The U.S. Court of Appeals for the Second Circuit affirmed a district court dismissal of a securities suit against investors in Men’s Wearhouse Inc. for allegedly making short-swing trades ahead of the reorganization of the men’s retailer under a holding company.
In a summary order, the panel of U.S. Circuit Judges Reena Raggi, Peter Hall and Susan Carney said U.S. District Judge Ronnie Abrams of the Southern District of New York was correct in dismissing plaintiff Larry Morrison’s Section 16(b) action for lack of statutory standing. Since Men’s Wearhouse had done a stock exchange for shares in the holding company, Tailored Brands, plaintiff no longer held stock in the issuer of the securities that were part of the short-swing trades.
Focusing exclusively on the standing issue, the panel leaned on the U.S. Supreme Court’s 1991 ruling in Gollust v. Mendell, which held that, though securities law is particular about the type of security required for standing, it must be held in the issuer to whom the profits of the trades would accrue—that is, the company that actually issued the security.
Since the securities owned by plaintiff was in Tailored Brands, not Men’s Wearhouse, at the time the action was initiated, Abrams’ was correct in dismissing the suit. Morrison went on to argue that the operative language from Gollust was dicta, but the panel found the argument to “merit little discussion.”
Further the panel dismissed Morrison’s argument that the securities violation cause of action was an asset transfer under Exchange Act Rule 414(b), finding that the two securities rules had “no relationship” to each other in the suit. They also dispensed with the suggestion that Men’s Wearhouse was reorganized to deprive Morrison of standing, finding it “implausible” as the company’s announcement occurred before the complaint was filed.
Appellees were represented by Schulte Roth & Zabel partner Michael Swartz. He could not be reached for comment.
Abraham, Frutcher & Twersky name attorney Jeffrey Abraham represented Morrison on appeal. He could not be reached for comment.