Alan Dye's Section16.net Blog

Last year I blogged about a California judge’s denial of an insider’s motion for summary judgment in a 16(b) action (Nosirrah Management v. Franklin Wireless) alleging that a purchase of issuer securities by the insider’s adult daughter was attributable to the insider and could be matched with the insider’s sales. The case ended up being tried before a jury, which rendered a verdict in favor of the plaintiff for $2 million. The insider moved for judgment as a matter of law or a new trial, and the judge has now denied that motion.

The defendant in the case is O.C. Kim, the CEO of Franklin Wireless. Kim’s sister, who lives in Korea, wanted to sell her Franklin Wireless stock but was having difficulty due to the limited OTC market in Korea. Kim arranged for his sister to sell her stock to Kim’s adult daughter, who didn’t reside with Kim. Kim said his sister’s delivery of stock to his daughter was really a consignment, allowing his daughter to keep any sale proceeds exceeding $2.50 a share. Kim reported his daughter’s acquisition as a “purchase” (using transaction code “P”) and reported that he beneficially owned the shares indirectly. The daughter never sold the shares and returned them to Kim’s sister after the plaintiff submitted a demand letter.

Here are the judge’s key rulings:

Purchase. The plaintiff produced sufficient evidence to support the jury’s determination that the daughter’s acquisition was a purchase, not a consignment. Kim reported the transaction as a purchase, using transaction code “P,” and never amended the Form 4 to say otherwise. And, Kim offered no testimony supporting the “consignment” argument.

Beneficial ownership. Kim’s adult daughter was not financially dependent on him and had her own home, but her testimony showed that she had no investment experience, accepted the shares at Kim’s request, and did not expect to profit from ownership of the shares. Based on those facts and Kim’s Form 4 reporting beneficial ownership of the shares, the jury could have concluded that Kim had the ability to tell his daughter what to do with the shares and how to dispose of any proceeds, giving Kim a pecuniary interest in the shares.

Profit realized. Kim argued that, because his daughter didn’t pay for the shares and eventually returned them, Kim realized no profit. The court said that, because a purchase occurred, Kim realized a profit under the Smolowe rule, and the daughter’s return of the shares was merely an effort to rescind the transaction and was ineffective because its purpose was to avoid liability under Section 16(b).

Pre-judgment interest. The Court applied a three-factor test to determine whether Kim should pay pre-judgment interest: (1) whether the insider acted innocently or knowingly; (2) whether the insider repaid the corporation promptly upon demand; and (3) whether there has been substantial delay caused by the insider. The court said Kim did not act in bad faith, but the second and third factors favored an award of prejudgment interest, which the court determined to be $284,712.42.

Post-judgment interest. The court said that post-judgment interest is mandatory and directed Kim to pay interest at a rate of 5.44% through the date of payment.

Attorney’s fees. The plaintiff asked for an award of attorney’s fees of $700,000, representing 35% of the recovery. The court said the Ninth Circuit has held that the benchmark award in common fund cases is 25% of the recovery and that courts have discretion to use either the percentage of recovery method or the lodestar method. The court applied the percentage of recovery method and awarded attorney’s fees of 26% of the recovery, or $520,000.