25-2728-cv
20230930-DK-Butterfly-1 Inc. v. HBC Invs. LLC
United States Court of Appeals
For the Second Circuit
August Term 2025
Argued: June 23, 2026
Decided: July 7, 2026
No. 25-2728
20230930-DK-BUTTERFLY-1, INC., f/k/a Bed Bath &
Beyond Inc.,
Plaintiff-Appellant,
v.
HBC INVESTMENTS LLC, HUDSON BAY CAPITAL
MANAGEMENT LP,
Defendants-Appellees,
Appeal from the United States District Court
for the Southern District of New York
No. 24-cv-00370, Mary Kay Vyskocil, Judge.
Before: CALABRESI, LYNCH, and SULLIVAN, Circuit Judges.
Plaintiff 20230930-DK-Butterfly-1 (“Butterfly”) – the post-bankruptcy
successor of retailer Bed Bath & Beyond (“BBBY”) – appeals from a judgment of the United States District Court for the Southern District of New York (Vyskocil, J.) dismissing its claim under section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) for the disgorgement of short-term profits acquired by an investment manager and its client fund (collectively, “Hudson Bay”).
Shortly before declaring bankruptcy, BBBY sold derivatives to Hudson Bay
granting it the ability to acquire – at a discount – large amounts of BBBY’s common stock. The power to buy up significant blocks of stock, however, comes with certain responsibilities. Specifically, section 16(b) of the Exchange Act, 15 U.S.C. § 78p(b), strictly requires beneficial owners of more than ten percent of a public company’s stock – including those who have the right to acquire such ownership – to disgorge all short-term profits. Looking to avoid this potential liability, Hudson Bay included so-called “blockers” in the contracts governing its
derivatives. These clauses, on their face, prevented Hudson Bay from ever actually obtaining more than 9.99% of BBBY’s common stock at any one time. With the
blockers in place, Hudson Bay reaped large short-term profits by acquiring BBBY’s stock, selling it, and then acquiring more – all the while keeping its ownership of BBBY’s stock below ten percent.
Butterfly subsequently sued Hudson Bay, alleging that (i) the blockers were illusory; (ii) Hudson Bay effectively had the right to acquire more than ten percent of BBBY’s common stock; and (iii) Hudson Bay thus faced strict liability and mandatory disgorgement of its short-term profits. The district court disagreed with Butterfly’s first premise and dismissed the complaint, concluding that the blockers shielded Hudson Bay from section 16(b) liability. In resolving what is an issue of first impression in this Circuit, we agree with the district court and accordingly AFFIRM the judgment in full.
AFFIRMED.
JAMES A. HUNTER, Law Office of James A. Hunter,
Radnor, PA, for Plaintiff-Appellant.
DOUGLAS A. RAPPAPORT (James E. Tysse, Akin
Gump Strauss Hauer & Feld LLP, Washington,
2
D.C.; Kaitlin D. Shapiro, Akin Gump Strauss
Hauer & Feld LLP, New York, NY, on the brief),
Akin Gump Strauss Hauer & Feld LLP, New York,
NY, for Defendants-Appellees.
Michael C. Keats, Fried, Frank, Harris, Shriver, &
Jacobson LLP, New York, NY, for Amicus Curiae
Managed Funds Association in support of DefendantsAppellees.
RICHARD J. SULLIVAN, Circuit Judge:
Plaintiff 20230930-DK-Butterfly-1 (“Butterfly”) – the post-bankruptcy
successor of retailer Bed Bath & Beyond (“BBBY”) – appeals from a judgment of
the United States District Court for the Southern District of New York (Vyskocil,
J.) dismissing its claim under section 16(b) of the Securities Exchange Act of 1934
(the “Exchange Act”) for the disgorgement of short-term profits acquired by an
investment manager and its client fund (collectively, “Hudson Bay”).
