Mintz Secures Summary Judgment Win in Short-Swing Profit Case in SDNY

The Situation

In 2021, Plaintiff Dennis Donoghue filed a lawsuit against Thomas Gad, the Founder and President of Y-mAbs Therapeutics, Inc., alleging violations of Section 16(b) of the Securities Exchange Act of 1934. The case revolved around transactions dating back to 2015, involving the ownership and exchange of Y-mAbs common stock through various entities. In March 2021, our client engaged in an exchange whereby he obtained direct ownership of Y-mAbs shares by surrendering his ownership in an entity that had held Y-mAbs common stock pegged to each of its shareholders since 2015. The plaintiff claimed this transaction constituted a purchase under Section 16(b), which could trigger liability for any profits realized from sales within six months. The plaintiff sought disgorgement of alleged profits exceeding $2.4 million. Prior counsel had litigated the matter on Mr. Gad’s behalf through discovery without an acceptable resolution. Following the close of discovery and with a trial date looming, Mr. Gad hired Mintz to take over the matter.

The Approach

Our team mounted a robust defense strategy centered on two key arguments. First, we contended that the March 2021 transaction, where Mr. Gad's business entity, GAD Enterprises, exchanged its shares in WG Biotech for Y-mAbs common stock, did not qualify as a "purchase" under Section 16(b). Second, we argued that even if it were considered a purchase, it was exempt from liability under SEC Rule 16a-13 because it merely represented a change in the form of beneficial ownership without altering Mr. Gad's pecuniary interest.

Throughout the case, our defense meticulously examined both the extensive factual record and the legislative purpose of Section 16(b), emphasizing that its intent was to prevent insiders from exploiting non-public information for financial gain. We presented compelling evidence that Mr. Gad lacked control over the timing or terms of the transaction, which bolstered our argument that he could not have manipulated the exchange based on inside information.

The Outcome

The Court examined whether Mr. Gad retained beneficial ownership and pecuniary interest in the Y-mAbs shares after the transaction. It found that he did maintain such an interest, as evidenced by his entitlement to profits from any sale of the Y-mAbs shares by WG Biotech, a company through which Mr. Gad indirectly owned the shares. The Court granted Mr. Gad’s motion for summary judgment, concluding that the March 2021 transaction did not constitute a new “purchase” under Section 16(b), and otherwise was exempt from liability under SEC Rule 16a-13 because it involved only a change in the form of beneficial ownership without affecting the defendant's pecuniary interest in the Y-mAbs stock.

This case underscores the significance of understanding and applying regulatory exemptions in securities law and highlights Mintz’s capabilities in navigating complex legal disputes and evidentiary requirements. The Court’s decision not only accepted both of our core arguments but also resulted in precedent that creates a clearer understanding of the purchase requirements and exemption rules under Section 16(b).