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Column: ‘Meme king’ Ryan Cohen moves to toss novel insider trading case by Bed Bath shareholders



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By Alison Frankel

Nov 9 (Reuters) -Billionaire investor Ryan Cohen, dubbed the “meme king” for his ability to mobilize an army of retail investors during the pandemic-era meme stock craze, owned a big equity stake in Bed Bath & Beyond for only a short stint in 2022.

But litigation stemming from Cohen’s sale of his stake in the home goods chain – which allegedly netted him tens of millions of dollars in profits – is raising novel legal questions whose answers will outlive the peculiar moment in internet history when investors hung on Cohen’s every tweet.

I already told you about a first-of-a-kind ruling last July in which U.S. District Judge Trevor McFadden of Washington, D.C., held that a class of Bed Bath shareholders could proceed with fraud claims against Cohen and his company based on Cohen’s tweet of a smiley-faced moon emoji. McFadden concluded that investors plausibly alleged that Cohen, who was allegedly getting ready to dump his shares, tweeted the emoji to dupe investors into thinking he was confident the share price would rise.

That class action is still in discovery. But in the meantime, a separate Bed Bath case in federal court in Manhattan has provoked a fascinating dispute about who can sue – and who can be sued – for alleged violations of the Exchange Act's "short swing profit" provision. The rule bars corporate insiders from exploiting their access to confidential information to net quick profits from trading in their company's shares over a six-month period.

The Manhattan case is not a class action because claims under the short-swing provision, known as Section 16(b), belong to the company, not to shareholders. Last year, two different Bed Bath shareholders, one represented by Abraham, Fruchter & Twersky and the other by Squitieri & Fearon and Gardy & Notis, petitioned Bed Bath's board to demand the return of his profits from the sale of his stake in the company. When the board said it did not believe it had a cause of action, the shareholders filed their own lawsuits.

The complaints, since consolidated before U.S. District Judge Dale Ho, contend that Cohen is liable as a corporate insider under two theories. First, according to the plaintiffs, he held a stake of more than 10% in Bed Bath. Cohen insisted in securities filings that his stake was under the 10% threshold, based on Bed Bath’s disclosures on the number of outstanding shares. It later turned out, however, that because of a Bed Bath share repurchase program, Cohen’s holdings topped 11%. Plaintiffs claim he should have known the share repurchase program would affect the size of his stake.

Alternatively, they contend, Cohen qualifies as an insider because Bed Bath agreed to appoint three Cohen-backed candidates to its board after he disclosed his equity stake. Those directors, by plaintiffs’ reckoning, acted as Cohen’s deputies.

Cohen’s lawyers at Wollmuth Maher & Deutsch moved on Wednesday to dismiss the shareholder suits, arguing that the Bed Bath investors do not have standing to assert claims because their shares were canceled in the company’s Chapter 11 bankruptcy and that Cohen is simply not an insider under the Exchange Act’s short-swing provision.

“The court should reject plaintiffs’ invitation to ignore their lack of standing and their novel efforts to radically expand the reach of Section 16(b),” the motion said. “These cases never should have been brought.”

U.S. Securities and Exchange Commission rules for calculating equity stakes, Cohen’s lawyers said, require investors to rely on the company’s most recent disclosure of the number of outstanding shares. Both Cohen and Bed Bath followed that rule in referring repeatedly to Cohen’s 9.8% stake, the dismissal motion said -- and plaintiffs offered no facts to suggest Cohen knew how many shares Bed Bath had repurchased while he was amassing his stake.

Nor, Cohen said, do the complaints plausibly assert that the directors he backed for board seats were merely his surrogates. The three directors, Cohen’s motion argued, were independent of him and Bed Bath insiders.

Shareholders previously contested similar arguments by Cohen before Bed Bath entered bankruptcy last April, arguing that their allegations about Cohen, a famously savvy investor, are sufficient to withstand dismissal.

But in the new dismissal motion, Cohen said Ho doesn’t even need to reach the merits of the allegations because the plaintiffs no longer have standing after Bed Bath's bankruptcy.

The U.S. Supreme Court ruled in 1991’s Gollust v. Mendell that a shareholder had standing to proceed with a Section 16(b) claim even after selling his shares when the company was acquired in an M&A deal. But Cohen argued that the justices reached that conclusion because the shareholder in the Gollust case received shares in the successor company, giving him an ongoing interest in the Section 16(b) claim.

The Bed Bath plaintiffs, Cohen argued, are more like the investor in a 2018 case at the 2nd U.S. Circuit Court of Appeals. The investor cashed out his shares when the company was acquired by a private equity fund. The 2nd Circuit tossed his short-swing profit suit, reasoning that he had lost any financial interest in the suit when he cashed out.

Cohen said canceled Bed Bath shareholders similarly have nothing to gain by maintaining their case.

In letters to the court last month, plaintiffs' lawyers previewed their responses to Cohen’s dismissal motion. Both Abraham Fruchter and Squitieri argued that the Supreme Court took a broad view in the Gollust case of what constitutes a continuing financial interest.

Abraham Fruchter said its client met that requirement because he had acquired stock in a company that now owns Bed Bath debt. Squitieri argued that the prospect of statutory attorneys' fees and a potential incentive award provide its client with a financial stake in the case.

I reached out to both shareholder firms for comment on Cohen’s motion. Lee Squitieri declined to comment. Jeffrey Abraham directed me to his previous filings. His client, he said, “continues to have standing to pursue the claims which we believe are meritorious.”

Cohen counsel Joshua Slocum and David Wollmuth did not respond to my email.


Read more:

Bed Bath & Beyond investor Ryan Cohen must face emoji-inspired shareholder suit

Bed Bath & Beyond files for bankruptcy protection, begins liquidation sale

Ryan Cohen's $60 million Bed Bath u-turn triggers meme stock investor ire


(Reporting By Alison Frankel)

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