Greenberg v. Hudson Bay Master Fund Ltd. et al

Filing 49

OPINION & ORDER....The Defendants' November 10 motion to dismiss is denied. (Signed by Judge Denise L. Cote on 5/12/2015) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
:
ERIC GREENBERG,
:
:
Plaintiff,
:
:
-v:
:
Hudson Bay Master Fund Ltd., Iroquois
:
Master Fund Ltd., American Capital
:
Management LLC, GRQ Consultants, Inc.
:
401K, Barry Honig, Richard Molinsky,
:
and WPCS International Incorporated,
:
:
:
Defendants.
:
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APPEARANCES:

14cv5226 (DLC)
OPINION & ORDER

For Plaintiff:
Jack Gerald Fruchter
Mitchell M.Z. Twersky
Jeffrey S. Abraham
Mark S. Hamill
Abraham Fruchter & Twersky LLP
One Penn Plaza
Suite 2805
New York, NY 10119
For Defendants Iroquois Master Fund Ltd. and American Capital
Management LLC
Thomas James Fleming
Renee Michele Zaytsev
Olshan Frome Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, NY 10022
DENISE COTE, District Judge:
The plaintiff brings this case under Section 16(b)
(“Section 16(b)”) of the Securities Exchange Act of 1934

(“Exchange Act”) to recover on behalf of WPCS International Inc.
(“WPCS”) short-swing insider trading profits earned by Iroquois
Master Fund Ltd. (“Iroquois”) and American Capital Management
(“ACM”) (collectively “Defendants”) while they were statutory
insiders of WPCS. 1

The Defendants have moved to dismiss the

complaint, largely on the ground that their investment in WPCS
is governed by an agreement that contains a conversion cap,
which operates as a matter of law to prevent any one of them
from becoming a beneficial owner of more than 10% of the
company’s shares.

The plaintiff’s allegation that investors

have formed a Section 13(d) group is sufficient here to require
denial of the motion to dismiss.
The plaintiff Eric Greenberg (“Greenberg”) is a shareholder
of WPCS.

WPCS is a Delaware corporation whose common stock is

registered with the Securities and Exchange Commission (“SEC”).
Defendants, also WPCS shareholders, are companies organized
under the laws of the Cayman Islands.

Greenberg initiated this

action on July 14, 2014, and following a motion to dismiss by
Hudson Bay, amended the complaint on October 15 (“Complaint”).
Defendants and Hudson Bay moved to dismiss the Complaint on
November 10.

That motion was fully submitted on December 12.

Hudson Bay Master Fund Ltd. (“Hudson Bay”), GRQ Consultants,
Inc. 401K, Barry Honig, and Richard Molinsky have been dismissed
from this action.
1

2

On January 30, 2015, Greenberg stipulated to the dismissal of
Hudson Bay from this action.
The Defendants and others participated in a private
offering, infusing WPCS with capital in December 2012 in
exchange for WPCS notes (“Notes”) and warrants (“Warrants”).

A

year later, the Defendants and Hudson Bay sold BTX Trader, LLC
(“BTX”) to WPCS.

The plaintiff believes that the sale of BTX

provided the Defendants with the opportunity to make illegal
short-swing profits on their investment in WPCS.

For roughly

two weeks following the announcement of the sale of BTX to WPCS,
the volume trading of WPCS stock increased exponentially and its
stock price fluctuated greatly.
Since each of the Defendants owned less than 10% of the
outstanding shares of WPCS, the plaintiff has alleged that the
Defendants and Hudson Bay formed a group to purchase and sell
WPCS stock in violation of the securities laws.

The plaintiff

relies on two events to infer the formation of a group, and its
concomitant purchase and sale of WPCS stock: their coordinated
investment in WPCS and their combined purchase of BTX and its
subsequent sale to WPCS.
BACKGROUND
The following facts are asserted in the Complaint and taken
from documents integral to those claims.

On December 4, 2012,

WPCS obtained $4 million when it entered into a Securities
3

Purchase Agreement (“SPA”) with Defendants, Hudson Bay, and
others (collectively “Buyers”).

