Category: Business Law


Philadelphia Business Lawyers: Class Action Lawsuit for Unsolicited Text Messages

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Advertising firm, Campbell-Ewald, sent unsolicited text messages on behalf of the U.S. Navy to approximately 100,000 people, stating: “Destined for something big? Do it in the Navy.” These messages were sent as part of an ongoing recruitment drive. The U.S. Supreme Court has recently ruled against Campbell-Ewald, despite arguments that the advertising firm’s settlement offer to class action members would have resolved the case.

The class action plaintiffs claim that the company violated the federal Telephone Consumer Protection Act by sending the unsolicited text messages. The company argued that because it had offered to pay plaintiffs the maximum amount available under law to settle the claims, that the Court had no grounds to hear the case. Campbell-Ewald had offered to settle for $1,500 for each violation of the Act.

The Supreme Court upheld the September 2014 decision of the San Francisco-based 9th Circuit Court of Appeals. The Court’s six-three decision was issued in favor of the plaintiffs, led by class action lead plaintiff Jose Gomez. Writing on behalf of the majority, Justice Ruth Bader Ginsburg indicated that an unaccepted settlement offer does not moot a plaintiff’s case. The Court’s opinion is docketed Campbell-Ewald v. Gomez, U.S. Supreme Court, No. 14-857.

In the current Supreme Court term, there are three class action appeals on the docket. The other cases involve appeals filed by Tyson Foods, Inc. and Spokeo, Inc. Campbell-Ewald is a large Detroit-based advertising agency that is a subsidiary of the Interpublic Group of Companies, Inc.

The U.S. Navy was not named as a defendant in this case and is not being sued with respect to this incident. The Obama administration has filed an amicus brief in favor of Gomez and the other class action plaintiffs.

Philadelphia Business Lawyers at Sidkoff, Pincus & Green Represent Individuals in Class Action Lawsuits

In a class action lawsuit, large numbers of individuals who have suffered a similar harm can harness the power of their numbers to effectively seek justice against a large corporation. When an individual suffers a nominal harm, such as receiving an unsolicited text message, there is no incentive to file a lawsuit due to the high cost-benefit ratio. But when plaintiffs unite, class actions are an effective means to hold corporations responsible for their harmful conduct.

Philadelphia business lawyers at Sidkoff, Pincus & Green represent clients in class actions throughout Philadelphia and South Jersey. Our offices are conveniently located in Center City Philadelphia. To schedule a consultation, call us at 215-574-0600 or contact us online.

Philadelphia Litigation Lawyer: How To Help Your Lawyer Win Your Case

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By Gary Green, Managing Partner at Sidkoff, Pincus & Green P.C.[email protected]

The client is not just a passenger in a lawsuit. Instead, the client should be a combination of co-pilot and Air Traffic Control. Your lawyer needs your help.

1.  Write A Story About Your Case

You know what happened. Judges and juries will transform the evidence they hear at trial into a story. Therefore, you can get a head start by putting the facts together in the same way a novelist would write about the case. You can use chronological order and create a narrative that starts at the beginning. In some cases, the personalities and relationships of the parties and witnesses are more important. Whatever you select, write out everything you can think of. Eliminate all duplication to allow your lawyer to digest your story. Keep a copy and update your story as you learn or understand new things. Do not be afraid to throw out the story and start over if the mode you picked (e.g., chronological) turns out to be less effective than another (e.g., personal relationships). When you have your testimony taken, your story will help you keep the facts in perspective to the issues in the case. Also, your narrative will be a road-map for your lawyer when he cross examines your adversaries and plans for the evidence needed for you to win.

2.  Do Not Be Afraid To Be Honest

Many people make the mistake of thinking that if their case does not have a perfect set of facts they cannot win. However, judges and juries know life is flawed like genuine leather and a case that looks perfect is treated like a cheap, plastic imitation of the truth. Your lawyer will be planning your case around what you tell him. If you do not tell him the truth, he will get stuck on a detour. Think of telling an ambulance driver directions on where it should pick up a sick loved one. You surely would be as accurate as possible; and your communications with your lawyer must be just as careful and accurate

3.  Organize Your Emails And Papers

In modern trials, email and documents often dominate the case. Do not shirk the work of diligently searching all of your computers and phones for email and text messages; and similarly, locate every paper document. These things will be like bullets in your lawyer’s gun on the one hand, and will give him a plan of how to avoid traps.