Shortly before declaring bankruptcy, BBBY sold derivatives to Hudson Bay
granting it the ability to acquire – at a discount – large amounts of BBBY’s common
stock. The power to buy up significant blocks of stock, however, comes with
certain responsibilities. Specifically, section 16(b) of the Exchange Act, 15 U.S.C.
§ 78p(b), strictly requires beneficial owners of more than ten percent of a public
company’s stock – including those who have the right to acquire such ownership
– to disgorge all short-term profits. Looking to avoid this potential liability,
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Hudson Bay included so-called “blockers” in the contracts governing its
derivatives. These clauses, on their face, prevented Hudson Bay from ever actually
obtaining more than 9.99% of BBBY’s common stock at any one time. With the
blockers in place, Hudson Bay reaped large short-term profits by acquiring BBBY’s
stock, selling it, and then acquiring more – all the while keeping its ownership of
BBBY’s stock below ten percent.
Butterfly subsequently sued Hudson Bay, alleging that (i) the blockers were
illusory; (ii) Hudson Bay effectively had the right to acquire more than ten percent
of BBBY’s common stock; and (iii) Hudson Bay thus faced strict liability and
mandatory disgorgement of its short-term profits. The district court disagreed
with Butterfly’s first premise and dismissed the complaint, concluding that the
blockers shielded Hudson Bay from section 16(b) liability. In resolving what is an
issue of first impression in this Circuit, we agree with the district court and
accordingly affirm the judgment in full.
I. BACKGROUND
BBBY was founded in 1971 and eventually grew into a “nationally[ ]known
retailer of home goods.” J. App’x at 14. But by the early 2020s, it had hit hard
times, as “pandemic-related store closures, supply disruptions, and management
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missteps” led it to the brink of financial ruin. Id. In “desperate need of cash,”
BBBY turned to the capital markets to issue “three new classes of derivative
securities” – (i) convertible preferred stock; (ii) preferred-stock warrants; and
(iii) common-stock warrants. Id. at 14–15. In a nutshell, those derivatives enabled
investors to obtain common stock at a potential discount by either converting their
preferred stock to common stock, exercising their warrants to acquire preferred
stock (and then converting it), or simply exercising their warrants to obtain
common stock. Ultimately, Hudson Bay bought up almost all these derivatives,
“anchor[ing]” the public offering in return for “the right to buy heavily
discounted, freely tradable BBBY common stock.” Id. at 15, 20 (internal quotation
marks omitted).
Hudson Bay did not, however, want to exercise too much control over BBBY.
That is because federal securities laws would require Hudson Bay to take on
certain regulatory responsibilities, including possible “disclosure and
disgorgement obligations,” if it “beneficially own[ed]” – or had the ability to
acquire – at least ten percent of BBBY’s common stock at any given moment. Id. at
30. “In an attempt to suppress [its] beneficial ownership,” Hudson Bay therefore
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added contractual provisions known as “blockers” to the terms of its derivatives.
Id. (internal quotation marks omitted).
These blockers prohibited Hudson Bay from ever “beneficially own[ing] in
excess of 9.99%” of BBBY’s common stock. Id. at 31 (internal quotation marks
omitted). Indeed, they expressly provided that any preferred-stock conversion or
warrant exercise would “be null and void and treated as if never made” if it
brought Hudson Bay over the 9.99% threshold, and that Hudson Bay would “not
have the power to vote or transfer” any shares issued in excess of that percentage.
Id. at 31, 88, 154 (internal quotation marks omitted). And every time it sought to
convert its preferred stock or exercise its warrants, Hudson Bay was also required
to certify that upon execution of the requested conversion or exercise, it would not
“have beneficial ownership. . . of a number of shares of [BBBY] Common Stock
[that] exceed[ed]” 9.99%. Id. at 275, 278.