In exchange for the investment,

the Buyers received $4 million in principal amount of
convertible Notes and Warrants to purchase 15,923,567 shares of
WPCS’s common stock. 2

In connection with the SPA, WPCS also

entered into a registration rights agreement with Buyers
(“Rights Agreement”).

Iroquois’ and ACM’s Notes constitute

approximately 31% and 3%, respectively, of the total value of
the Notes issued pursuant to the SPA.
The SPA and Rights Agreement contain provisions describing
the circumstances and manner in which the Buyers could purchase
additional WPCS securities and sell the WPCS common stock
obtained through conversion of the Notes.

The Rights Agreement

also describes scenarios in which the Buyers would be able to
register their securities with the SEC.

In each of these

scenarios, the Rights Agreement requires that notice be given to
each Buyer of the impending registration, and permits each Buyer
to participate in the registration.

If a particular

registration was oversubscribed by the Buyers, the Rights
Agreement describes a pro rata method of reducing the number of
shares to be registered.

According to the SPA, Iroquois received $1,257,500 in Notes and
Warrants for 5,005,971 shares. ACM received $100,000 in Notes
and Warrants for 389,089 shares.
2

4

The SPA explains that the use of a single agreement was for
the convenience of WPCS and should not create a presumption that
the Buyers were acting as a group.

It provides:

The obligations of each Buyer under the [SPA and
Rights Agreement] are several and not joint with the
obligations of any other Buyer. . . . Nothing
contained herein or in any other [document], and no
action taken by any Buyer pursuant hereto . . ., shall
be deemed to constitute the Buyers as . . . a
partnership, an association, a joint venture, or any
other kind of group or entity, or create a presumption
that the Buyers are in any way acting in concert . . .
. The decision of each Buyer to purchase securities
pursuant to [any document relating to this
transaction] has been made by such buyer independently
of any other Buyer. . . . Each Buyer shall be
entitled to independently protect and enforce its
rights . . . . The use of a single agreement to
effectuate the purchase and sale of the securities
contemplated hereby was solely in the control of
[WCPS] . . . and was done solely for the convenience
of [WPCS] . . . . It is expressly understood and
agreed that each provision contained in [the SPA and
other transaction documents] is between [WPCS], each
subsidiary and a Buyer, solely, . . . and not between
and among the Buyers.
(Emphasis supplied.)

The Rights Agreement contains a similar

provision.
Recognizing the impact of Section 16(b), the Notes contain
a provision limiting the right of the holder to convert the
Notes to achieve ownership in excess of 9.99% of common stock.
Specifically, the Notes provide that:
Notwithstanding anything to the contrary contained in
this Note, this Note shall not be exercisable by the
Holder hereof, and [WPCS] shall not effect any
conversion . . . to the extent (but only to the
extent) that giving effect to such conversion or other
5

share issuance hereunder the Holder (together with its
affiliates) would beneficially own in excess of 9.99%
. . . of the Common Stock. . . . For purposes of this
paragraph, beneficial ownership . . . shall be
determined in accordance with Section 13(d).
(Emphasis supplied.)

The Warrants contain a similar provision:

Notwithstanding anything to the contrary contained in
this Warrant, this Note shall not be exercisable by
the Holder hereof to the extent (but only to the
extent) that giving effect to such conversion or other
share issuance hereunder the Holder (together with its
affiliates) would beneficially own in excess of 9.99%
. . . of the Common Stock. . . . For purposes of this
paragraph, beneficial ownership . . . shall be
determined in accordance with Section 13(d).
Provisions such as these are known as “blocker provisions” or
“conversion caps.”
The Complaint alleges that the blocker provisions were
ineffective because WPCS did not know how many of its shares
were outstanding.

In a December 19, 2013, earnings call with

shareholders WPCS executives did not identify the number of
shares that were outstanding.

In a Form 8-K, filed on December

20, the day after the earnings call, however, WPCS disclosed the
number of outstanding shares through December 19. 3

Taken

collectively, and based on documents filed by their investors
and managers, the Defendants and Hudson Bay own almost twenty
percent of WPCS shares.

Judicial notice may be taken of a regulatory filing although
not to prove the truth of its contents. Staehr v. Hartford Fin.
Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008).
3

6

On October 25, 2013, WPCS amended certain conversion
features of the Warrants and Notes.

