supp.3d 369 (S.D.N.Y. 2014).

On October 1, 2014, Lowinger appealed the district court’s decisions

dismissing the complaint and denying reconsideration. The parties subsequently

filed briefs, and this Court heard oral argument.

DISCUSSION

A Typical Lock-Up Agreement, Standing Alone, is Insufficient to

Establish a Group for Section 13(d) or Section 16(b) Purposes.

Although the creation of a “group” for purposes of Sections 13(d) and 16(b)

depends on the specific facts and circumstances of any given case, a typical lockup agreement executed by shareholders for the benefit of the underwriters as part

of an underwritten public offering, standing alone, is not sufficient to establish

such a group. Lock-up agreements are common in connection with underwritten

public offerings, and they do not present the kinds of risks that Sections 13(d) and

16(b) are intended to address.

As noted, when two or more persons “act as” a group for the purpose of

acquiring, holding, or disposing of equity securities of an issuer, the group is

deemed a “person” under Section 13(d)(3). Similarly, in determining status as a

more-than-ten-percent holder for Section 16 purposes, the securities beneficially

owned by the group must be included in the calculation by each individual member

of the group. A group is deemed to acquire beneficial ownership as of the date that

the group members “agree to act together for the purpose of acquiring, holding,

voting or disposing of equity securities of an issuer.” Rule 13d-5(b)(1). An

agreement does not have to “be expressly memorialized in writing.” Wellman v.

Dickinson, 682 F.2d 355, 363 (2d Cir. 1982). Instead, there must be “‘sufficient

direct or circumstantial evidence to support the inference of a formal or informal

understanding between [the parties]’ for the purpose of acquiring, holding, or

disposing of securities.” Hallwood Realty Partners, L.P. v. Gotham Partners, L.P.,

286 F.3d 613, 617 (2d Cir. 2002) (quoting Wellman, 682 F.2d at 363).

Applying that standard, this Court has held that while a lock-up agreement

“may bear upon” the question of whether a group exists, evidence of coordination

and testimony demonstrating that parties joined together to acquire, hold, or

dispose of securities are more likely to demonstrate the existence of a group.

Quintel Entm’t, 249 F.3d at 127; see also Hallwood Realty Partners, 286 F.3d at

618 (affirming decision finding no group based on record that included evidence of

prior relationships between parties, trading patterns, discussions, and other

circumstantial factors). That approach is consistent with the Commission’s long

established position that a lock-up agreement may help evidence the existence of a

group. Cf. Brief of Securities and Exchange Commission, Amicus Curiae, Morales

v. Quintel Entm’t, Inc., No. 99-9374 (2d Cir.) (March 2000), at p. 27 (“Whether a

lock-up provision constitutes an agreement for the purposes of creating a Section

13(d) group depends on the facts and circumstances of any given case.”).

At the same time, the Commission does not believe that a typical lock-up

agreement executed between shareholders and underwriters as part of an

underwritten public offering, standing alone, is sufficient to demonstrate the

existence of a group for purposes of Sections 13(d) or 16(b). As the district court

correctly concluded, lock-up agreements are a common fixture of the IPO process.

In re Facebook, Inc., 986 F. Supp.2d at 553; see also see also David A.

Westenberg, Initial Public Offerings: A Practical Guide to Going Public § 18:12

(1st ed. 2011); Anita Indira Anand, The Efficiency of Direct Public Offerings, 7 J.