For more information, call Philadelphia business lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Lawyer: Monster Energy Settles Copyright Infringement Lawsuit

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Monster Beverage Corp. (Monster) recently settled a copyright infringement lawsuit filed by the Beastie Boys. The claim arose after Monster released a four-minute long commercial for a Canadian snowboarding competition. The video featured five Beastie Boys’ tracks without the group’s permission. The Beastie Boys then filed a lawsuit, asserting that the commercial use of their songs lead the public to think that they had endorsed the company’s energy drink, Monster Energy, when they did not.

The band won the lawsuit on its merits and were subsequently awarded $1.7 million plus an additional $667,000 in legal fees. However, Monster appealed on grounds that the award was unreasonably high. The Beastie Boys settled the case with Monster before the appeal was adjudicated for an undisclosed amount.

Philadelphia Business Litigation Lawyers at Sidkoff, Pincus & Green Represent Victims of Copyright Infringement

At Sidkoff, Pincus & Green, our experienced team of Philadelphia business litigation lawyers handle all types of legal matters, including claims of trademark and copyright infringement. If you believe your business is the victim of copyright infringement, contact us at 215-574-0600 or fill out our online contact form today.

 

Philadelphia Bad Faith Lawyers: Award Against Safe Auto

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Bad Faith Charges Awarded Against Safe Auto after Failing to Appear at Arbitration

 In the case of Mangan v. Safe Auto Insurance Company, the policy owner brought claims for breach of contract and bad faith after Safe Auto refused to pay a claim arising from a traffic accident that the insured’s vehicle was involved in. The policy owner asserted that he was not required to cover the damage to the vehicle under the terms of the policy.

An arbitration hearing was scheduled on the day the complaint was filed, which neither defense counsel nor a representative for Safe Auto Insurance Company attended. The Arbitration Panel held an ex parte trial, during which it only heard testimony from the policy owner and his counsel. The Panel entered a verdict against Safe Auto for $35,000 ($24,000 being in bad faith damages).

Safe Auto filed a motion for post-trial-relief asserting the verdict should be vacated and the case should be scheduled for a new arbitration hearing. Safe Auto claimed there was no evidence produced that showed their failure to appear was intentional and they were not notified in an adequate amount of time. Safe Auto additionally claimed the trail failed to “consider any lesser sanctions than imposing an ex parte verdict” and to “limit the non-jury award to $25,000” in violation of a local rule. The motion was denied and Safe Auto appealed. In affirming the judgment, the Superior Court reasoned that the trial court thoroughly addressed the insurer’s claims, and determined that the court properly denied the insurer’s request that the verdict be vacated, “as defense counsel did not offer a satisfactory excuse for his failure to appear.”

For more information, call our Philadelphia bad faith attorneys at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Lawyers: SEC Charges Settle

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SciClone Agrees to Pay $12.8 Million to Settle SEC Bribery Violation Charges

SciClone Pharmaceuticals Inc., a US-based, China-focused specialty pharmaceutical company will install a number of compliance measures after employees of SciClone subsidiaries acted as SciClone agents and gave money, gifts, and other things of value to foreign officials in China in order to obtain sales of SciClone pharmaceutical products. These transactions were falsely recorded in SciClone’s books and records as legitimate business expenses (travel, conferences, and promotional expenses). Although the company fired the specialist and conducted an internal investigation regarding that employee’s conduct, no further action or remedial measures were taken. The SEC determined SciClone failed to devise and maintain a sufficient system of internal accounting control and lacked an effective anti-corruption compliance program.

One of the SEC’s charges that SciClone violated was Section 30(A)(g) of the Foreign Corrupt Practices Act. This section makes it unlawful for any issuer to corruptly act outside of the United States by an offer or promise of anything of value to any foreign official.

To settle the charges, the pharmaceutical company agreed to pay $12.8 million in penalties and will hire a compliance officer for its China operations, extensively review employee travel and entertainment reimbursement policies, and reduce the number of suppliers providing third-party travel ($9.426 million in disgorgement of sales profits, $900,000 in prejudgment interest and a $2.5 million penalty).

As a result, SciClone agreed to take steps to improve internal accounting controls to make a dedicated compliance function. Those include incorporating anti-corruption policies in third-party contracts, providing anti-corruption training, disciplining employees and managers who violate such policies, and making internal audit and compliance departments. Under the settlement terms, SciClone will conduct an initial review and submit a report about the implementation of compliance measures, then conduct and prepare at least three follow-up reviews and reports.

