(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.