SMALL & EMERGING BUS. L. 433, 456 (Fall 2003) (“In traditional offerings,

underwriters insist on lock-up agreements.”); John J. Jenkins, Recirculation of a

Preliminary Prospectus: Statutory Basics and Analytical Techniques for Resolving

Recirculation Issues, 55 BUS. L.J. 135, 171 n.163 (Nov. 1999) (“[U]nderwriters

typically insist on receiving ‘lock-up’ agreements from insider shareholders.”);

NYSE/NASD IPO Advisory Comm., Report & Recommendations of a committee

convened by the NYSE, Inc. & NASD at the request of the U.S. Securities and

Exchange Commission (May 2003), at p. 16, available at http://www.finra.org/

sites/default/ files/Industry/p010373.pdf (“Underwriters routinely require directors,

officers and certain pre-IPO shareholders of an issuer to enter into lock-up

agreements that restrict their sale of company shares for a specified period,

typically six months”). Indeed, the Commission’s website advises investors that,

“[b]efore a company goes public, the company and its underwriter typically enter

into a lockup agreement to ensure that shares owned by these insiders don’t enter

the public market too soon after the offering.” Initial Public Offerings: Lockup

Agreements, Fast Answers, U.S. Securities & Exchange Commission, available at

http://www.sec.gov/answers/lockup.htm (last checked June 26, 2015).

Such lock-up agreements do not raise Section 13(d) or Section 16(b)

concerns. Section 13(d) is intended to “alert investors in securities markets to

potential changes in corporate control and . . . provide them with an opportunity to

evaluate the effect of these potential changes.” Wellman, 682 F.2d at 365; accord

Quintel Entm’t., Inc., 249 F.3d at 124-25 (actual control purpose not required to

trigger Section 13(d), but that section is intended “to alert the market to large

acquisitions that threaten potential shifts in corporate control” (internal quotation

marks omitted) (emphasis in original); see also Brief of the SEC, Amicus Curiae,

Morales v. Quintel Entm’t, Inc., at p. 20 (“There is no doubt that the purpose of

Section 13(d) is to require disclosure of information by persons who have acquired

a substantial interest, or increased their interest in equity securities of a company

by a substantial amount . . . so that investors might assess the potential for changes

in corporate control and adequately evaluate the company’s worth.” (internal

quotation marks omitted)). And the corresponding beneficial ownership rule

“prevent[s] a group of persons who seek to pool their voting or other interests . . .

from evading” Section 13(d)’s disclosure regime. Wellman, 682 F.2d at 366

(quoting S. Rep. No. 550, 90th Cong., 1st Sess. 8 (1967)).

Typical lock-up agreements between shareholders and underwriters have

nothing to do with potential control, long-term ownership, or evading disclosure

rules. Rather, they facilitate the offering process by “maintain[ing] an orderly

market” and preventing a rush of pre-IPO shares from “exerting substantial

downward pressure on the market price of the newly issued shares.” Westenberg,

Initial Public Offerings: A Practical Guide to Going Public § 18:12; see Jenkins,

Recirculation of a Preliminary Prospectus: Statutory & Basic Analytical

Techniques for Resolving Recirculation Issues, 55 BUS. L.J. at 171 n.163

(agreements “promote an orderly market for a new issue and to guard against

insider sales shortly after an offering”). Such agreements, like the ones here, are

also publicly disclosed. See Facebook Prospectus, Form 424 B4, pg. 163 (A-46);

Amend. No. 5 to Form S-1 Registration Statement, pg. A-1 to B-5) (A-73-82).

Further, as explained in greater detail below, because underwriters merely

act as short-term conduits for the distribution of securities, temporary lock-up

agreements between underwriters and shareholders do not lend themselves to the

type of abuse that Section 16 was designed to prevent. See infra at pp. 24-25.

Thus, the Commission believes that, standing alone, typical lock-up

agreements between shareholders and underwriters executed in connection with an

underwritten public offering are not sufficient to establish a group for purposes of

Section 13(d) or 16(b). That does not mean, however, that a lock-up agreement

will never itself establish or constitute supporting evidence of the establishment of

a group. Atypical language in the lock-up agreement, or other facts and

circumstances outside of the lock-up agreement, could demonstrate that the parties

to an agreement share a common purpose sufficient to establish a group. See, e.g.,

Brief of the SEC, Amicus Curiae, Morales v. Quintel Entm’t, Inc., at p. 27

(recognizing that lock-up agreements that “have the effect of making shares

unavailable for sale to those who might seek to compete for or to influence

corporate control” might form the basis for a group). Instead, as the Commission

previously explained, “whether a lock-up provision creates a Section 13(d) group

depends on the specific facts and circumstances of any given case.” Id. at 26.