Pursuant to the amendment,

the Buyers exchanged 154,961 of their Warrants for 38,740 shares
of common stock and new warrants to purchase 154,961 shares of
common stock (“New Warrants”).

In exchange, Buyers waived

various provisions of the original Warrants that favored the
Buyers, including anti-dilution protection.

On November 5, WPCS

amended the Notes to eliminate certain redemption rights, alter
the interest rate payable on the Notes, and change the term of
the instrument.

As a consequence of these modifications, WPCS

determined that the original Notes were extinguished and issued
new notes (“New Notes”).

The New Notes and New Warrants

retained the same blocking provisions as contained in the Notes
and Warrants. 4
BTX was a technology start-up company seeking to provide
access to the Bitcoin market.

The Defendants and Hudson Bay,

among others, owned BTX and incorporated it on December 4, 2013.
In connection with the formation of BTX, Defendants acquired
software and intellectual property rights for an aggregate of
$439,408 in the WPCS New Notes and $1,185,000 in cash.

While the Complaint does not explicitly state that the New
Notes retained the original blocker provisions, no party has
argued that the blocker provisions were eliminated in these
amendments.
4

7

On December 17, 2013, WPCS announced that it had acquired
BTX in exchange for convertible shares (“BTX Transaction”).
WPCS issued an aggregate of 2,438 shares of Series E Convertible
Preferred Stock for $2,430,000, and warrants to purchase up to
1,500,000 share of Common Stock in exchange for BTX.

Following

the BTX announcement, trading volume of WPCS increased
dramatically from about 100,000 shares of the common stock per
day to about three million shares, and ultimately thirty-three
million on December 27.

From December 17 to December 31, the

market price of the WPCS common stock fluctuated between $1.51
and $3.13 per share.

During this period, the Complaint asserts

that the Defendants converted the New Notes into shares and sold
these at a profit. 5

One writer stated that this transaction “at

worst, looked like a cynical ploy by a pair of hedge funds to
take advantage of the Bitcoin frenzy to create some excitement
around the [WPCS] stock so the funds could get out from under a
troubled loan [to WPCS].”

This lawsuit followed, seeking

disgorgement of the profits obtained during this period on
behalf of WPCS.
The Complaint describes a number of disclosures WPCS made
regarding the conversion of the Notes and New Notes between July
30, 2013 and January 13, 2014. WPCS’s disclosures did not
include the names of the converting shareholders. There were,
however, only six Buyers of the Notes. Between December 17 and
19, 2013, all six Buyers converted shares. By necessity, the
Defendants were among the Buyers converting shares in this
period.
5

8

DISCUSSION
When deciding a motion to dismiss under Rule 12(b)(6), Fed.
R. Civ. P., a court must “accept all allegations in the
complaint as true and draw all inferences in the non-moving
party’s favor.”

LaFaro v. New York Cardiothoracic Group, PLLC,

570 F.3d 471, 475 (2d Cir. 2009).

To survive a motion to

dismiss, “a complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible
on its face.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(citation omitted).

A complaint must do more, however, than

offer “naked assertions devoid of further factual enhancement.”
Id. (citation omitted).

A court is “not bound to accept as true

a legal conclusion couched as a factual allegation.”

Id.

“For purposes of a motion to dismiss, we have deemed a
complaint to include any written instrument attached to it as an
exhibit or any statements or documents incorporated in it by
reference, as well as . . . documents that the plaintiffs either
possessed or knew about and upon which they relied in bringing
the suit.”

Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)

(citation omitted).

The Complaint references the Notes,

Warrants, SPA, Rights Agreement, and Schedule 13G and 14A SEC
filings in the Complaint. 6

Accordingly, these documents may be

A Schedule 13G is an SEC form used to disclose beneficial
ownership of five percent or more of a company’s equity
6

9

considered at the motion to dismiss stage.

The Court may also

take judicial notice of the fact that public disclosures were
made through other filings with the SEC.

Staehr, 547 F.3d at

425.
“Section 16(b) of the Exchange Act requires that profits of
short-swing trading be disgorged to the issuer of the stock.”
Morales v. Quintel Entm’t, 249 F.3d 115, 121 (2d Cir. 2001).
“The statute aims to deter insiders from taking unfair advantage
of confidential company information to realize short-swing
profits on trades in the company’s stock.”

