Huppe v. WPCS International Inc.
United States Court of Appeals for the Second Circuit
670 F.3d 214 (2nd Cir. 2012)
Special Situations Fund III QP (QP) and Special Situations Private Equity Fund (PE) (defendants), each owning over 10% of WPCS International Inc. (WPCS), delegated investment decisions to Austin Marxe and David Greenhouse and sold WPCS shares on the open market from December 2005 to January 2006; after a later stock-price drop, WPCS approached Marxe and Greenhouse, and in April 2006 QP and PE bought shares directly from WPCS at a price 7% below market, with the WPCS board's approval. Shareholder Maureen Huppe (plaintiff) brought a derivative action arguing QP and PE, as 10%-plus shareholders, were liable under §16(b) of the Securities Exchange Act for profiting from a purchase and sale within six months (a "short-swing" transaction); the district court ruled for Huppe, and QP and PE appealed.
Whether a beneficial owner's purchase of securities directly from an issuer, made at the issuer's request and with board approval, is exempt from §16(b) short-swing-profit liability the same way such purchases are exempt for the issuer's own directors and officers.