For more information, call our Philadelphia business lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Litigation Attorneys: Boards of Directors Benefit from Presumption of the Business Judgment Rule

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Generally, a corporate board of directors has a fiduciary duty of care due to their power, authority, and responsibility in managing the business affairs of the corporation. However, directors also have the protection of the Business Judgment Rule. This Rule provides for judicial presumption that directors have acted in accordance with their fiduciary duties of care, loyalty, and in good faith. Some policy reasons for this is to deter frivolous lawsuits and to encourage individuals to serve on the board.

The Business Judgment Rule can be rebutted if the plaintiff pleads, with particularity, that the Board of Directors failed to act:

1) In good faith;

2) In an informed manner (i.e., grossly negligent);

3) Without a conflict of interest; or

4) With the honest belief that its actions are in the best interest of the company

If a plaintiff can successfully prove one of those four elements to rebut the Business Judgment Rule, the burden then shifts to the board of directors to prove that their decision was both fair and reasonable (i.e., the entire fairness test of Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) which comprises fair price and fair dealing).

In deciding fair price and fair dealing, the courts will simply look to market value when deciding if the price was fair. In order to prove that the Board dealt “fairly”, candor and disclosure is of the utmost importance. Other factors to consider are 1) when the transaction was timed; 2) how it was initiated, structured, negotiated, and disclosed to directors; and 3) how the approvals of the directors and the stockholders were obtained.

For more information, call Philadelphia business litigation attorneys at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Lawyers: Rival Continuing to Sell Infringing Products

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Last year, Texas Advanced Optoelectronic Solutions, Inc. (TAOS), a company that makes light sensors used in iPhones and other products, was awarded $88.7 million after a jury found that its competitor had infringed upon its patent and misappropriated trade secrets. The competitor, Intersil, continues to deny infringement, according to TAOS. TAOS is now seeking a permanent injunction against Intersil.

Back in November of 2008, TAOS first sued Intersil, alleging that it unlawfully used confidential information disclosed during merger or acquisition negotiations. According to allegations in the lawsuit, Intersil wanted to either secure a license from TAOS or acquire the company. When TAOS failed to accept their offer, Intersil attempted to destroy the company in order to take the full market share.

In March of 2015, a jury found that Intersil used TAOS’ patented technology for dual-diode ambient light sensors without consent and misappropriated trade secrets in order to gain a competitive advantage. TAOS was awarded $48.7 million in disgorgement, $12 million in royalties, $8 million in lost profits and $20 million in punitive damages. Only about $73,000 was awarded for patent infringement.

Now, TAOS is seeking to permanently enjoin Intersil from marketing and selling the dual-diode technology. Four products that TAOS holds patents for are the focus of the dispute. TAOS is also seeking to recover attorneys’ fees.

According to one of TAOS’s lawyers, Intersil continues to sell products that the jury determined were infringing upon their client’s patent and is now directly competing with TAOS by selling the stolen technology.

Intersil continues to deny these claims, and argues that the jury verdict should be set aside. Intersil insists that if a judgment is entered, the company should not be required to stop making the product, but rather, should be asked to pay a royalty to TAOS for use of the patented technology. Intersil’s position is that even though the jury found that it willfully misappropriated trade secrets, this behavior is somewhat common.

The judge has requested that the parties continue to mediate the dispute in order to attempt to negotiate a license and royalty agreement. If the parties choose not to participate in the mediation, the judge will issue a ruling.

Philadelphia Trademark Infringement Lawyers at Sidkoff, Pincus & Green Represent Businesses Victimized By Misappropriation of Trade Secrets

If you are the owner of a valid trademark or patent that is being used by another individual or business without your permission, Philadelphia business lawyers at Sidkoff, Pincus & Green can help. With offices conveniently located in Center City Philadelphia, we represent clients throughout Philadelphia and South Jersey. Call us at 215-574-0600 or fill out our online contact form today.

Philadelphia Business Lawyers: Help Your Lawyer Win Your Case

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How To Help Your Lawyer Win Your Case[1]

Summary:

The client is not just a passenger in a lawsuit. Instead, the client should be a combination of co-pilot and Air Traffic Control. Your lawyer needs your help.

