The opinions expressed here are those of the author, a columnist for Reuters.

By Alison Frankel

Nov 13 (Reuters) - Whether a company's shareholders sue on the company’s behalf to recoup short-swing profits from an investor with a 10% stake in the company’s stock is a fairly niche question.

So when the hedge fund Raging Capital Management filed a petition asking the U.S. Supreme Court to review an appellate ruling that said 1-800-FLOWERS shareholder Brad Packer satisfied constitutional standing requirements to sue the fund for violating the Securities and Exchange Act, Raging Capital’s lawyers at Olshan Frome Wolosky widened the pitch.

First, some background. Section 16 of the Securities and Exchange Act bars company insiders from profiting from quick-fire trading. That restriction applies not just to corporate directors and officers but also to most investors (with certain exceptions) who hold a 10% stake in a class of shares in the company. When an insider violates Section 16 provisions, the company can seek the return of profits. But if the company does not attempt to go after the money, a shareholder can sue the alleged Section 16 violator derivatively on behalf of the company.

That's what Packer did, suing Raging Capital derivatively in federal court in Brooklyn in 2015. He asserted that the hedge fund, which owned a 10% stake in a class of 1-800-FLOWERS stock, breached Section 16 provisions and must therefore pay back about $5 million in profits.

Raging Capital challenged Packer's constitutional standing to sue, as well as his underlying theory that the hedge fund is subject to Section 16's short-swing prohibitions for insiders.

In June 2024, the 2nd U.S. Circuit Court of Appeals concluded that Packer had standing to sue for Raging Capital's alleged statutory violations. The appeals court held, in a nutshell, that under the Supreme Court's most recent precedent on constitutional standing in suits alleging statutory violations, the key question is whether the statutory violation is analogous to a historical or common law cause of action. Here, the appeals court said, Packer's statutory claim was akin to a claim for breach of fiduciary duty, so he met standing requirements.

That is a relatively narrow holding, so when Raging Capital went to Supreme Court, it did not merely argue that the 2nd Circuit reached the wrong decision about Packer's standing to sue Section 16 of the Exchange Act.

Raging Capital instead told the justices that the 2nd Circuit botched the Supreme Court’s latest instructions on constitutional standing for claims arising from statutory violations.

The 7th, 9th and 11th Circuits, Raging Capital said, have adopted a two-stage test for constitutional standing based on alleged statutory breaches. In those circuits, the hedge fund argued, courts look first at whether the plaintiff suffered a concrete injury from the alleged statutory violation. Then they consider whether the statutory violation is rooted in history or common law, Raging Capital said.

By contrast, the fund argued, the 2nd Circuit skipped the first step and went to straight to the question of whether the alleged statutory violation was analogous to an established cause of action.

Raging Capital told the Supreme Court that if the 2nd Circuit had applied the two-step test used by the 7th, 9th, and 11th Circuits, it would have concluded that Packer suffered no concrete harm.

After all, the hedge fund said, it was not engaged in the sort of corporate insider trading that Section 16 is supposed to rein in. It did hold a 10% stake in one class of 1-800-FLOWERS shares, the fund's lawyers acknowledged, but that class of shares carried extremely limited voting power. Raging Capital said it was not privy to insider information, had no seat on the board and realized its $5 million in profits only from savvy trading based on public information. It insisted that its trades harmed no other shareholders.

By nevertheless concluding that Packer had standing to sue, the hedge fund said, the 2nd Circuit’s “would nullify the well-established requirement of concrete injury under this court’s Article III jurisprudence.

The Supreme Court rejected Raging Capital’s pitch on Tuesday, leaving intact the 2nd Circuit ruling that Packer has standing to proceed with his case in federal court in Brooklyn.

Raging Capital counsel Thomas Fleming of Olshan Frome said by email that his side was “disappointed but not surprised” that the judges declined the fund’s petition, “given the demands of the court’s docket.”

One of Raging Capital’s more subtle arguments was this case was being driven by Park’s lawyers, Ostrager Chong Flaherty & Broitman and solo Paul Wexler. Park, according to Raging Capital, purchased 10 shares of 1-800-FLOWERS months after Raging Capital’s filings at the U.S. Securities and Exchange Commission disclosed the fund’s short-swing trading in the company — and after consulting with the lawyers who filed his suit.

“The trajectory of this case demonstrates the true driver of Packer’s claim: legal fees,” Raging Capital said in its petition.

Packer did not file a brief opposing Raging Capital’s petition for Supreme Court review. But when I asked Packer counsel Wexler about the hedge fund accusation of lawyers driving the case, Wexler called it “meritless” in an email statement.

“Mr. Packer has been and remains a shareholder of Flowers,” Wexler said. “The 2nd Circuit and now the Supreme Court have decided that he has standing and that Flowers has suffered real injury. Mr. Packer brought the case to recover short-swing profits for the company. This is the intent of the statute and has been the practice for almost 100 years. We are pleased that we are heading for a resolution of this nine-year-old case.”

Even while Raging Capital’s Supreme Court petition was pending, the underlying case has been chugging along before U.S. Magistrate Judge James Wicks in Brooklyn. He is scheduled to hear oral arguments next month on Raging Capital’s motion for summary judgment.

Most short-swing derivative suits alleging Section 16 violations are already filed in New York federal courts. Now that the Supreme Court has tacitly blessed the 2nd Circuit’s analysis of shareholders’ standing to bring the cases, you can expect more of the same.