Id. at 122.

Short-

swing trading is generally defined as “the purchase and sale (or
vice versa) of a company’s stock within a six-month period by
persons deemed to be insiders . . . .”
omitted).

Id. at 121 (citation

Statutory insiders are persons who “directly or

indirectly [are] the beneficial owners of more than 10% of any
class of any equity security . . . .”

15 U.S.C. § 78p(a)(1).

Section 16(b) only applies to transactions where the individual
was a statutory insider at both the time of the purchase and the
time of sale.

Foremost-McKesson, Inc. v. Provident Sec. Co.,

securities when the purchaser has no intent to change or
influence the issuer or to act in concert with others who so
intend. See 17 C.F.R. § 240.13d-1(c) (1999); Hallwood Realty
Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 616 n.4
(2d Cir. 2002). Schedule 14A sets out the minimum disclosures
that must be made prior to the solicitation of proxies.
Maldonado v. Flynn, 597 F.2d 789, 797 n.9 (2d Cir. 1979); United
States v. Dixon, 536 F.2d 1388, 1391 (2d Cir. 1976).
10

423 U.S. 232, 235 (1976).

Therefore, a purchase that pushes the

buyer over the ten percent threshold cannot be matched with a
sale for Section 16(b) liability.

Id.

Because Section 16(b)

imposes liability without fault within its narrow limits, courts
are “reluctant to exceed a literal, mechanical application of
the statutory text in determining who may be subject to
liability, even though in some cases a broader view of statutory
liability could work to eliminate an evil that Congress sought
to correct through § 16(b).”

Gollust v. Mendell, 501 U.S. 115,

122 (1991) (citation omitted); see also Gibbons v. Malone, 703
F.3d 595, 599 (2d Cir. 2013).
There is no allegation that any single defendant
beneficially owned more than ten percent of any class of WPCS
stock.

The plaintiff’s theory of Section 16(b) liability is

that the Defendants and Hudson Bay formed a shareholder group
that collectively owned more than ten percent of WPCS common
stock.

Relying on this contention, it asserts that the October

and November 2013 amendments to the Notes and Warrants
constitute a purchase that may be paired with the sales of WPCS
stock that occurred between December 2013 and January 2014,
thereby requiring disgorgement of the profits obtained.
Defendants move to dismiss on four separate grounds.
Defendants argue they are not subject to disgorgement under
Section 16(b) because they did not form a shareholder group, a
11

prerequisite to finding that they beneficially owned enough
shares of WPCS common stocks to be deemed statutory insiders.
Defendants further ague that, even if they did form a
shareholder group, the blocker provisions in the Notes and
Warrants preclude them from beneficially owning as a group ten
percent or more of WPCS securities.

Iroquois also argues that

it does not beneficially own the shares at issue as the shares
were held by a registered investment adviser.

Defendants also

argue that the plaintiff has not adequately matched purchases
and sales of securities within six months as required to plead a
Section 16(b) violation.

Each of these arguments will be

considered in turn.
I. The Complaint Plausibly Alleges a Shareholder Group.
In order to be subject to liability under Section 16(b), a
shareholder must beneficially own ten percent of a class of
securities.

The Exchange Act does not define the term

beneficial owner as it is used in Section 16(b).
F.3d at 122.

Morales, 249

To fill this gap, the SEC promulgated regulations

stating that the term beneficial owner as used in Section 16(d)
as “any person who is deemed a beneficial owner pursuant to
section 13(d) of the [Exchange] Act and there rules thereunder.”
17 C.F.R. § 240.16a–1(a)(1).

Under Rule 13d–3(d)(1), a person

is deemed to be a holder of the underlying security “if that
person has the right to acquire beneficial ownership of such
12

security . . .

within sixty days . . . through the conversion

of a security . . . .”

Id. § 240.13d–3(d)(1).

