## Facts

- WPCS International Inc., a NASDAQ-traded company, sought additional capital after a financial restatement caused its share price to drop and disrupted plans for a secondary offering to fund a strategic acquisition.
- Special Situations Fund III QP, L.P. and Special Situations Private Equity Fund, L.P. (the Funds) were Delaware limited partnerships engaged in PIPE investing and each owned more than 10% of WPCS common stock.
- At WPCS’s request and with board approval, the Funds acquired additional WPCS securities directly from WPCS in a privately negotiated PIPE transaction.
- Within six months, the Funds sold WPCS securities at a profit.
- The Funds’ partnership agreements vested exclusive management and control in a general partner, and voting and investment decisions were made by the general partner’s agents.
- A WPCS shareholder filed a derivative action seeking disgorgement of the Funds’ short-swing profits under § 16(b) of the Securities Exchange Act of 1934.

## Issues

1. Whether a more-than-10% holder’s acquisition of securities directly from the issuer in an issuer-requested, board-approved private placement is a “purchase” covered by § 16(b).
2. Whether limited partnership funds remain “beneficial owners” subject to § 16(b) when voting and investment authority is delegated to a general partner and its agents.

## Decision

- The Second Circuit affirmed judgment for the plaintiff.
- The Funds’ issuer-directed PIPE acquisition was a “purchase” under § 16(b).
- The Funds were “beneficial owners” for § 16(b) purposes despite delegating voting and investment discretion to their general partner’s agents.

## Legal Principles

- Section 16(b) imposes strict liability requiring insiders to disgorge profits from any purchase and sale (or sale and purchase) of the issuer’s equity securities within six months, without proof of actual misuse of inside information.
- “Purchase” under the Exchange Act is defined broadly; courts generally do not create transaction-specific exemptions based on an assessment that a voluntary deal lacks speculative-abuse potential.
- A voluntary, negotiated private placement (including an issuer-directed PIPE) falls within § 16(b)’s coverage when executed by a statutory insider.
- “Beneficial ownership” for § 16(b) includes holding a pecuniary interest and being the owner of record of more than 10% of the issuer’s registered securities; delegation of voting or investment authority does not, by itself, eliminate beneficial-owner status.
- Allowing insiders to avoid § 16(b) through formal delegation arrangements would undermine the statute’s automatic, objective disgorgement mechanism.

## Conclusion

The court held that a 10% holder’s issuer-requested PIPE acquisition is a § 16(b) “purchase” and that limited partnerships remain § 16(b) beneficial owners despite delegating portfolio control, requiring disgorgement of short-swing profits.


Huppe v. WPCS Int'l Inc., 670 F.3d 214 (2d Cir. 2012)