  1. Write A Story About Your Case

You know what happened. Judges and juries will transform the evidence they hear at trial into a story. Therefore, you can get a head start by putting the facts together in the same way a novelist would write about the case. You can use chronological order and create a narrative that starts at the beginning. In some cases, the personalities and relationships of the parties and witnesses are more important. Whatever you select, write out everything you can think of. Eliminate all duplication to allow your lawyer to digest your story. Keep a copy and update your story as you learn or understand new things. Do not be afraid to throw out the story and start over if the mode you picked (e.g., chronological) turns out to be less effective than another (e.g., personal relationships). When you have your testimony taken, your story will help you keep the facts in perspective to the issues in the case. Also, your narrative will be a roadmap for your lawyer when he cross examines your adversaries and plans for the evidence needed for you to win.

  1. Do Not Be Afraid To Be Honest

Many people make the mistake of thinking that if their case does not have a perfect set of facts they cannot win. However, judges and juries know life is flawed like genuine leather and a case that looks perfect is treated like a cheap, plastic imitation of the truth. Your lawyer will be planning your case around what you tell him. If you do not tell him the truth, he will get stuck on a detour. Think of telling an ambulance driver directions on where it should pick up a sick loved one. You surely would be as accurate as possible; and your communications with your lawyer must be just as careful and accurate.

  1. Organize Your Emails And Papers

In modern trials, email and documents often dominate the case. Do not shirk the work of diligently searching all of your computers and phones for email and text messages; and similarly, locate every paper document. These things will be like bullets in your lawyer’s gun on the one hand, and will give him a plan of how to avoid traps.

Additional resources provided by the author

Gary Green

For more information, contact our Philadelphia business lawyers at 215-574-0600 or contact us online.


[1] Copyright 2016  by Gary Green Esquire, Managing Partner of Sidkoff, Pincus & Green P.C.,  Philadelphia Pa.

 

Philadelphia Business Lawyer: Gift to Minors under UTMA

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The strategy of a making a gift to a minor under the UTMA in Pennsylvania to reduce the size of a marital asset just prior to the filing of a a divorce [1]

  1. The factual background and the challenge

We were consulted by a wealthy woman who was contemplating a divorce. At the time, there was no disharmony in the marriage, the parties were living together as a married couple, and neither had spoken to the other about a separation or divorce. However, our client was an accomplished interior designer and an architect who made her fortune by merging talent with hard work. By contrast, her husband, although only in his mid-forties, decided to retire and live off of his wife’s income. Moreover, the husband wanted nothing to do with the couple’s ten year old daughter. This caused our client to reach the conclusion that she wanted to end the marriage, but before taking any action, she wanted to drain her funds out of the joint bank account, and at the same time provide for her daughter’s wellbeing in the future if something happened to our client since it was obvious that the child could never rely on her father.

  1. Our research and proposed solution

We recognized that under Pennsylvania law, after a divorce is filed, all assets are frozen and are deemed marital assets that neither spouse can spend without court approval. On the other hand, before the divorce action is instituted there generally is no restraint on how a spouse spent money in joint accounts, unless the court finds there was a brewing or actual problem in the marriage, and that one spouse dissipated marital funds. Here there was not yet any brewing problem, but we needed to find law to determine whether a gift to the child would be deemed dissipation. We thus looked into whether our client could accomplish her goal by making a gift to her daughter under the Pennsylvania Uniform Transfers to Minors Act (“UTMA”) 20 Pa.C.S.A. § 5301, et seq., which is often referred to by lawyers and bankers who have been around for more than a few years by the well-known name of the law it replaced, the Uniform Gifts to Minors Act. “The purpose of PUTMA is to provide an inexpensive, easy way for giving property to minors. Sutliff v. Sutliff, 515 Pa. 393, 528 A.2d 1318, 1323 (1987). Section 5304 of PUTMA addresses the irrevocable nature of transfers to PUTMA accounts and provides:

A person may make a transfer by irrevocable gift to, or the irrevocable exercise of a power of appointment in favor of, a custodian for the benefit of a minor pursuant to section 5309 (relating to manner of creating custodial property and effecting transfer).” 20 Pa.C.S.A. § 5304. Whatever its source, custodial property that is held pursuant to Section 5304 is the property of the minor child. Sutliff, 528 A.2d at 1323.” Sternlicht v. Sternlicht, 2003 PA Super 95,  (2003) aff’d, 583 Pa. 149, 876 A.2d 904 (2005)