The rules promulgated by the SEC in connection with Section
13(d) define a shareholder group as existing “[w]hen two or more
persons agree to act together for the purpose of acquiring,
holding, voting or disposing of equity securities of an issuer.”
Id. § 240.13d-5(b)(1); see also Roth v. Jennings, 489 F.3d 499,
507-508 (2d Cir. 2007) (“[I]f two of more entities agree to act
together for any of the listed purposes, a group is thereby
formed.” (citation omitted)).

When a shareholder group is

formed, “each person in the group shall be deemed to be the
beneficial owner of all equity securities of that issuer
beneficially owned by any member of the group.”
at 508 (citing 17 C.F.R. § 240.13d-5(b)(1)).

Roth, 489 F.3d

The agreement to

form a shareholder group may be formal or informal, and may be
proven by direct or circumstantial evidence.

Wellman v.

Dickinson, 682 F.2d 355, 363 (2d Cir. 1982).

“Whether the

requisite agreement exists is a question of fact.”
F.3d at 124.

Morales, 249

A complaint must still, however, plead sufficient

factual allegations to plausibly support the inference that an
agreement was made.

Iqbal, 556 U.S. at 678; see also Segal v.

Gordon, 467 F.2d 602, 608 (2d Cir. 1972) (finding that the lack
of specificity in alleging a Section 13(d) group required
dismissal of the claim).
13

There are two sets of facts alleged in the Complaint to
support the allegation that the Defendants and Hudson Bay formed
a shareholder group.

The first involves the simultaneous

investment in WPCS and their acquisition of rights through the
Rights Agreement and SPA.

The second is the BTX Transaction. 7

The second set of facts is sufficient to plausibly allege the
formation of an agreement between the Defendants and Hudson Bay
for the purpose of acquiring, holding, voting or disposing of
WPCS’s equity securities.
The transaction documents provide little support for the
plaintiff’s contention that the Defendants formed a shareholder
group with Hudson Bay.

The Complaint highlights the provisions

of the SPA and Rights Agreement that require notice to all
Buyers in connection with the registration of securities, and
describe a pro rata method for allocating the right to register
securities in the event that Buyers wish to register more
securities than WPCS deems prudent.

The use of a single

document in a private placement is not unusual, and courts have
routinely rejected the argument that transaction documents
granting investors parallel rights and obligations create an
The plaintiff’s opposition brief also refers to another
transaction that occurred in 2013 where Hudson Bay and
Defendants worked together. The plaintiff did not include any
allegations about this transaction in the original complaint or
the October 2014 amended complaint. Accordingly, these
allegations are not included in the pleadings and are not
considered here.
7

14

inference that a shareholder group was formed.

See In re

Facebook, Inc., IPO Sec. & Derivative Litig., 986 F. Supp. 2d
544, 552-53 (S.D.N.Y. 2014); Chechele v. Scheetz, 819 F. Supp.
2d 342, 348-49 (S.D.N.Y. 2011); Litzler v. CC Investments,
L.D.C., 411 F. Supp. 2d 411, 415-16 (S.D.N.Y. 2006); cf.
Morales, 249 F.3d at 126-127 (“[T]he [parallel] lock-up
provisions in the Sales Agreement, viewed in light of the other
facts, suggest the [the defendants] reached a mutual agreement
with respect to holding and disposing of shares . . . .”
(emphasis added)).

Furthermore, the SPA and Rights Agreement

specifically assert that the rights are separately granted and
the use of a single document is for the convenience of WPCS.
The other set of allegations supporting the existence of
agreement is the BTX Transaction.

But, the BTX Transaction

occurred in December 2013, and the Section 16(b) disgorgement
penalty only applies to a group if the group was formed prior to
both the date of the purchase and sale of securities that is the
basis of the Section 16(b) claim.
U.S. at 234.

See Foremost-McKesson, 423

Plaintiff has identified a “purchase” in this case

as occurring on October 25 and November 5, 2013 through the
amendments to the Notes and Warrants.
The Complaint alleges that Defendants and Hudson Bay shared
a common objective to dispose of WPCS securities, and plausibly
alleges that they worked together for some time in advance of
15

the December 2013 BTX Transaction to achieve that objective.
The steps necessary to prepare for the incorporation of BTX and
subsequent sale to WPCS -- such as opportunity sourcing,
negotiating, drafting, and due diligence -- necessarily predated
the date of the BTX Transaction.

