Company Sues Former Officer For Failing To File Form 4s

A complaint filed in the Central District of California caught my eye because it involved the rather unusual circumstance of a corporation suing a former director and officer for, among other things, failing to file reports under Section 16(a) of the Securities Exchange Act of 1934.  The case, Micro Imaging Techn., Inc. v. Brennan (C.D. Cal. Case No. 2:14-cv-06560), was first reported last Friday in Securities Regulation Daily. 

While unusual, it’s not entirely unprecedented for a corporation to sue a former insider for violations of Section 16(a).  For example, in Scientex Corp. v. Kay, 689 F.2d 879 (9th Cir. Cal. 1982), a corporation filed an action seeking a mandatory injunction to require a former insider to comply with Section 16(a).  However, the Ninth Circuit Court of Appeals concluded:

It is eminently logical that a private cause of action to enforce compliance with section 16(a) be available in order to provide plaintiffs with information concerning the basis of a claim under section 16(b).  The function of this court is not, however, to provide a private remedy merely because Congress ought to have done so. . . .  The language and structure of section 16(a) of the Securities Exchange Act of 1934 and its legislative history lead us to conclude that Congress did not intend to imply private remedies in addition to those expressly provided.

For a complete discussion of the statutorily provided remedies, I strongly recommend Romeo & Dye’s Section 16 Treatise and Reporting Guide.

The complaint in Micro Imaging also has some interesting allegations.  For example, it alleges:

From August 2, 2006 through April 13, 2012, Defendant Michael W. Brennan was both an officer and a director of Plaintiff Micro Imaging Technology, Inc., and, by definition, an affiliate subject to the filing requirements noted above, for a period extending to ninety (90) days after the date on which he ceased his “affiliation” (July 12, 2012).

First of all, Section 16(a) doesn’t apply to “affiliates” per se.  By its express terms, it applies to officers, directors and beneficial owners of more than 10% of any class of equity securities (“10% Owners”).

Second, Rule 16a-2(b) governs the post termination filing obligations of former officers and directors:

A transaction(s) following the cessation of director or officer status shall be subject to section 16 of the Act only if:
(1) Executed within a period of less than six months of an opposite transaction subject to section 16(b) of the Act that occurred while that person was a director or officer; and
(2) Not otherwise exempted from section 16(b) of the Act pursuant to the provisions of this chapter.

Note that Rule 16a-2(b) applies only to former officer and directors.  It does not apply to 10% Owners.

The Plaintiff May Have Invoked The Wrong Principle

The complaint also alleges the location of the corporation’s “principle place of business”.  This is a common source of confusion and one that I’ve undoubtedly made as well.  The correct word is the adjective “principal”, not the noun “principle”.  California courts also have made the same error.  See, e.g., Conklin v. Sloss, 86 Cal. App. 3d 241, 243 (1978) ([T]he Modoc County Record, a weekly newspaper with its principle place of business in Alturas, California . . .).

 

Topics:  Chief Compliance Officers, Directors, Professional Liability, Reporting Requirements, Securities Exchange Act

Published In: Civil Procedure Updates, General Business Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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