In the area of divorce, in Radakovich v. Radakovich, 2004 PA Super 82, ¶ 23, 846 A.2d 709, 717 (2004) The husband set up an account for the couple’s son under the UTMA to cover his future college education. The account, at the time of the divorce had grown to over $100,000. The trial judge held that the gift made the funds the property of the son. On appeal, the Wife’ contention was that the trial court erred in concluding the bank account was subject to the Pennsylvania Uniform Transfers to Minors Act (PUTMA), 20 Pa.C.S.A. § 5301–5310 and that it should have been considered for equitable distribution under the Pennsylvania Divorce Code  23 Pa.C.S.A. §§ 3501 and 3323. The wife lost on appeal, and the transfer of funds to the son was upheld. The court found that the deposit of funds from joint accounts during the marriage  under the Pennsylvania Uniform Transfers to Minors Act (PUTMA) to brokerage account  resulted in an irrevocable gift to son, which was not subject to equitable distribution between the husband and wife.

Since our client was earning in excess of $5000 per week as her take home pay, she decided to withdraw from the bank full $575,000 that had accumulated in the account, all of which had been deposited by her from her earnings. The client did not need to worry about current expenses or even a rainy day fund because she believed that her earnings were sufficiently robust. Of course a very attractive benefit from the withdrawal is that it would shrink the size of the marital estate, and potentially stop her husband from walking away with money she earned. A few months later she filed for divorce.

The key to the disposition of the case was the strictness of UTMA with regard to the use by the parents of money gifted to a child. Our client’s deposit of the funds into an account for her daughter was intended to be a gift, and all of the formalities were followed to comply with the UTMA. “To establish a valid inter vivos gift, the claimant must do so by clear, precise, direct and convincing evidence. To constitute a gift inter vivos there must be shown an intention to make an immediate gift and constructive delivery to the donee.” Sternlicht (Supra.), 822 A.2d at 739. The account was titled in our client’s name, but not as her property. Instead the account had a legend imprinted by the bank showing that our client was acting in the capacity as the custodian for her daughter. Pursuant to the UTMA, at 20 Pa. C.S.A. § 5311, the deposit of the funds into this account was irrevocable, because “the custodial property is indefeasibly vested in the minor.” Moreover, under the UTMA (id. at §§ 5313 and 5314), our client was listed on the account only nominally for her daughter, the real party in interest on the account. Furthermore, our client could not exercise any rights, powers or authority over the account, except in her fiduciary capacity under the UTMA; and expressly, not for herself.

This strategy was a good one. When the husband challenged the transfer and sought to have it reversed and the funds declared part of the marital estate, he did not find a friendly ear in the judge; nor did he win on appeal.

For more information, call our Philadelphia business lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.


 

[1] Researched and written by Gary Green, Esquire, who is the Managing Partner of Sidkoff, Pincus & Green P.C.. This was copyrighted on January 26, 2016 by the author.

Philadelphia Business Lawyers: SEC Rule 144 – Part II

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Where a founder of a publicly traded company bought shares of his company on the NASDAQ  stock exchange, and then pledged them to a bank to collateralize a personal loan, if the bank foreclosed on the control securities, would it be required to comply with  the Securities Exchange Commission’s Rule 144 (17 C.F.R. § 230.144)? [1]

  1. The facts of the proposed transaction

Sidkoff, Pincus & Green P.C., was asked by a client I will call “Mr. Founder,” to help him negotiate with his bank (“THE BANK”). He was the founder and CEO of his publicly traded company (“COMPANY”). Several years after COMPANY had completed its Initial Public Offering (“IPO”) he used his stock broker to buy $10 million dollars of the shares of COMPANY in a normal NASDAQ transaction. These were shares that had been registered with the SEC as part of the IPO, and the shares of COMPANY traded briskly every day since the IPO. Mr. Founder sought to borrow $6 million from a bank (“THE BANK”) and offered to pledge the shares as collateral for the loan. However, THE BANK refused to accept the shares because its lawyers stated they were “control securities” notwithstanding that Mr. Founder purchased them on the open market through his stock broker. In the view of the lawyers for THE BANK, if Mr. Founder defaulted, and THE BANK then foreclosed on the shares pledged as collateral for the loan, THE BANK could not sell them without first getting clearance from the SEC because in their view, the shares could only be sold under the rules and restrictions set forth in SEC Rule 144 (17 C.F.R. § 230.144).