Moreover, the Defendants and

Hudson Bay used WPCS stock to purchase the technology for BTX,
and received WPCS stock from WPCS in exchange for BTX.

Taken

together, these allegations are sufficient to plausibly allege
the formation of a group in advance of October 25, 2013.
II. The Conversion Cap
The Defendants argue the blocker provisions in the Notes
and Warrants apply with equal force to any group that might be
formed, and therefore preclude them from collectively owning
more than 9.99% of WPCS shares.

This argument fails.

Under Rule 13d–3(d)(1), a person is deemed to be a holder
of the underlying security “if that person has the right to
acquire beneficial ownership of such security . . . within sixty
days . . . through the conversion of a security. . . .”
C.F.R. § 240.13d–3(d)(1) (emphasis added).
depends on the right to acquire a security.

17

Thus, Rule 13d
Levy v. Southbrook

Intern. Investments, Ltd., 263 F.3d 10, 15 (2d Cir. 2001).

As a

result, holders of freely convertible securities, including
warrants and notes, are generally deemed to be beneficial owners
of the underlying common stock.

Where conversion rights are
16

limited, however, a holder of a convertible security may not be
deemed the beneficial owner of the underlying common stock.

A

blocker provision limits the right of a holder to convert
securities above a specified amount.

Id. at 16.

Thus, “as long

as the conversion cap . . . is binding, [the defendant] cannot
be the beneficial owner of more than” the amount of stock
specified in the conversion cap.

Id. at 16; see also Levner v.

Prince Alwaleed, 61 F.3d 8, 9 (2d Cir. 1995); Decker v.
Advantage Fund, Ltd., 362 F.3d 593, 596-97 (9th Cir. 2004);
Peter J. Romeo & Alan L. Dye, Section 16 Treatise and Reporting
Guide § 2.03, at 170-173 (4th ed. 2012).

“At any one time, [the

defendant] cannot hold more than that amount of stock because it
does not have the right to acquire more than [the specified
amount of] common stock within sixty days of each divestment.”
Levy, 263 F.3d at 16 (citation omitted) (emphasis added).
Both the Notes and the Warrants contain a conversion cap.
While this conversion cap is binding on a single shareholder, it
does not shield a shareholder from liability when that
shareholder acts as a part of a group.

Each individual

shareholder has no “right” to convert shares in excess of the
cap, but by acting as a group shareholders may acquire shares in
excess of the caps on each shareholder’s rights.
The Defendants emphasize that the conversion cap applied to
each shareholders’ “affiliates,” citing to Log On Am., Inc. v.
17

Promethean Asset Mgmt. L.L.C., 223 F. Supp. 2d 435 (S.D.N.Y.
2001).

They reason that members of a group should be deemed

affiliates and encompassed by the cap.

But the term affiliates

refers to “a corporation that is related to another corporation
by shareholdings or other means of control [such as] a
subsidiary, parent, or sibling corporation,” Black’s Law
Dictionary 69 (10th ed. 2014), and there is no reason to find
that it should be given a broader meaning here.

Accordingly,

since the other alleged members of the group are not affiliates
of each other, they are not shielded by the conversion cap.
Defendants’ reliance on Log On Am., which involved a conversion
cap with similar language, is misplaced.

In Log On Am., the

court separately determined that the plaintiff had not plausibly
alleged a shareholder group and that the conversion cap was
binding and enforceable.

Id. at 448-449.

The Defendants note that the conversion cap instructs that
beneficial ownership shall be calculated according to Section
13(d), which also contains provisions for determining the
ownership of a shareholder group.

17 C.F.R. § 240.13d-5(b)(1).

But, the Defendants admit that WPCS did not view them as a
group.

They do not explain, therefore, how WPCS could have

acted to enforce the conversion caps that explicitly operated
vis-à-vis individual shareholders in the group that the
plaintiff alleges existed here.
18

III. Iroquois as Beneficial Owner
Iroquois also argues that it cannot be liable for a
violation of Section 16(b) because its investment advisor,
Iroquois Capital Management, L.L.C. (“ICM”), and not Iroquois is
the beneficial owner of its WPCS shares, and, as an investment
advisor, ICM is exempt from Section 16(b) liability.
§ 16a-1(a)(1)(V).