II.

Section 16(b)’s Short-Swing Profit Rule Does Not Apply to Sales and

Purchases Made Pursuant to a Bona Fide Underwriting.

An underwriter is entitled to rely on the exemptions provided by Exchange

Act Rules 13d-3(d)(4) and 16a-7, even though the underwriter has obtained

material non-public information, so long as the underwriter’s purchases and sales

are made in connection with the underwriter’s participation in a bona fide

underwritten public offering.

As noted above, Rule 16a-7 (together with Rule 16a-10) exempt from

Section 16(b) liability any purchases and sales in connection with an offering

where “[t]he person effecting the transaction is engaged in the business of

distributing securities and is participating in good faith” in such a distribution and

the security is “purchased in good faith” as part of that business. Similarly, Rule

13d-3(d)(4) temporarily exempts from the beneficial ownership calculation

securities that an underwriter acquires “through his participation in good faith in a

firm commitment underwriting.”

Together, those rules provide that “an underwriter’s purchase and sale of

securities pursuant to an underwriting will be exempt from Section 16 in all but the

most unusual circumstances.” Peter J. Romeo and Alan L. Dye, Section 16

Treatise & Reporting Guide, § 7.14 (4th ed. 2012). When it proposed Rule 16a-7,

the Commission explained that such unusual circumstances do not include bona

fide—or good-faith—underwriting activity. Specifically, the proposing release

stated:

Distributions by underwriters and selling group dealers would be excluded

for reasons similar to those supporting exclusion of transactions by

liquidating agents. Underwriters and selling group dealers are conduits for

securities in a distribution and their ownership is generally brief. Although

they may have access to inside information in some cases, their market

activity generally is constrained by other rules. As long as they act in those

capacities, rather than as investors, there is no need for a [Section 16(a)]

report.

Proposing Release, 53 Fed. Reg. at 50004 (footnote omitted). The same standard

applies to transactions exempted from Section 16(b). See 17 C.F.R. 240.16a-10

(“[A]ny transaction exempted from . . . section 16(a) . . . shall be likewise exempt

from section 16(b).”); Hazen, 4 Treatise on the Law of Securities Regulation, §13.2

(Section 16(b)’s reach parallels Section 16(a)’s coverage). As the proposing

release indicates, an underwriter’s transactions are exempt from Section 16 liability

as long as the underwriter acts as a conduit—that is, as a bona fide underwriter—

rather than as an investor. Proposing Release, 53 Fed. Reg. at 50004. Further,

even when so exempt, as the release explains, an underwriter remains “constrained

by other rules,” id., meaning that an underwriter could simultaneously be exempt

from Section 16(b) and liable for violating other rules. By contrast, sham

transactions, where an underwriter is simply a disguised investor or engages in

purchases and sales for a purpose other than to conduct an orderly underwriting,

are not exempted. See id.

An underwriter’s access to material non-public information does not affect

eligibility for the Rule 16a-7 exemption. To the contrary, that rule is explicitly

framed as an exemption from a short-swing profit regime that would otherwise

apply to underwriters and other “insiders, who are presumed to possess material

information about the issuer.” Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d

305, 308 (2d Cir. 1998) (internal quotation marks and footnote omitted); accord

Foremost-McKesson, Inc., 423 U.S. at 243; see also Adopting Release, 56 Fed.

Reg. at 7244 (explaining that “Section 16, as applied to ten percent holders, is

intended to reach those persons who can be presumed to have access to inside

information”). The above-quoted proposing release also notes that the underwriter

exemption was being adopted even though underwriters “may have access to inside

information in some cases.” Proposing Release, 53 Fed. Reg. at 50004.

