[00:00:01] Speaker 02:
Next case this morning is 25-1082, Revive Investing et al.

[00:00:12] Speaker 02:
v. Armistice Capital Master Fund.

[00:00:15] Speaker 02:
Council for Appellant, would you make your appearance and proceed, please?

[00:00:26] Speaker 02:
Council for Appellant, if you'd make your appearance and proceed, please.

[00:00:34] Speaker 00:
Thank you, Your Honor, Dan Doherty, for the appellant shareholders.

[00:00:38] Speaker 00:
I'd ask for one minute for rebuttal to be reserved.

[00:00:43] Speaker 00:
Following the stock market crash in 1929, Congress investigated the causes of the crash.

[00:00:51] Speaker 00:
And one of the causes was that there was rampant insider trading by officers, directors, and shareholders of public companies.

[00:01:01] Speaker 00:
The 1934 Act was passed in response

[00:01:04] Speaker 00:
And its purpose was announced to provide for the regulation of transactions in the public markets, including those by officers, directors, and principal shareholders of public companies, so as to ensure fair and honest markets.

[00:01:24] Speaker 00:
Part of the 34 Act is Section 16B, which requires officers, directors, and principal shareholders

[00:01:32] Speaker 00:
who engage in a purchase-sale, sell-purchase couplet within a period of less than six months to disgorge any profits made back to the issuer.

[00:01:42] Speaker 00:
16b allows the SEC to make exemptions for transactions, quote, not comprehended within the purpose of 16b.

[00:01:52] Speaker 00:
It wasn't long after the passage of the 34

[00:01:56] Speaker 00:
that it became apparent that 16b posed a huge impediment to stock compensation for officers and directors.

[00:02:06] Speaker 00:
The SEC responded by enacting rule 16b-3, first in 1935, which I understand was a temporary rule, but later in the 40s, and all the way up

[00:02:19] Speaker 00:
to today, it is the principal mechanism by which offices and directors are able to acquire stock from the company without having to worry about disgorging any profits.

[00:02:34] Speaker 00:
The problem was this.

[00:02:35] Speaker 00:
Stock compensation normally takes place on a 12-month cycle.

[00:02:40] Speaker 00:
Section 16 looks back six months and forward six months, and so it

[00:02:45] Speaker 00:
it acted as a permanent bar to ever reaping the fruits of stock compensation, which is meant to incentivize management of these corporations.

[00:02:56] Speaker 00:
So it acted almost as a permanent bar.

[00:03:01] Speaker 00:
That's the problem 16B3 was designed to address.

[00:03:05] Speaker 02:
And as I understand it, your position is that the SEC exceeded its authority in enacting 16B3, right?

[00:03:17] Speaker 00:
They exceeded their authority in 1996 when they removed requirements that would reach, in particular, requirement that the shares come out of a shareholder-approved plan.

[00:03:30] Speaker 00:
And so it opened the exemption up to directors who were not part of management.

[00:03:39] Speaker 00:
In other words, directors by deputization.

[00:03:41] Speaker 00:
That's what this case is all about.

[00:03:43] Speaker 02:
And to that question, do you think that the SEC would have exceeded its authority if it as it relates to directors who are humans, as opposed to you're talking about directors by deputization?

[00:03:57] Speaker 02:
Directors by deputization, Your Honor.

[00:03:59] Speaker 02:
So if they were human, the SEC would have been within the bounds of its authority?

[00:04:04] Speaker 00:
I believe they would have been.

[00:04:05] Speaker 00:
I mean, it's a question, but we're not questioning that aspect of the rule.

[00:04:12] Speaker 02:
Well, I mean, we're talking about what are the bounds of what the SEC can do.

[00:04:18] Speaker 02:
Well, if most of your arguments would be equally applicable to the SEC's authority as it relates to humans,

[00:04:25] Speaker 02:
and directors by deputization, then why isn't that a concern?

[00:04:30] Speaker 02:
I mean, because one would have to know how far your argument goes, right?

[00:04:35] Speaker 00:
I think the SEC can make rational distinctions between directors who are managerial directors, I'll call them, human directors, versus shareholder directors.

[00:04:49] Speaker 00:
For one thing, scale is important.

[00:04:55] Speaker 00:
We have in our reply brief a report by F.W.

[00:04:59] Speaker 00:
Cook that says that for companies the size of A2, the number of shares granted on an annual basis to the whole group of management is less than 2% of the outstanding shares.

[00:05:12] Speaker 00:
When you're talking about an institutional investor who's a director by deputization, the scale goes way up.

[00:05:19] Speaker 00:
In this case, we're talking about an acquisition of 10 million shares

[00:05:24] Speaker 03:
A time when the company only had 21 million shares of outstanding... Well, Counsel, you just said that you believe the SEC can make a rational distinction between directors who are human versus directors who are directors by deputization.

[00:05:39] Speaker 03:
Can they not then make a rational decision that they don't want to treat those differently?

[00:05:47] Speaker 00:
Well, they could, but... Isn't that what they did?

[00:05:52] Speaker 00:
Well, I don't think they did.

[00:05:54] Speaker 00:
I think it was inadvertent, frankly, because there's nothing in the releases that ever speaks in terms of officers and directors.