We disagreed with that view, even though many authors of books on Securities Laws had stated that any shares an affiliate (i.e., a CEO or other top executive with control) of an issuer (i.e., COMPANY) obtained, automatically became control shares that were subject to Rule 144; and if THE BANK obtained the shares from Mr. Founder, it would stand in his shoes. Our view was that the lawyers for THE BANK and the authors had misread the law, and our legal position can be summarized as follows.

  1. Legal analysis why shares bought on a stock exchange by an affiliate of an issuer do not become control securities, and can be freely sold or pledged to a bank without the need for compliance with Rule 144

As described above, Mr. Founder had purchased the shares he proposed to pledge as collateral through a stockbroker on the open public market maintained by NASDAQ.  Therefore, this pledge was of “registered shares” that had been included in the float the SEC approved when it authorized COMPANY to proceed with its IPO. Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, states, “It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security…” Mr. Founder’s shares were in fact registered when the SEC approved COMPANY’s Form S-1 registration statement followed by its registration statement pursuant to Exchange Act Section 12(g); and indeed, that is how Mr. Founder was able to acquire the COMPANY’s Shares on the NASDAQ market, anonymously based on their then trading price.

After studying the law, we concluded that if there was any filing requirement, it would not be found in Rule 144 because it is silent on shares that were purchased through the regular stock exchanges and NASDAQ. Moreover, even if Mr. Founder was required to disclose his share purchase under another SEC rule, as an insider or otherwise, it would not turn the shares into Rule 144 shares.   Additionally, we understood that one purpose of Rule 144 was to insure that the markets for securities have full disclosure in the “distribution” of shares where the receipt benefits the issuer (in Rule 144, the distributors of shares were called “underwriters”).  The thrust of Rule 144 therefore is not to demote shares that already were registered (such as the shares Mr. Founder bought through his stock broker) nor was the thrust convert shares that had previously been registered back to restricted shares that needed SEC approval before they could be sold back into the public market.

In forming our opinion, we relied on the many things the SEC has stated, and the language of the law and SEC Rules which demonstrated that shares purchased on NASDAQ by a control person (i.e., a CEO such as Mr. Founder) are not transformed merely by his purchase into shares that could be sold only under Rule 144. On the contrary, looking the law and the SEC statements, those shares, would not be restricted shares. For example, the SEC has stated in explaining Rule 144,

A third factor, which must be considered in determining what is deemed not to constitute a “distribution,” is the impact of the particular transaction or transactions on the trading marketsSection 4(1) was intended to exempt only routine trading transactions between individual investors with respect to securities already issued and not to exempt distributions by issuers or acts of other individuals who engage in steps necessary to such distributions. Therefore, a person reselling securities under Section 4(1) of the Act must sell the securities in such limited quantities and in such a manner as not to disrupt the trading markets. The larger the amount of securities involved, the more likely it is that such resales may involve methods of offering and amounts of compensation usually associated with a distribution rather than routine trading transactions. Thus, solicitation of buy orders or the payment of extra compensation are not permitted by the rule.  (Emphasis added)

The language of Rule 144 was limited to the steps one needed to take to sell unregistered share, and did not address shares bought on NASDAQ; and nothing in the purchase made by Mr. Founder through his stock broker fit within the language or the reasoning of Rule 144.  Furthermore, the Rule gave us additional support at 17 CFR 230.144 where the SEC discussed the  rational for Rule 144, and what the Rule attempts to accomplish:

The term “underwriter” is broadly defined in Section 2(a)(11) of the Securities Act to mean any person who has purchased from an issuer 1 with a view to, or offers or sells for an issuer 2  in connection with, the distribution of any security, 3  or participates, or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct         or indirect underwriting of any such undertaking. 4  The interpretation of this definition traditionally has focused on the words “with a view to” in the phrase “purchased from an issuer with a view to * * * distribution.” An investment banking firm which arranges with an issuer for the public sale of its securities is clearly an “underwriter” under that section. However, individual investors who are not professionals in the securities business also may be “underwriters” if they act as links in a chain of transactions 5 through which securities move from an issuer to the public.

I used the red numbers above to draw attention to all of the items that are not associated with Joseph’s purchase of the shares  from a stockbroker, and his gifting of the shares to the FLP under the UTMA.

#1        Mr. Founder bought shares of COMPANY from a stockbroker, and those shares had already been registered years ago at the time of the IPO (and obviously, had already been bought and sold many times by others via the NASDAQ exchange). Therefore, Mr. Founder expressly did not purchase the shares from the issuer, Inovio;

#2        Mr. Founder’s purchase and proposed pledge of the             shares were not for the benefit of COMPANY or at             the  behest of COMPANY- and in fact, COMPANY      was completely uninvolved when Mr. Founder           bought the shares on the  ASDAQ exchange.

