Akin Secures Appellate Victory for Armistice Capital with Second Circuit Affirming Summary Judgment Win

(New York) – Akin has secured a significant victory on behalf of Armistice Capital at the Second Circuit in the case, Roth v. Armistice Capital et al, which fully affirmed the District Court’s summary judgment decision dismissing an action seeking disgorgement of $87 million. This precedential decision brings five years of litigation to an end and further solidifies an important issue under Section 16(b) for investment funds. The Akin team, led by partners Doug Rappaport and Kate Shapiro, was recognized with a “Shout Out” from The American Lawyer’s Litigation Daily for the result.  

The case involved an action brought against investment advisor Armistice Capital LLC, its investment fund Armistice Capital Master Fund Ltd., and its chief investment officer Steven Boyd (collectively “Armistice”) under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) is a strict liability statute that provides that a statutory insider who earns “short-swing” profits by buying and selling stock within a six-month period may be required to disgorge those profits to the issuer company.  The plaintiff, Andrew Roth, asserted that Armistice earned a short-swing profit of $87 million in disgorgeable profit.   

After completing fact and expert discovery, Armistice sought and won summary judgment at the Southern District of New York. The court’s decision turned on an exemption under Section 16(b). Because Section 16(b) is a strict liability statute, Congress specifically provided that liability would not attach to any transaction which the SEC “by rules and regulations may exempt as not comprehended within the purpose” of the statute.  

Specifically, SEC Rule 16b-3 provides that an acquisition by a company’s officers or directors which is approved in advance by the company’s board of directors is not subject to Section 16(b) because it is not presumptively made on the basis of material nonpublic information. Because Armistice was what is referred to under Section 16(b) as a “director by deputization” of Vaxart due to its representation on Vaxart’s board of directors through Mr. Boyd and Armistice Capital managing director Dr. Keith Maher, and the purported acquisition was approved by Vaxart’s board in advance, the district court found that Rule 16b-3 exempted the acquisitions from Section 16(b), resulting in no liability under the statute.   

On appeal, the Plaintiff challenged that conclusion, arguing that the Vaxart board needed to be aware that Armistice was a “director by deputization,” and that it was not sufficient that the board understood that Mr. Boyd and Dr. Maher served as Armistice’s representatives on the Vaxart board. The Second Circuit rejected Roth’s argument, concluding that an “issuer’s board need not be on notice of the investor’s formal, legal status as a ‘director by deputization’ to understand that it is approving a transaction with an insider.  Instead, to ensure that short-swing profits are not ‘at the expense of uninformed shareholders,’ an issuer’s board simply needs to be aware that one of its members serves as the eyes, ears voice, and vote of an investor when deciding whether to approve a transaction with that investor.” Because undisputed facts confirmed that was the case with respect to the transactions at issue, summary judgment was appropriate. 

In addition to funds litigation partners Rappaport and Shapiro, the Akin team included investment management partner William Wetmore, appellate partner James Tysse and counsel Michael Chen.  

This win marks Akin’s fourth victory for Armistice Capital in the past sixteen months, winning summary judgment in Roth v. Armistice Capital in the Southern District of New York in March 2024 and securing a jury trial win in Revive Investing LLC et al. v. Armistice Capital Master Fund Ltd. et al. at the U.S. District Court for the District of Colorado, where the jury found Armistice Capital exempt from a law that would require it to return $11 million in profits from the short-swing trades of Aytu BioPharma’s stock and obtaining a dismissal of a shareholder derivative action at the Court of Chancery of Delaware in the case, Paul Witmer. v. Armistice Capital Master Fund Ltd. et al. 

Akin is a leading international law firm with more than 900 lawyers in offices throughout the United States, Europe, Asia and the Middle East.  

# # #