[00:06:01] Speaker 00:
There's anything other than managerial members of management.

[00:06:09] Speaker 00:
If you look at the language of the releases, it says based on the premise that most, if not all, transactions between the issuer and its officers and directors

[00:06:22] Speaker 00:
compensatory purposes.

[00:06:24] Speaker 00:
That was the premise, even in the 96th release.

[00:06:26] Speaker 04:
Counsel, so here we have Master Fund, that's the director by deputization.

[00:06:33] Speaker 04:
Correct.

[00:06:35] Speaker 04:
Could an individual be a director by deputization?

[00:06:45] Speaker 00:
For example, not that I know of.

[00:06:49] Speaker 00:
I suppose they could.

[00:06:50] Speaker 00:
They have to be very wealthy.

[00:06:52] Speaker 04:
Is that the understanding under the rule that the director by deputization is some sort of institutional investor?

[00:07:01] Speaker 04:
Is that the universal understanding?

[00:07:05] Speaker 04:
Pardon?

[00:07:06] Speaker 04:
Is that the understanding?

[00:07:07] Speaker 00:
Well, the rules, the releases by the SEC show no consciousness that shareholders are in view at all.

[00:07:15] Speaker 00:
The only time they mention shareholders is to say they're not eligible.

[00:07:19] Speaker 03:
Well, it was the courts that introduced the notion of director by deputization, not the SEC, correct?

[00:07:25] Speaker 00:
They did.

[00:07:25] Speaker 03:
It was using it in an offensive manner, not a defensive manner first, right?

[00:07:29] Speaker 00:
Correct.

[00:07:31] Speaker 00:
Blowby-Lehmann was the first case to recognize that the concept of director by deputization found none in that case.

[00:07:40] Speaker 02:
And was given an opportunity to opine on it.

[00:07:42] Speaker 02:
The SEC in an amicus brief in the Drilling case, wherever that's pronounced, said yes.

[00:07:49] Speaker 02:
That is within the scope of 16B3, right?

[00:07:51] Speaker 02:
They did.

[00:07:52] Speaker 00:
And the justifications they used were really two, that the board of directors is an adequate gatekeeper between the insiders and the company, and two, that there's informational parity between these insiders and the company.

[00:08:12] Speaker 00:
The problem with the gatekeeper argument is the board of directors is guarding the wrong gate.

[00:08:18] Speaker 00:
The gate that the 16B is concerned with is the gate between the insiders and the public markets.

[00:08:25] Speaker 00:
State law already provides provisions for protecting the issuer from fraud by its own directors.

[00:08:35] Speaker 00:
In terms of informational parity, the result of this is that a director by deputization who's a shareholder who has a deputy on the board

[00:08:45] Speaker 00:
feeding it information to influence its investment policy in the issuer has access to the exemption.

[00:08:53] Speaker 00:
But a shareholder with just as many shares who has no deputy and no access to inside information cannot access the exemption.

[00:09:02] Speaker 00:
It's backwards.

[00:09:05] Speaker 00:
And it's backwards because I don't believe the... Back to the dryling cases, the SEC's justification

[00:09:17] Speaker 00:
Look, if informational parity is a ticket into the exemption, why is it an informational inferiority?

[00:09:24] Speaker 00:
You know, the shareholder without a deputy cannot access the exemption.

[00:09:29] Speaker 00:
That's just not reasonable.

[00:09:31] Speaker 00:
It's not a reasonable outcome.

[00:09:32] Speaker 04:
Could I just, counsel, could I just, this is sort of backing up a bit.

[00:09:36] Speaker 04:
Okay.

[00:09:36] Speaker 04:
But the issue you're presenting for appeal is whether the SEC lacked statutory authority to exempt

[00:09:45] Speaker 04:
board approved transactions between issuers and directors by deputization.

[00:09:50] Speaker 04:
That's the issue presented.

[00:09:53] Speaker 04:
But in district court, it seems that the thrust of the arguments were more a matter of interpreting the rule, not so much whether the SEC had authority.

[00:10:05] Speaker 04:
And so I just have to ask whether this issue has been preserved.

[00:10:15] Speaker 04:
Your Honor, we actually mentioned both bases for... Did you mention that in your initial motion, your cross-motion for summary judgment?

[00:10:27] Speaker 00:
We asked the court, we argued that the exemption was invalid either through interpretation

[00:10:37] Speaker 00:
or because it exceeded the authority of the SEC.

[00:10:40] Speaker 00:
I'll grant you, we leaned on the interpretation fork at the district court, but the arguments are largely the same, whether you're arguing against that it's a bad interpretation or that it exceeds the authority.

[00:10:57] Speaker 00:
It's the irrationality of the result.

[00:11:01] Speaker 00:
If you look at the arguments in our district court brief, they're basically very much like the ones here.

[00:11:07] Speaker 03:
But, counsel, let me ask you this.

[00:11:10] Speaker 03:
If there was not an overturning of the Chevron deference, would we even be here?

[00:11:18] Speaker 03:
Isn't that the crux of this?