#3      Mr. Founder’s NASDAQ purchase had nothing to do            the “distribution” of COMPANY’s shares to the            public; that distribution had long since been         completed.

#4        Mr. Founder’s NASDAQ purchase was not part of   the underwriting of the shares he bought.

In other words, Mr. Founder’s transaction,  buying shares that were traded in due course, on NASDAQ, through a retail stockbroker, did not even arguably satisfy the definition of shares involved in an underwriting or shares that could be deemed to be implicated as being bought or sold by an underwriter. The SEC further explained 17 CFR 230.144, why it promulgated Rule 144, and noting that the Rule was designed to apply only if Mr. Founder would otherwise have been deemed to be an underwriter:

The Commission adopted Rule 144 to establish specific criteria for determining whether a person is not engaged in a distribution.  Rule 144 creates a safe harbor from the Section 2(a)(11) definition of “underwriter.  (Emphasis added)

However, as demonstrated, Mr. Founder did not need a “safe harbor from the Section 2(a)(11) definition of “underwriter’”, and Rule 144 did not apply to him. Nonetheless, the lawyers for THE BANK argued that by implication, Rule 144 made any shares obtained Mr. Founder subject to Rule 144, even shares trading on the NASDAQ market; and they raised the language in Rule 144 (b) (2) that says:

(2) Affiliates or persons selling on behalf of affiliates. Any affiliate of the issuer, or any person who was an affiliate at any time during the 90 days immediately before the sale, who sells restricted securities, or any person who sells restricted or any other securities for the account of an affiliate of the issuer of such securities, or any person who sells restricted or any other securities for the account of a person who was an affiliate at any time during the 90 days immediately before the sale, shall be deemed not to be an underwriter of those securities within the meaning of section 2(a)(11) of the Act if all of the conditions of this section are met.

In disputing this point, we started by observing the important fact that there is not a single mention of “control securities” in Rule 144. Moreover, there is not a single description of in the Rule that is expressly aimed at registered shares bought by a CEO or other control person after an IPO on a national stock exchange – even though such trades are very common.  We reiterated that the shares Mr. Founder bought on the NASDAQ exchange had already been registered, and were, by definition, not therefore “restricted securities”.  We demonstrated that under the express definitions set forth in  to Rule 144, the term “restricted securities” are only those that were not registered and fit into one of the following categories:

  1. The term restricted securities means:
  • Securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering;
  • Securities acquired from the issuer that are subject to the resale limitations of Rule 502(d)under Regulation D or Rule 701(c);
  • Securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A;
  • Securities acquired from the issuer in a transaction subject to the conditions of Regulation CE;
  • Equity securities of domestic issuers acquired in a transaction or chain of transactions subject to the conditions of Rule 901or Rule 903under Regulation S;
  • Securities acquired in a transaction made under Rule 801to the same extent and proportion that the securities held by the security holder of the class with respect to which the rights offering was made were as of the record date for the rights offering “restricted securities” within the meaning of this paragraph (a)(3); and
  • Securities acquired in a transaction made under Rule 802to the same extent and proportion that the securities that were tendered or exchanged in the exchange offer or business combination were “restricted securities” within the meaning of this paragraph (a)(3).

Therefore, under the plain meaning of the text of  Rule 144, the shares Mr. Founder bought on NASDAQ fit no category that the Rule lists, and the shares were thus not “restricted”.  While Rule 144 also speaks of “any other securities,” but that language does not pertain if “the person is not offering or selling for an issuer in connection with the distribution of the securities, does not participate or have a direct or indirect participation in any such undertaking, and does not participate or have a participation in the direct or indirect underwriting of such an undertaking.” (See, Rule 144)

We concluded our negotiation successfully, and convinced the lawyers for THE BANK that the language of Rule 144 is not directed at shares bought on the NASDAQ exchange that were already registered; and the confusion grew out of sloppy draftsmanship by the SEC when it made the Rule.

 For more information, call our business lawyers in Philadelphia at 215-574-0600 or contact us online.


 

[1] Researched and written by Gary Green, Esquire, who is the Managing Partner of Sidkoff, Pincus & Green P.C.. This was copyrighted on January 26, 2016 by the author.