Second Circuit Affirms Dismissal of Civil Securities Claim Against Kramer Levin Client Rajat K. Gupta

In a unanimous opinion issued on April 5, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the complaint in the case of Mercer v. Gupta. James Mercer, a shareholder of The Goldman Sachs Group, Inc., brought this action purportedly on behalf of Goldman Sachs against Kramer Levin client Rajat K. Gupta under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) is a strict liability provision that forces statutory insiders (that is, officers, directors and owners of more than 10% of the outstanding shares of a corporation) to disgorge all profits realized by him or her from any purchase and sale (or sale and purchase) made within a six-month period. Mercer alleged that Mr. Gupta was the “beneficial owner” of profits realized by Raj Rajaratnam through Rajaratnam’s trading in Goldman Sachs stock for the Galleon Group. On behalf of Mr. Gupta, we brought a motion to dismiss the complaint, arguing that the complaint failed adequately to plead that Mr. Gupta was a beneficial owner of these shares (it being conceded by Mercer that Mr. Gupta, himself, never traded Goldman Sachs stock). By a decision issued on July 28, 2012, U.S. District Judge Jed S. Rakoff accepted our arguments and dismissed the complaint with prejudice. Mercer appealed, but the Second Circuit agreed with the district court that Mercer had failed adequately to plead that Mr. Gupta was the beneficial owner of the Galleon Group’s shares of Goldman Sachs (and therefore Mr. Gupta had not “realized” any profits as required for liability under Section 16(b)). The Second Circuit also accepted our argument that “Section 16(b) does not apply perforce to tippers,” where the central allegation of the complaint was that Mr. Gupta tipped information about Goldman Sachs to Rajaratnam; the opinion thereby reconciles the respective roles of Sections 10(b) and 16(b) of the Exchange Act.

The Kramer Levin team consisted of firm co-chair and Litigation department head Gary P. Naftalis and Litigation partners Michael S. Oberman and Alan R. Friedman.