[00:11:19] Speaker 00:
Is now we need to take another view and determine for... We might be here because the cases that have upheld us so far are not in this district.

[00:11:33] Speaker 00:
So, yeah, we might be here.

[00:11:36] Speaker 00:
Maybe not.

[00:11:37] Speaker 00:
It's hard to say.

[00:11:38] Speaker 02:
And to that point, do you think it would be appropriate to remand to the district court to let the district court apply, deal with the issue under Loper Bright?

[00:11:50] Speaker 00:
It's possible, Your Honor.

[00:11:51] Speaker 00:
I think this court ought to take it up on the merits, though.

[00:11:55] Speaker 00:
If Judge Arguello were to rule against us, we'd appeal it back up here, and I'm sure

[00:12:04] Speaker 00:
Master Fund would appeal an adverse ruling back up here.

[00:12:07] Speaker 00:
So for purposes of judicial economy, I think this court ought to just rule on the merits.

[00:12:12] Speaker 04:
Well, on the merits, as I understand it, one of the considerations, maybe the primary consideration, is whether board-approved transactions involving a director by deputization

[00:12:27] Speaker 04:
pose an intolerable risk of abuse, right?

[00:12:31] Speaker 04:
Isn't that the... I think that's a decent view of the standard, yes.

[00:12:35] Speaker 04:
And who has the burden on that?

[00:12:40] Speaker 00:
I think the SEC has the burden.

[00:12:43] Speaker 04:
Well, you say in your brief we should use the ordinary tools of statutory construction to resolve that issue, but if we're talking about intolerable risk of abuse,

[00:12:57] Speaker 04:
I'm not really sure what the ordinary tools of statutory construction would be.

[00:13:05] Speaker 04:
Isn't this kind of laden with factual questions a level of risk?

[00:13:11] Speaker 04:
You're saying we should decide as a matter of judicial economy.

[00:13:15] Speaker 04:
How do we make that determination?

[00:13:17] Speaker 00:
Well, the SEC is only allowed to make exemptions for transactions not contemplated within the purpose of 16B.

[00:13:26] Speaker 00:
consider what the purpose of 16b is and whether the exemption originally designed to allow compensation has any purpose being served by applying it to directors by deputization.

[00:13:45] Speaker 02:
Well, adopting that interpretive lens and whether within the purposes contemplated by 16b,

[00:13:54] Speaker 02:
It seems to me that that leads, and correct me here, for a broad range of discretion by the SCC in determining what would fall within the purposes of 16b.

[00:14:07] Speaker 02:
I mean, how precise do they have to be?

[00:14:11] Speaker 02:
in tracking or relating to the purposes, first question.

[00:14:16] Speaker 02:
Second, aren't they allowed some room for being overinclusive or underinclusive in determining what would be within the contemplation of 16B?

[00:14:27] Speaker 00:
Your Honor, I think Loper-Bride addressed this and said that, you know, vague terms are not enough, that unless there are

[00:14:35] Speaker 00:
explicit terms of discretion such as in the judgment of the agency or as the agency finds or sometimes a statute will tell the agency to find a term.

[00:14:49] Speaker 00:
Those still are subject to agency discretion, but there's no such terms here.

[00:14:54] Speaker 00:
It says, you've got words of permission.

[00:14:56] Speaker 00:
they may exempt, followed by words of limitation, transactions not contemplated within the purposes of 16b.

[00:15:02] Speaker 02:
But it gives the SEC the authority to make that determination, right?

[00:15:08] Speaker 00:
Only within the limits Congress set, Your Honor.

[00:15:15] Speaker 02:
And those limits would be the purposes of 16b, and then the question is, who's making that determination?

[00:15:21] Speaker 02:
If Loper-Bright contemplates, and it speaks in that footnote about one area where there's an explicit designation that you decide this, why isn't that this?

[00:15:34] Speaker 00:
I think that because, Your Honor, it is the province of the courts that determine what the law is.

[00:15:39] Speaker 00:
This is what Loper-Bright was all about.

[00:15:42] Speaker 00:
You don't just leave it up to agencies to say what the purpose of 16B is.

[00:15:49] Speaker 00:
the court's duty to interpret the statute and determine whether the SEC's action is within the bounds set by Congress.

[00:15:58] Speaker 02:
Well, that's true, but I won't take time to pull up that language from Loper-Bright, but the language, in effect, is there's this range in which Congress has designated somebody to make that determination, i.e.

[00:16:13] Speaker 02:
the agency, then the job of the court is to acknowledge that

[00:16:18] Speaker 02:
into police the boundaries of that designation, which would mean that the court is going to have to make a determination within the context of the statute, is this contemplated by 16B or not?

[00:16:33] Speaker 02:
Okay, fine, we can do that, but presumably that means there's a whole bunch of stuff that the SEC can regulate

[00:16:42] Speaker 02:
where we shouldn't be in a situation where we're saying that it is within, not within the contemplation.

[00:16:49] Speaker 00:
But Your Honor, when the exemption is modified so as to allow large institutional investors who are privy to inside information access to the exemption and the same shareholder without that not to have access to the exemption, surely you can say that that's irrational.

[00:17:10] Speaker 00:
That's just crazy.

