Securities Regulation Daily Wrap Up, DIRECTORS AND OFFICERS—S.D.N.Y.: Short-swing suit survives dismissal after finding of deputy on company board, (Jul 22, 2025)

By Rodney F. Tonkovic, J.D.

The "deputy" was placed on the board to protect the shareholder's interests and shared inside information with the shareholder.

A district court concluded that a company was a "director by deputization" for the purposes of short-swing liability under Section 16(b). The company had placed a representative on the board of a biopharmaceutical company so that it could protect its investment. In 2023, the company profited from short-swing trading, and this suit argued that those profits should be repaid. The complaint argued that the company's representative on the board had access to inside information that was used by the defendants in making investment decisions. The court found that the plaintiffs had sufficiently alleged that the defendant could be deemed a director through its deputization of the representative (Calenture, LLC v. Sofinnova Venture Partners X, L.P., No. 1:24-cv-04194 (S.D. N.Y. July 21, 2025)).

Sofinnova Venture Partners X, L.P is a shareholder in Vera Therapeutics, Inc., a clinical-stage biopharmaceutical company. Sofinnova first invested in Vera in October 2020, purchasing $15 million of the $80 million shares Vera had offered (18.75% of the shares). To protect its investment, Sofinnova (as well as the other three principal investors) designated a member to Vera's board of directors. Dr. Maha Katabi, a Sofinnova general partner has been this representative since October 2020.

Each of the principal investors agreed to keep confidential and not use (other than to monitor their investments) any confidential information obtained from Vera. The confidentiality and non-use obligations, however, would not limit the representatives' ability to trade any security of a public company.

Short-swing trades. Between January and March 2024, Sofinnova purchased and sold millions of dollars in Vera equity securities. Sofinnova realized a profit estimated at nearly $2 million from these transactions. While Dr. Katabi repaid an undisclosed amount to Vera, representing her pecuniary interest in Sofinnova's profits, Sofinnova did not repay anything. This suit seeking recovery of short-swing profits under Section 16(b) followed.

Deputization. At issue was whether Sofinnova was an officer or director of Vera. The plaintiffs argued that Sofinnova was a director by "deputization" because Dr. Katabi was on Vera's board and had regular access to confidential information about Vera that was used in making investment decisions.

The Supreme Court has affirmed that an investor becomes a statutory insider when it deputizes an individual to be its representative on a board of directors. In the Second Circuit, deputization is a question of fact, but, the court noted, there is little caselaw on the subject. So, the court looked to a leading treatise on Section 16 authored by Peter J. Romeo and Alan L. Dye. The treatise lists several factors to assess whether deputization has occurred, and in this case, the court found that all of them applied.

First, the plaintiffs plausibly alleged that Dr. Katabi was recommended for, and elected to Vera's board for the purpose of protecting Sofinnova's interests. Dr. Katabi is a general partner and control person at Sofinnova, and the defendants maintained the right to use Vera's confidential information to trade in securities of public companies free of any confidentiality and non-use obligations. To the court, these facts plausibly supported the deputization theory.

The court then found that the plaintiffs plausibly alleged that Dr. Katabi had access to Vera's material nonpublic information and shared that with the defendants, who used for their investments in Vera securities. The complaint also alleged that all of Sofinnova's investments in Vera were made under Dr. Katabi's purview as a general partner. In short, Dr. Katabi's position enabled her to acquire Vera's confidential information and utilize it for Sofinnova's benefit.

The case is No. 1:24-cv-04194.

Judge: Ramos, E.

Attorneys: Mari Kristine Bonthuis (Sterlington PLLC) for Calenture, LLC. James Austen Hunter (Law Office of James A. Hunter) for Nosirrah Management, LLC. Brian Lee Muldrew (Katten Muchin Rosenman LLP) for Sofinnova Venture Partners X, L.P., Sofinnova Management X, L.P. and Sofinnova Management X-A, L.L.C.

Companies: Calenture, LLC; Nosirrah Management, LLC; Sofinnova Venture Partners X, L.P.; Sofinnova Management X, L.P.; Sofinnova Management X-A, L.L.C.

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