That judgment rests on the Commission’s assessment that, despite potential

access to inside information, an underwriter’s sales and purchases—including the

common practice of overselling an offering and engaging in permitted syndicate

covering transactions in the secondary market—“do not lend themselves to the

speculative abuse Section 16 was designed to prevent.” Amending Release, 61

Fed. Reg. at 30383; see also Romeo & Dye, Section 16 Treatise & Reporting

Guide, § 6.03 (an underwriter’s “involvement in the distribution of securities is

unlikely to be motivated by, or to present an opportunity for, speculative abuse”).

To the contrary, as discussed above, such activities are designed to “facilitate

public offerings.” Amending Release, 61 Fed. Reg. at 30383; see also Regulation

M Release, 69 Fed. Reg. 75774, 75779-80 (discussing common underwriting

practices designed to facilitate offerings). And consistent with that policy and

despite presumed access to inside information, Rule 16a-7 broadly “exempts an

underwriter’s transactions in the secondary market that are intended to stabilize the

market price in connection with a distribution.” Romeo & Dye, Section 16

Treatise & Reporting Guide, § 7.14.

The complaint here does not appear to allege that the underwriting itself was

a sham or that the Underwriters entered into it for a purpose other than the orderly

distribution of Facebook stock. Rather, the complaint essentially alleges that the

Underwriters may have violated the antifraud provisions of the securities laws and,

therefore, should be considered not to have been acting in good faith. See In re

Facebook, Inc., IPO Secs. & Derivative Litig., 986 F. Supp.2d at 547 (“Similar to

the consolidated complaint filed in the securities class action,” the complaint here

alleges that Facebook’s amended registration statement earnings disclosure “was

false and misleading[.]”). But that would disregard the fact that, “Congress . . . has

left some problems of the abuse of inside information to other remedies,” such as

“general antifraud statutes that proscribe fraudulent practices by insiders.”

Foremost-McKesson, Inc., 423 U.S. at 255; see also Perine v. William Norton &

Co., Inc., 509 F.2d 114, 120-21 (2d Cir. 1974) (noting that, “[o]ther provisions of

the securities laws provide adequate protection against the underwriter’s misuse of

information obtained as a result of the underwriting relationship itself.”). It would

likewise conflict with the language in the Rule 16a-7 proposing release, which

expresses an intent to exempt bona fide underwriting activities from Section 16

liability while leaving underwriters “constrained by” and potentially liable for

violations of “other rules.” Proposing Release, 53 Fed. Reg. at 50004.

CONCLUSION

For the foregoing reasons, the Commission urges the Court to conclude that:

(1) typical lock-up agreements entered into with underwriters in connection with

an offering are not sufficient, on their own, to establish a group for purposes of

Section 13(d) or Section 16(b); and (2) an underwriter is entitled to rely on the

exemptions provided by Exchange Act Rules 13d-3(d)(4) and 16a-7, even though

the underwriter has obtained material non-public information, so long as the

underwriter’s purchases and sales are made in connection with the underwriter’s

participation in a bona fide underwritten public offering.

Respectfully submitted,

MICHAEL A. CONLEY

Deputy General Counsel

JOHN W. AVERY

Deputy Solicitor

NICHOLAS J. BRONNI

Senior Counsel

/s/ Nicholas J. Bronni

Securities and Exchange Commission

100 F. Street, N.E.

Washington, D.C. 20549

(202) 551-5117 (Bronni)

August 2015

CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

This brief complies with the type-volume limitation of Fed. R. App. P.

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this brief has been prepared in a proportionally spaced typeface using Microsoft

Word in 14 point Times New Roman font.

/s/ Nicholas J. Bronni

NICHOLAS J. BRONNI

Senior Counsel

Securities and Exchange Commission

100 F Street N.E.

Washington, DC 20549

(202) 551-5117

BronniN@sec.gov

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