[00:17:12] Speaker 00:
That's not the way the exemption ought to be.

[00:17:15] Speaker 00:
And I think it's the court's job to step up and say that to the SEC.

[00:17:20] Speaker 03:
Well, isn't that a different point?

[00:17:22] Speaker 03:
It's not the way it should be is one thing.

[00:17:25] Speaker 03:
Is that how we view this?

[00:17:27] Speaker 03:
Do we decide anew this is not how it should be?

[00:17:30] Speaker 03:
Or do we decide whether it was in the context of the framework of their authority?

[00:17:35] Speaker 03:
Aren't those two different issues?

[00:17:36] Speaker 00:
I don't think so.

[00:17:37] Speaker 00:
I think you determined that that kind of outcome was not within the purposes of 16B, which is to prevent this kind of short swing trading.

[00:17:52] Speaker 02:
You've used your time, counsel.

[00:17:54] Speaker 02:
I'll give you a little time.

[00:17:56] Speaker 00:
Thank you, Your Honor.

[00:18:10] Speaker 01:
Good morning, and may it please the court, James Tice on behalf of the Appellees.

[00:18:14] Speaker 01:
This court may affirm the final judgment after a jury verdict on any of three independent grounds, waiver, the merits, or the statutory safe harbor.

[00:18:25] Speaker 01:
I'll begin with waiver.

[00:18:26] Speaker 01:
Judge Matheson, you're absolutely right that there's a waiver problem here.

[00:18:32] Speaker 01:
The summary judgment motion, as you pointed out, focused exclusively on the scope of the rule and the interpretation of the rule.

[00:18:39] Speaker 01:
citing our deference.

[00:18:41] Speaker 01:
It's about one page long.

[00:18:43] Speaker 01:
It does not mention, it does not invoke chevron.

[00:18:45] Speaker 01:
It does not say that the agency exceeded its statutory authority in promulgating the rule.

[00:18:50] Speaker 01:
I will grant you that in the response to the summary judgment motion, which is about five pages long, the thrust of that, I think as my friend on the other side agreed, was on the interpretive form of the argument.

[00:19:02] Speaker 01:
The SEC got its interpretation wrong under our

[00:19:05] Speaker 01:
and in fact cites our on the final page of that argument, but has a throwaway line essentially saying, or it also exceeds the authority.

[00:19:12] Speaker 01:
But again, that was not the thrust of the argument below.

[00:19:15] Speaker 01:
It was not.

[00:19:15] Speaker 02:
Did the district court speak in its written order to the question of authority?

[00:19:19] Speaker 01:
I think there's some ambiguity on that, Your Honor.

[00:19:21] Speaker 02:
Well, OK.

[00:19:23] Speaker 02:
There may be some ambiguity.

[00:19:24] Speaker 02:
But if there's an argument that the district court did pass on it, then we would not be in a range of forfeiture, would we?

[00:19:31] Speaker 01:
I agree with that if the district court had clearly ruled on it, Your Honor.

[00:19:33] Speaker 01:
But I think what the district court said is that they have asked, you know, the other side has asked us to overrule the SEC's interpretation.

[00:19:41] Speaker 01:
And then it cites a few cases, the Dreeling and Roth cases, which deal with both forms of the argument.

[00:19:47] Speaker 01:
They deal with the interpretive form of the argument as well as the excessive authority argument.

[00:19:51] Speaker 01:
So I think what she says in the footnote is they're asking me to overrule the SEC's interpretation.

[00:19:57] Speaker 01:
That to me sounds like the interpretive form.

[00:19:59] Speaker 01:
So I think this is a waiver problem.

[00:20:03] Speaker 01:
I think, though, to zero in on the point a little further, this kind of shows why I think forfeiture is generally appropriate.

[00:20:11] Speaker 01:
We don't have a ruling below from the district court, as Your Honor noted.

[00:20:15] Speaker 01:
We have a footnote that deals with this very briefly.

[00:20:18] Speaker 01:
The summary judgment argument was only one page long.

[00:20:21] Speaker 01:
It didn't mention this at all.

[00:20:23] Speaker 01:
And so you don't have a developed record.

[00:20:25] Speaker 01:
You don't have developed arguments below.

[00:20:27] Speaker 01:
You also crucially don't have the SEC involved in this case.

[00:20:30] Speaker 04:
By the way, counsel, did you say anything about scope of authority in your initial motion for summary judgment?

[00:20:39] Speaker 01:
It wasn't teed up, Your Honor.

[00:20:41] Speaker 01:
I mean, we think the rule is valid.

[00:20:43] Speaker 01:
The SEC has said over decades that the rule is valid and applies to directors by deputization.

[00:20:49] Speaker 01:
So we had no basis in our summary judgment motion to opine on that.

[00:20:52] Speaker 01:
It was incumbent upon

[00:20:54] Speaker 01:
my friend on the other side to challenge the SEC's authority if he was so inclined to do that.

[00:21:00] Speaker 02:
So you did not raise the question of authority.

[00:21:02] Speaker 02:
That was not within the scope of your argument.

[00:21:05] Speaker 01:
It was not within the scope of our argument because the way the case was briefed and argued below was that if we were a director by deputization, then we should therefore, the transactions are exempt.