Hudson Bay and BBBY supplemented these contracts with a letter
agreement (the “Side Letter”), which provided, as relevant here, that (i) the publicoffering documents “set forth the totality of the procedures required of [Hudson
Bay] in order to exercise” its warrants and convert its preferred shares; (ii) BBBY
would not “require” Hudson Bay to produce additional “information or
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instructions” when Hudson Bay attempted to invoke those rights; and (iii) BBBY
would instead “honor” Hudson Bay’s requests for stock “in accordance with the
terms” of the public-offering documents. Id. at 212, 221–22. The Side Letter also
made clear that its terms neither superseded nor in any way altered the
public-offering documents. Id. at 225.
With these agreements in place, BBBY received its cash infusion. But it was,
in the end, not enough: BBBY continued to spiral downward and ultimately filed
for bankruptcy in April 2023. Even as BBBY teetered on the brink of bankruptcy,
however, Hudson Bay “reaped . . . profit[s] of over $300 million” by rapidly
acquiring newly issued BBBY stock at a discount and then reselling it at market
value. Id. at 13. In May 2024, Butterfly (BBBY’s successor) sued Hudson Bay,
alleging that the blockers were “illusory,” that Hudson Bay consistently owned
more than ten percent of BBBY, and that Hudson Bay was “strictly liable to account
for and repay” all its short-term profits under section 16(b). Id. at 10, 13.
The district court disagreed, concluding that Butterfly did not sufficiently
plead that “the blocker provisions were illusory or a sham.” Sp. App’x at 32.
Butterfly timely appealed.
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II. DISCUSSION
“We review de novo a district court’s dismissal for failure to state a claim,
accepting all factual allegations in the complaint as true and drawing all
reasonable inferences in favor of the plaintiff.” Knapp v. Barclays PLC, 171 F.4th
166, 170 (2d Cir. 2026) (internal quotation marks omitted). “To survive a motion
to dismiss, a complaint must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (internal quotation marks omitted).
A. Contractual Blockers Shield Investors from Section 16(b) Liability.
Section 16(b) of the Exchange Act is a “blunt instrument”: to categorically
“remove any temptation . . . to engage in” insider trading, it imposes “strict
liability” on corporate insiders who have profited from buying and selling
securities within a six-month period. Magma Power Co. v. Dow Chem. Co., 136 F.3d
316, 320–21 (2d Cir. 1998) (citing 15 U.S.C. § 78p(b)). Those insiders include both
a public company’s directors and officers and its powerful shareholders – namely,
those who “directly or indirectly” are “the beneficial owner[s] of more than [ten]
percent of any class of any equity security.” 15 U.S.C. § 78p(a). Furthermore, even
potential beneficial ownership qualifies; so long as the insider “has the right to
8
acquire beneficial ownership” of the underlying security, 17 C.F.R. 240 § 13d–
3(d)(1)(i); see also 17 C.F.R. § 240.16a–1(a)(1), it will be subject to section 16(b)’s
strict-liability ban on short-swing profits.
Sometimes, however, investors want to hold large numbers of options,
warrants, or convertible securities without navigating the perils of section 16(b).
To do so, they employ so-called “blocker[s]” or “conversion cap[s],” Roth v. Solus
Alternative Asset Mgmt. LP, 124 F. Supp. 3d 315, 323 (S.D.N.Y. 2015) – contractual
provisions that “den[y] an investor the right to acquire more than [ten percent] of
the underlying equity securities of an issuer[] at any one time,” Levy v. Southbrook
Int'l Invs., Ltd., 263 F.3d 10, 12 (2d Cir. 2001). In other words, blockers allow
investors to retain the ability to cumulatively acquire hefty amounts of an issuer’s
stock over a short-term period, without ever having the power to obtain more than
ten percent at any given instant. See id. at 16 (“[B]eneficial ownership is
determined at any one time, not cumulatively”). By thus extinguishing “the right
to acquire beneficial ownership,” 17 C.F.R. 240 § 13d–3(d)(1)(i), these blockers are
designed to shield investors from section 16(b).
