Sections 13/16: Group Formation & Short-Swing Profit Disgorgement

December 19, 2025

In Augenbaum v. Anson Investment Master Fund LP et al., the Southern District of New York recently denied a motion to dismiss in a case seeking short-swing profit disgorgement relating to trades that generated ~$500 million by an alleged investor “group”.[1]

The case is a stark reminder of the importance of carefully avoiding group formation through the appearance of implicit agreements or concerted action. 

The alleged facts are complicated and involve a particularly volatile security during an especially turbulent period, the COVID-19 pandemic. Annex I presents a detailed chart of the timeline. Annex II shows the stock price during the relevant period. Annex III presents the SEC’s Q&A regarding the legal standard for determining whether a “group” has been formed.

Section 16

  1. The Section 16 regime aims to prevent corporate “insiders” from unfairly using confidential information to profit from trading in the issuer’s securities. 
    • An investor becomes a Section 16 “insider” if it beneficially owns > 10% of any class of SEC-registered voting equity securities of a U.S. issuer – whether individually or as the result of collective ownership with other members of a group – or has a director representative or is an officer at a U.S. issuer. 
    • An insider generally must file SEC reports indicating its beneficial ownership (Form 3) and when it transacts (Form 4).
    • Absent an exemption, an insider is required to disgorge to the issuer profits (or deemed profits) resulting from “short-swing” trading in the issuer’s equity securities.
    • A short-swing trade generally is any purchase and any sale (or vice versa) that are made by an insider within six months of each other.
    • Derivative securities are generally reportable and transactions in derivatives may be considered matchable trades that can result in “short-swing” profits. 
  2. A “beneficial owner” is a person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares voting or investment (including dispositive) power over a security. (This is the same standard as for Schedules 13D and 13G.)
    • A person generally is deemed a beneficial owner of a security if the person has the right to acquire beneficial ownership within 60 days, including through a convertible security or similar right. 
  3. A “group” is formed when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, even in the absence of a written agreement or intent to form a group. Group formation ultimately depends on relevant facts and circumstances and the SEC has issued guidance in the form of a Q&A. The group is deemed to have acquired beneficial ownership of all the securities beneficially owned by its members.
  4. Exchange Act Rule 13d-6 provides a limited exemption from group formation where investors purchase equity securities directly from an issuer in a private placement so long as:
    • Each investor is a regulated entity, such as an investment adviser or broker-dealer.
    • The purchase is in the ordinary course of each member’s business and not with the purpose nor with the effect of changing or influencing control of the issuer.
    • There is no agreement among or between any members of the group to act together with respect to the issuer or its securities except for the purpose of facilitating the specific purchase involved.
    • The only actions among or between any members of the group with respect to the issuer or its securities subsequent to the closing date of the non-public offering are those which are necessary to conclude ministerial matters directly related to the completion of the offer or sale of the securities.
  5. Very often, market participants cannot meet these stringent conditions, and must proceed carefully with the advice of counsel to the extent that they wish to interact with each other in connection with an issuer’s capital raising activity and avoid “group” status. 
    • Some courts have taken a flexible approach and found that an “understanding” between parties is enough to find an agreement to act together. The agreement does not have to be in writing and may be proven by circumstantial evidence, which involves a fact-intensive inquiry. 
    • Courts generally look at multiple factors, such as coordination and communications leading up to the initial decision to make parallel investments. 
      • In one case, the court granted summary judgment to defendants where the plaintiffs alleged group status based only on the existence of a common PIPE agreement negotiated and executed by a common lawyer. Litzler v. CC Invs., L.D.C., 411 F. Supp. 2d 411, 414–15 (S.D.N.Y. 2006). 
      • However, where multiple indices of collusion are present, such as identical or very similar trading activities, courts are more likely to allow suits to go forward. 

Augenbaum Court’s Reasoning

  1. In January 2022, Todd Augenbaum, a shareholder of Genius Brands International (“Genius”), filed a derivative action on behalf of Genius suing several institutional investors alleging that they formed a group when they entered into a joint Securities Purchase Agreement (“SPA”) in order to obtain more than 10% of Genius’s securities.
  2. The court found evidence from which a jury could infer agreement, including:
    • Messages among the placement agent (“PA”) and defendants leading up to the initial transaction and afterwards. These included messages between the PA and defendants about other investors’ intentions. 
    • An internal placement agent memo noting that it had “received a call from [two of the defendants] asking if the company was willing to sell common stock off its shelf registration statement at $1.50.”
    • Defendants working together prior to signing the SPA. 
    • Email chains among the placement agent and defendants regarding comments on a proposed term sheet for an investment in the issuer. 
    • Defendants knowing of each other’s plans prior to purchasing the issuer’s securities.
    • The placement agent revealing intended investor identities, and the lead investor’s legal counsel trading comments and drafts with other defendants.
  3. In the court’s view, these factors combined to create a genuine issue of fact as to the existence of a group. 
  4. Takeaways:
    • The decision highlights the importance of avoiding even the appearance of acting as a group. 
    • The case highlights several potential mitigating factors that investors should be aware of to avoid being viewed as a group including taking independent action, engaging one’s own counsel, and carefully planning how to proceed, both prior to, during and following an investment.
    • Investors should consult with counsel before undertaking a transaction that has the potential to result in group liability under the Section 16 regime, especially when participating in coordinated private placements.

Annex 1

Annex 2

Annex 3

[1] Augenbaum v. Anson Invs. Master Fund LP, No. 22-CV-249 (AS), 2025 WL 2780854 (S.D.N.Y. Sept. 30, 2025).