[00:21:19] Speaker 01:
So we had no basis to

[00:21:20] Speaker 03:
What's your position on the stipulation at the jury trial on the issue?

[00:21:25] Speaker 01:
Yeah, well, I think that's another good point, Your Honor.

[00:21:29] Speaker 01:
At the jury trial, after this issue had been resolved in our favor, the plaintiff stipulated that if Master Fund were deemed director by deputization, that was the end of the case, that we were entitled to the exemption.

[00:21:42] Speaker 03:
Is there any reservation or qualification on the stipulation?

[00:21:44] Speaker 01:
There was not, Your Honor.

[00:21:45] Speaker 01:
When we made certain factual stipulations but wanted to preserve our legal argument, we did so.

[00:21:50] Speaker 01:
there was no such reservation here.

[00:21:52] Speaker 01:
It was a flat stipulation.

[00:21:54] Speaker 01:
If we lose on this issue, their exemption is triggered and the case is over.

[00:21:59] Speaker 01:
So I think that is just another independent ground to rule in our favor.

[00:22:05] Speaker 01:
But again, I do think it's prejudicial because the SEC was just not involved.

[00:22:08] Speaker 01:
I think if they had clearly challenged the scope of the rule, the SEC may well have gotten involved.

[00:22:13] Speaker 01:
I'm happy to answer any other questions on that.

[00:22:15] Speaker 01:
But turning to the merits, Your Honor, I think

[00:22:19] Speaker 01:
There's a few things that are important to emphasize.

[00:22:22] Speaker 01:
I think as we've discussed this morning, Congress expressly delegated to the SEC this task of carving out exemptions to the blunt instrument of Section 16.

[00:22:32] Speaker 01:
I think that's the way it's been described in the case law.

[00:22:35] Speaker 01:
because it's a blunt instrument that takes the profit out of an entire class of transactions completely.

[00:22:40] Speaker 01:
The courts, including the Supreme Court, for example, in the Formos-McKesson case says that essentially it should be narrowly construed.

[00:22:47] Speaker 01:
We don't try to capture every potential short swing transaction if there's any ambiguity whatsoever.

[00:22:55] Speaker 01:
I think Formos says it would be inappropriate to impose this harsh rule of liability when there's any ambiguity at all.

[00:23:02] Speaker 01:
And in light of that, the SEC has been given very explicit authority to exempt transactions that are not within the purpose of the statute.

[00:23:12] Speaker 01:
And I think crucially, for our purposes today, the purpose of the statute is to prevent the unfair use of information.

[00:23:19] Speaker 01:
I think that language by itself connotes some

[00:23:22] Speaker 01:
measure of discretion in determining what is unfair in light of the SEC's 80 years of experience interpreting the statute, and as the expert agency that is delegated the task of determining what transactions, even though they might literally fall within Section 16 scope, should not lead to liability.

[00:23:43] Speaker 04:
Council, if we were to dive into the merits of this, as Mr. Doherty is urging us to do,

[00:23:52] Speaker 04:
Is it enough for resolution to look at the history of the statute and the rule, the purpose and so forth, or would we need more information?

[00:24:07] Speaker 04:
In other words, in assessing whether a deputy by deputization exemption poses intolerable risk, how do you make that determination without evidence?

[00:24:23] Speaker 01:
Well, Your Honor, that's a great question.

[00:24:25] Speaker 01:
I do think that ultimately this has been a clear delegation to the agency to make those calls.

[00:24:32] Speaker 01:
To your point, I'm not even sure how the court is supposed to determine what exemptions should be created, because it's not a delegation to the courts to exempt transactions.

[00:24:43] Speaker 01:
It's a delegation to the agency to do so.

[00:24:46] Speaker 01:
So I don't actually think it's even an evidentiary question.

[00:24:48] Speaker 01:
I think it's a question of,

[00:24:50] Speaker 01:
did the SEC act within the scope of its delegated authority?

[00:24:54] Speaker 01:
To the Loper-Bright point, Judge Holmes, I think you referenced this language, but in cases like this, where the best reading of a statute is from Loper-Bright, is that it delegates discretionary authority to an agency, the task of the court is to recognize the constitutional delegations, which no one doubts this one is, fix the boundaries of the delegated authority, and ensure the agency is engaged in reasoned decision making within that.

[00:25:18] Speaker 01:
And I think there's no question that we have that sort of reasoned decision making here.

[00:25:22] Speaker 01:
They disagree.

[00:25:22] Speaker 01:
They think it's unreasonable.

[00:25:24] Speaker 01:
But I think my friend on the other side also suggested that they have a range of authority.

[00:25:28] Speaker 01:
It might be rational to include or exclude certain transactions.

[00:25:32] Speaker 01:
So I think it has to be viewed through that lens.

[00:25:34] Speaker 02:
Well, through that lens, I mean, you're right.

[00:25:37] Speaker 02:
The other side argued vociferously that it was irrational to have

[00:25:45] Speaker 02:
directors by deputization given access to that information and managers don't have that information.

[00:25:53] Speaker 02:
Why is that not irrational?