Because Hudson Bay will thus face section 16(b) liability only if its blockers
were defective, Butterfly attempts to undermine them, arguing first that they were
9
illusory, and second that Hudson Bay used them in an improper attempt to evade
regulatory reporting requirements. We disagree on both fronts.
B. Hudson Bay’s Blockers Were Not Illusory.
Courts disregard “sham” or “illusory” blockers. Levy, 263 F.3d at 17 n.4. As
the district court recognized, there is a “dearth of case[l]aw” regarding when a
blocker qualifies as “sham or illusory.” Sp. App’x at 17. That said, Levy – our
seminal case on blockers – suggests three relevant (and commonsense) factors to
be considered in assessing the viability of the blocker in question: whether (i) the
acquiring party may waive the blocker “in its sole discretion,” 263 F.3d at 17;
(ii) the blocker lacks “a means of ensuring compliance,” id.at 18; and (iii) as a
practical reality, the investor has “ever exceeded the conversion cap,” id. at 12. 1
All three factors indicate that the blockers at issue here are not illusory. First,
the blockers here are solid contractual provisions, not phantom clauses that
1
While some courts have relied on an amicus brief that the Securities and Exchange Commission (the “SEC”) filed in Levy – which listed several factors that might influence whether a blocker qualifies as illusory, see Br. for SEC as Amicus Curiae Supporting Appellees, Levy v. Southbrook Int’l Invs., Ltd., 263 F.3d 10 (2d Cir. 2001) (No. 00-7630), 2001 WL 34120374 (“SEC Amicus Br.”) – “[m]ost courts” have “not expressly applied the criteria set forth in the SEC’s amicus brief,” Peter J. Romeo & Alan L. Dye, Section 16 Treatise and Reporting Guide, § 2.03[5][l][ii] at 163 (6th ed. 2024). Furthermore, the three factors that Levy identified largely overlap with three of the SEC’s proposed factors. See SEC Amicus Br., 2001 WL 34120374, at *24–25 (analyzing whether the blocker (i) “lacks an enforcement mechanism,” (ii) is “easily waivable,” and (iii) “has not been adhered to in practice,” among other possible concerns); Butterfly Br. at 25–41 (arguing those three factors).
10
Hudson Bay could quietly waive without BBBY’s consent. Remarkably, Butterfly
contends that the blockers were wafer-thin because they could have been “waived
or amended like any other contract.” Butterfly Br. at 30. But the mere fact that the
parties could theoretically amend a contractual clause is not enough to make it
illusory; to hold otherwise would render virtually every clause of every contract a
sham. That explains why Levy focused on whether the alleged beneficial owner
could have waived or nullified the clause in “its sole discretion” – not on whether
the parties could have bilaterally changed their contract (as parties can always do
with any contract). 263 F.3d at 17; see also Lend Lease (US) Const. LMB v. Zurich Am.
Ins. Co., 28 N.Y.3d 675, 684 (2017) (“[A]n illusory contract . . . is[] an agreement in
which one party gives as consideration a promise that is so insubstantial as to
impose no obligation.” (internal quotation marks omitted and alteration
adopted)).
Second, they contain “a means of ensuring compliance,” id. at 18; indeed,
under the blockers, any acquisition of securities above ten percent is automatically
“null and void and treated as if never made,” J. App’x at 31 (internal quotation
marks omitted). And while Butterfly insists that “[e]nforcement of the blockers
depended entirely on self-policing by Hudson Bay,” and that the Side Letter –
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which required BBBY to honor Hudson Bay’s conversion and exercise requests
without demanding additional information – “actively disable[d]” BBBY’s ability
to “monitor[]” Hudson Bay’s compliance with the blockers, Butterfly Br. at 26, 30,
we have never found that a contractual clause is illusory simply because one party
cannot actively audit the other’s compliance in real time. On the contrary, Levy
(i) simply examined whether the contract at issue included mechanisms that
would prevent the investor from acquiring more than ten percent of the company’s
stock, and (ii) concluded that the investor’s own “ability to revoke a requested
conversion to the extent that full exercise would exceed the cap” sufficed. See 263
F.3d at 18. Here, the blockers go one step further than those in Levy, since they
automatically nullify any above-the-threshold acquisition. Finally, every time that
Hudson Bay attempted to exercise a warrant or convert preferred stock, it certified
that it was not amassing more than 9.99% of BBBY’s common stock.