17 C.F.R.

The plaintiff has adequately alleged that

Iroquois is the beneficial owner of the shares.
Section 13(d) provides that a beneficial owner of a
security includes “any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (1) Voting power which includes the
power to vote, or to direct the voting of, such security; and/or
(2) Investment power which includes the power to dispose, or to
direct the disposition of, such security.”

Id. § 240.13d-3(a).

The regulations contemplate that a purchaser may not avoid
Section 16(b) liability simply by delegating voting and
investment authority to a third party.

An entity may be the

beneficial owner of securities even when it only indirectly
shares or possesses voting and investment power.

Id.

In Huppe v. WPCS Intern. Inc., 670 F.3d 214 (2d Cir. 2012),
the Court of Appeals for the Second Circuit rejected the
argument that a limited partner could avoid Section 16(b)
liability by delegating all voting and investment power to the
19

general partner, which in turn delegated voting and investment
power to agents.

Id. at 221.

Because the delegating party

maintained a principal-agent relationship with the other party,
the principal remained the beneficial owner of securities for
Section 16(b) purposes.

Id.; see also Analytical Surveys Inc.,

v. Tonga Partners L.P., 684 F.3d 36, 51-52 (2d Cir. 2012); cf.
Romeo & Dye, supra, § 2.03, at 200 (“Where a client of an
investment adviser cedes all investment and voting discretion to
the adviser, who subsequently becomes a member of a Section
13(d) group . . ., the client should not be considered a member
of the group . . . .

If, however, the client and the investment

adviser share voting or investment power over the securities in
the client’s portfolio, the client, too, may be deemed a member
of the group.”).
The plaintiff alleges that, although ICM reported that it
was the beneficial owner of the Notes and Warrants in the 13G
filings, Iroquois remained the beneficial owner of the Notes.
In the Schedule 14A filings referenced by the plaintiff in the
Complaint, and cited by Iroquois, WPCS lists Iroquois -- and not
ICM -- as the beneficial owner of WPCS securities.

The precise

nature of the relationship between Iroquois and ICM need not be
alleged with particularity in the Complaint.

By alleging that

Iroquois maintained an active role in the disposal of WPCS
securities, the plaintiff has alleged sufficient facts to plead
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that Iroquois was the beneficial owner of the securities held by
ICM.
In support of the motion to dismiss, the Defendants
primarily rely on Egghead.Com, Inc. v. Brookhaven Capital Mgmt.
Co., 340 F.3d 79 (2d Cir. 2003), for the proposition that
securities held by an investment adviser may not be used in
calculating the beneficial ownership of a group.

Egghead,

however, confronted the question of whether a registered
investment adviser could be deemed the beneficial owner of
securities when alleged to be a member of a shareholder group.
Id. at 84-85.

It did not purport to answer the question of

whether a client who retains an economic interest in the
securities remains the beneficial owner of securities despite
delegations to its investment advisor.
IV. The Plaintiff Has Adequately Pleaded a Matched Purchase and
Sale.
Section 16(b) requires that a purchase and sale of
securities be made within a six month period.

The Defendants

argue that the plaintiff has failed to adequately match the
purchase and sale of securities within a six month period.

The

Defendants do not dispute that the plaintiff has adequately
alleged a purchase in October and November through the
amendments to the existing notes and issuance of its
replacement.

They do assert, however, that the plaintiff has
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failed to plead that the Defendants sold securities in December
2013 and January of 2013.

This argument fails.

In support of the assertion that the Defendants sold WPCS
shares within six months of the amendments, the plaintiff
identifies WPCS disclosures indicating that the Defendants
converted shares in December 2013, the elevated trading volume
and price of WPCS securities during, and that approximately 75%
of the Notes had been converted by January 13, 2014.

Taken

together, these allegations are sufficient to plead in a nonconclusory fashion that the Defendants sold WPCS shares during
the relevant period.

Accordingly, the plaintiff has adequately

alleged a matched purchase and sales of WPCS securities.
CONCLUSION
The Defendants’ November 10 motion to dismiss is denied.
Dated:

New York, New York
May 12, 2015
____________________________
DENISE COTE
United States District Judge

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