[00:25:55] Speaker 01:
Well, it's not irrational for a number of reasons, Your Honor.

[00:25:58] Speaker 01:
I mean, I think just to begin, I think my friend on the other side mentioned and certainly conceded in his briefs that he's not even arguing that the rule exceeds the SEC's exemptive authority as it applies to sort of managing directors or human directors.

[00:26:12] Speaker 01:
So I think we only really then need to focus on distinctions between human and directors by deputization.

[00:26:18] Speaker 01:
So I think, and human's a bit of a misnomer because I think to answer one of your questions, you could have a human director by deputization if they put a deputy on a company's board.

[00:26:27] Speaker 01:
But focusing on that sort of dichotomy just for ease of this argument.

[00:26:32] Speaker 01:
So I think you really just need to focus on what the differences are.

[00:26:34] Speaker 01:
And I don't think there's any real differences

[00:26:36] Speaker 01:
that my friend on the other side pointed to.

[00:26:38] Speaker 01:
I think the best, the closest difference they've come to of the five or so they mentioned is the fiduciary duty point, which is that a human director has a fiduciary duty, a outside shareholder may or may not have a fiduciary duty, probably does not, but I think what is crucial is that the deputy on the board, and this is what the SEC itself found, this is what the Roth case agreed with, the deputy on the board does have a fiduciary duty, and that fiduciary duty

[00:27:05] Speaker 01:
is important in two ways.

[00:27:06] Speaker 01:
Number one, it prevents the fiduciary from allowing the outside shareholder to benefit from sort of self-dealing or insider transactions.

[00:27:15] Speaker 01:
And number two, it knowingly prevents the outsider from working with the fiduciary in such a way that would harm the company and in that case would make the outside shareholder liable

[00:27:26] Speaker 01:
to the beneficiary.

[00:27:28] Speaker 01:
This is in the amicus brief, the Roth and Drilling amicus briefs, I think, on page, let's see, 34 and 35 of the third appendix.

[00:27:38] Speaker 01:
I think it walks through some of those points.

[00:27:41] Speaker 01:
And I think that's really crucial because SEC itself recognized there are backstops here.

[00:27:46] Speaker 01:
Section 16 is a blunt instrument.

[00:27:47] Speaker 01:
It should be narrowly construed.

[00:27:49] Speaker 01:
It's supposed to take out a

[00:27:51] Speaker 01:
narrow class of transactions involving essentially market-based transactions on both sides where the risk is intolerably great.

[00:27:57] Speaker 01:
But there are other things, other laws, both state and federal, that protect actual insider trading and self-dealing.

[00:28:07] Speaker 01:
You have state fiduciary duty laws.

[00:28:08] Speaker 01:
And importantly, you have Rule 10b-5, which imposes both civil and criminal liability for insider trading.

[00:28:15] Speaker 04:
Let me ask you about a couple of backstops.

[00:28:18] Speaker 04:
in the rule itself.

[00:28:20] Speaker 04:
Sure.

[00:28:20] Speaker 04:
Which we're talking about an acquisition from the issuer, it's not a market transaction, it's from the issuer, and an acquisition that the board has to approve.

[00:28:34] Speaker 04:
Correct, or the shareholders.

[00:28:35] Speaker 04:
Right.

[00:28:36] Speaker 04:
And that is, those are backstops that are supposed to protect against abuse of inside information.

[00:28:46] Speaker 04:
How does that work, though?

[00:28:48] Speaker 04:
I mean, that goes to the acquisition, but are there any protections about abuse of inside information when it comes to the sale?

[00:28:59] Speaker 04:
Because there, we don't, the board doesn't have to approve the sale, right?

[00:29:03] Speaker 01:
Correct.

[00:29:05] Speaker 01:
Yeah, so, Your Honor, I think the way to think about this is that there are two transactions.

[00:29:10] Speaker 01:
What the SEC has said is that the initial transaction, the purchase from the board,

[00:29:14] Speaker 01:
just doesn't fall within the rule.

[00:29:15] Speaker 01:
There's no risk of unfair use of information in that circumstance during that transaction, because the information is the same on both sides.

[00:29:23] Speaker 01:
So we can just put that sort of transaction aside.

[00:29:25] Speaker 01:
The second transaction in the market is the sort of transaction that the SEC was concerned, or Congress was concerned with, with Section 16.

[00:29:32] Speaker 01:
And that transaction can be matched against other market transactions that don't have the gate gimmick functions of that first transaction.

[00:29:39] Speaker 01:
But I think what the SEC's point was

[00:29:42] Speaker 01:
In this sort of – we can exempt this sort of class of transaction because they don't involve unfair use of information given sort of parity of information, given that the directors – the board of directors controls the timing of that acquisition.

[00:29:56] Speaker 01:
It's not a situation where a director can pop into the market and take advantage of market-based participants, and also because of the fiduciary duty.

[00:30:06] Speaker 04:
of the transaction, no board approval for that.

[00:30:09] Speaker 04:
No board approval.

[00:30:10] Speaker 04:
That would apply also to directors.

[00:30:15] Speaker 04:
Correct.

