Huppe v. Wpcs International Incorporated

670 F.3d 214 (2nd Cir. 2012)

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Nature of the Case

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Facts

QP and PE are Delaware limited partnerships. The Funds invest in publicly traded companies through privately negotiated acquisitions of positions in publicly traded companies called PIPE transactions (private investment in public equity). Each fund owned over 10% of the shares of nominal WPCS International Incorporated (WPCS), a wireless infrastructure engineering and special communications systems company whose shares trade on the NASDAQ. The Funds' limited partnership agreements provide that 'the management, operation and control of the business of the Fund shall be vested completely and exclusively in a General Partner' who 'shall have the right, power and authority, on behalf of the Fund and in its name, to exercise all rights, powers and authority of a general partner under the laws of Delaware.' Each general partner may invest or reinvest the limited partnership's assets, and appoint agents to perform the general partner's duties. PE's general partner is a limited liability company of which Austin W. Marxe and David M. Greenhouse are members. QP's general partner is a limited partnership of which Marxe and Greenhouse are limited partners. Marxe and Greenhouse hold the exclusive power to make all investment and voting decisions on behalf of the general partners and, in turn, on behalf of the Funds. From December 2005 until the end of January 2006, the Funds sold WPCS shares getting from $9.183 and $12.62 per share. In March 2006, WPCS announced that a change in applicable accounting rules required it to restate certain financial statements. WPCS's share price fell precipitously on the announcement, compromising WPCS's plans for a secondary public offering intended to raise capital for a critical strategic acquisition. WPCS approached Marxe and Greenhouse. On April 11, 2006, the Funds, together with other funds managed by Marxe and Greenhouse, bought 876,931 additional shares directly from WPCS at $7.00 per share - a discount of approximately 7% from the market price. WPCS's board approved the transaction. P is a WPCS shareholder. She filed this derivative action alleging that the Funds were liable to WPCS under Section 16(b) for their short swing profits. P sought disgorgement of approximately $486,000. Ds argued in part that the transaction should be exempt from the definition of a 'purchase' under Section 16(b) because it was issuer-solicited and approved by the board, which differed dramatically from the abusive sale/purchase sequence that Section 16(b) was enacted to prevent. The court ruled for P on summary judgment and Ds appealed.