[00:30:16] Speaker 04:
Right, if they've had board approval for a purchase from the issuer, they don't need board approval for the sale either.

[00:30:27] Speaker 04:
So the director and director by deputization would be treated the same?

[00:30:31] Speaker 01:
Right.

[00:30:32] Speaker 01:
Yes, that's correct, Your Honor.

[00:30:33] Speaker 01:
But that's true.

[00:30:34] Speaker 01:
Again, I think that goes to the point I mentioned earlier, which is that problem that my friend, the other side, mentioned would apply to both human directors and directors by deputization.

[00:30:42] Speaker 01:
So it's not a reason to hold that this rule is irrational with respect to directors by deputization.

[00:30:48] Speaker 01:
And what the SEC said on that in particular, and again, the Roth and Dreling, or Dreiling, I'm not sure how to say it either, go into this in some detail, is that there are both those state and federal backstops we're talking about.

[00:30:59] Speaker 02:
You're talking about 10b-5 on the federal front.

[00:31:01] Speaker 02:
That's right.

[00:31:02] Speaker 02:
Because what I want to understand is, I understand how the timing issue would sort of mitigate against one unfairly using the information in the market.

[00:31:11] Speaker 02:
But on the parity of information front, that really relates just to the purchase, right?

[00:31:15] Speaker 02:
Because the insider is still going to have information that the market doesn't have when they sell, right?

[00:31:24] Speaker 01:
Not usually, Your Honor, and not in this case, perhaps not ever, because in this situation, for example, there was a purchase in October 2019, and about five months later in March, there was a sale.

[00:31:35] Speaker 01:
But the purchase happened according to the terms of the agreement at that time.

[00:31:40] Speaker 01:
The sale five months later occurred only after, first, the COVID pandemic started rearing its ugly head.

[00:31:46] Speaker 01:
And number two, that good news about the company became public knowledge, which is that a test was going to

[00:31:54] Speaker 01:
have exclusive rights through this company.

[00:31:56] Speaker 01:
And that caused the share price to rise.

[00:31:58] Speaker 01:
At that point, there was also informational parity during the sale.

[00:32:02] Speaker 01:
So that's often going to be the case as well.

[00:32:04] Speaker 01:
This is not a case where, for example, the director purchased, the outside director, the shareholder, purchased stock from the general public when it was very cheap, knowing that they were going to get a special exclusive marketing arrangement.

[00:32:20] Speaker 01:
That would be the sort of unfair

[00:32:22] Speaker 01:
in-and-out quick market transactions that Section 16 was designed to prevent.

[00:32:27] Speaker 01:
That's not what's going on here.

[00:32:28] Speaker 02:
I think one other... Is it something that could go on here?

[00:32:31] Speaker 02:
I mean, what I'm trying to get at is because we're talking about the rule.

[00:32:35] Speaker 02:
We're not talking about what happened in this particular case.

[00:32:38] Speaker 01:
Of course, of course.

[00:32:39] Speaker 02:
I'm just trying to understand the informational parity issue.

[00:32:43] Speaker 02:
Why wouldn't the director necessarily be at an advantage vis-a-vis the market when they go into the market

[00:32:52] Speaker 02:
and have information and let's assume, again, not talking five months down the road, let's assume I purchase the shares from the company as a director by deputization or a managing director for that matter and I immediately turn around thinking that I have a sense from the information I have that, you know, things are either going to go up or go down and nobody else in the market has that.

[00:33:14] Speaker 02:
Why isn't that a conceivable possibility?

[00:33:16] Speaker 01:
Well, again, I don't think it is the sort of possibility that the statute is concerned with.

[00:33:20] Speaker 01:
There are other statutes that deal with insider trading with actual use of insider information.

[00:33:27] Speaker 01:
Here, there was two transactions.

[00:33:29] Speaker 01:
I mean, in general, there's going to be two transactions with equal market information, a purchase between equal parties and then a sale between equal parties, too, because at that point, again, you're only selling because the information is now known to the market.

[00:33:42] Speaker 01:
And so, again, I just don't think

[00:33:44] Speaker 01:
It's just this class of transactions the SEC determined in its expert judgment does not fall within the scope of the rule.

[00:33:50] Speaker 03:
Just to follow up on Chief Judge Holmes, would the situation be different?

[00:33:53] Speaker 03:
Would there be other protections?

[00:33:55] Speaker 03:
I understand the underlying facts in this case, the information went public and then there was the public sale.

[00:34:02] Speaker 03:
Would it be different if the public sale happened before the information became public?

[00:34:07] Speaker 03:
And are there other protections for that?

[00:34:09] Speaker 01:
Yeah, so I think what the SEC has said about that is, yes, there are other protections.

[00:34:13] Speaker 01:
There are self-dealing restrictions through state law, and there's insider trading protections through federal law.

[00:34:17] Speaker 01:
But I think one other thing the SEC has emphasized over and over again is, again, because Section 16 is this blunt instrument, and it imposes liability without fault, it's both under and over inclusive, that it's not supposed to prevent any possibility of speculative abuse, only intolerable risks of speculative abuse.

[00:34:35] Speaker 01:
Not any use of information, but unfair use of information.

[00:34:39] Speaker 01:
So again, I think the SEC was well within its discretion to say this sort of class of transaction for various reasons is not the sort of transaction we're worried about and we're going to exempt.

[00:34:48] Speaker 01:
I know I'm out of time.

[00:34:49] Speaker 01:
I just wanted to mention one final point on the safe harbor just because I think I'd be remiss if I didn't mention it.

[00:34:54] Speaker 01:
I just think that is another way to resolve this case.

[00:34:56] Speaker 01:
It's very straightforward.

[00:34:57] Speaker 01:
We invoked this exemption in our March 2020 filing.

[00:35:01] Speaker 01:
That was exhibit 40 in the docket below.

[00:35:08] Speaker 01:
filed a sale of the shares in March and at that time noted that Master Fund was a director and said that the transactions in question were exempt.

[00:35:19] Speaker 01:
There's testimony about this at ECF 179, pages 288 and following.

[00:35:25] Speaker 01:
I think if there's any doubt about any of these other issues, this clearly falls in the safe harbor.

[00:35:29] Speaker 01:
I don't know what it would mean to rely on a rule in good faith if it were not

[00:35:34] Speaker 01:
invoking it at the time of the supposedly liability-creating event before there was a demand letter and before there was any litigation.

[00:35:41] Speaker 01:
Thank you very much.

[00:35:43] Speaker 02:
Thank you, Counsel.

[00:35:46] Speaker 02:
Two minutes.

[00:35:51] Speaker 00:
On that last point, they claimed to be a director by deputization at the time of the sale when they needed the exemption.

[00:35:59] Speaker 00:
At the time of the purchase, they claimed they were non-exempt purchases on their public form

[00:36:04] Speaker 00:
So the reliance under 23A reliance is simply not attendable.

[00:36:10] Speaker 00:
Read Green v. Deets.

[00:36:12] Speaker 00:
The court there established a but-for test for 23A that the transaction would not have taken place.

[00:36:21] Speaker 00:
That means the purchase transaction in this case, but for the reliance on the exemption.

[00:36:26] Speaker 00:
I'd like to say something about Judge Matheson's question about

[00:36:32] Speaker 00:
the follow-up sale, yeah, when you grant an exemption, what is happening is you're giving permission to sell.

[00:36:42] Speaker 00:
If you're not going to sell, the exemptions are irrelevant.

[00:36:46] Speaker 00:
You don't need an exemption if you're not going to sell, all right?

[00:36:49] Speaker 00:
So to just look at the relationship between the issuer and the insider at the time of the acquisition,

[00:36:58] Speaker 00:
is incomplete.

[00:36:59] Speaker 00:
That's not the purpose of 16B.

[00:37:03] Speaker 00:
The purpose is to keep them from reselling them within six months, which is what happened in this case.

[00:37:09] Speaker 00:
And it happened within an hour of the press release that disclosed this.

[00:37:15] Speaker 00:
Market shoots up.

[00:37:17] Speaker 00:
They dump all their shares in one single day, OK?

[00:37:21] Speaker 00:
Now, can we prove that there's inside information?

[00:37:24] Speaker 00:
No, because we didn't need to.

[00:37:26] Speaker 00:
But it's fair to say that the market thought more of this COVID test announcement than Masterfund, who had a director on the board.

[00:37:36] Speaker 00:
You know, maybe he didn't believe it had legs, this price increase.

[00:37:40] Speaker 00:
And so they jump on it and they take advantage of the jump.

[00:37:44] Speaker 00:
The public thinks it's great.

[00:37:46] Speaker 00:
Masterfund, not so much.

[00:37:49] Speaker 00:
Why would you be selling everything you got in one day?

[00:37:51] Speaker 00:
On the jury instructions.

[00:37:53] Speaker 00:
We made those stipulations for the purpose of narrowing what the jury had to determine.

[00:37:59] Speaker 00:
That was not a concession of the legal issue in this case, so I reject that.

[00:38:03] Speaker 00:
On narrow construction, defenders love to cite the court saying that 16B should be narrowly construed, but they don't get it right.

[00:38:14] Speaker 00:
What the Supreme Court says is they're not going to

[00:38:19] Speaker 02:
Finish your thought, counsel.

[00:38:21] Speaker 02:
I gave you two minutes.

[00:38:22] Speaker 00:
What the Supreme Court says is we're not going to go outside the bounds of the language of the statute.

[00:38:27] Speaker 00:
For example, in Reliance Electric, the plaintiff wanted to match transactions more than six months apart based on the fact that they were planned within six months.

[00:38:37] Speaker 00:
The Supreme Court said, no, let's outside the statute.

[00:38:40] Speaker 00:
This is a remedial statute, so we're not going to give it this broad, woolly construction.

[00:38:47] Speaker 00:
But when transactions meet the criteria 16b, courts have insisted on vigorous enforcement.

[00:38:53] Speaker 00:
Okay.

[00:38:54] Speaker 02:
Case is submitted.

[00:38:56] Speaker 02:
Thank you, Your Honor.

[00:38:56] Speaker 02:
Thank you, Counsel.

[00:38:58] Speaker 02:
Thank you for fine arguments.