Finally, the Complaint does not plausibly allege that Hudson Bay ever
actually exceeded the ten-percent cap. Indeed, the trading records attached to the
complaint suggest that Hudson Bay’s end-of-day beneficial ownership always
stayed below that threshold. To be sure, Butterfly engages in some dubious math
to suggest otherwise by calculating Hudson Bay’s percentage of ownership to
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include shares that Hudson Bay had “already agreed to sell” but still technically
held. Butterfly Br. at 36. But that methodology ignores the definition of beneficial
ownership, which turns on whether the party in question enjoys “[i]nvestment
power . . . to dispose, or direct the disposition of, [a] security.” See 17 C.F.R. 240
§ 13d–3(a)(2); id. at § 240.16a–1(a)(1). 2 Here, Hudson Bay clearly lacked the
“power to dispose” of securities that it had already sold. See, e.g., Avalon Holdings
Corp. v. Gentile, 597 F. Supp. 3d 640, 650–51 (S.D.N.Y. 2022) (“[I]t is the moment the
trading decision is made, instead of the technicalities of stock transfers, such as the
passing of title or the exchange of the shares, that governs the construction of
[section] 16(b).” (internal quotation marks omitted)).
Butterfly nevertheless asserts that “at 9:27 a.m. on February 10, 2023,
Hudson Bay had 10.1% of BBBY’s outstanding common stock just sitting in its
brokerage account.” Butterfly Br. at 36; see J. App’x at 58. But where shares happen
to be “just sitting” is not the test for determining beneficial ownership. Rather, as
discussed above, we must look to whether Hudson Bay had already sold any of
this stock, regardless of whether the shares were still briefly transiting through its
2An investor’s voting power can also establish its beneficial ownership. See 17 C.F.R. 240 § 13d– 3(a)(1). But Butterfly does not argue that Hudson Bay had the ability to vote any shares in excess of 9.99% of BBBY’s common stock. Nor could it, because the blockers expressly stripped it of that power.
13
account. And Butterfly’s complaint clearly alleges that Hudson Bay was
continuously selling shares to offset its acquisitions. Indeed, Butterfly concedes
that Hudson Bay’s “exercise requests” leading up to the February snapshot “were
staggered with intervening sales.” J. App’x at 58; see id. at 281–82 (chart tracking
“[a]dvance [s]ales” of millions of shares).
On a more fundamental level, Butterfly repeatedly faults the district court
for overly-focusing on the “blockers’ text.” Butterfly Br. at 25. Pointing to a single
sentence of dicta in a footnote in Levy – which explained that “[t]he commercial
substance of the transaction rather than its form must be considered” to “guard
against sham transactions,” 263 F.3d at 18 n.4 (internal quotation marks omitted)
– Butterfly contends that we have endorsed a substance-over-form, multi-factor
standard that focuses less on the text of the blocker, and more on how it functioned
“in practice,” Butterfly Br. at 18.
But that is not what Levy held. For starters, the footnote highlighted by
Butterfly was quoting another case – Bershad v. McDonough – which was itself
simply explaining the uncontroversial principle that “an insider” may not
“disguise[] the effective transfer of stock” via artifices like shell companies or
proxies. 428 F.2d 693, 697 (7th Cir. 1970); see infra Part II.C. Moreover, the Supreme
14
Court has repeatedly underscored that section 16(b) “imposes liability without
fault [only] within its narrowly drawn limits,” Foremost-McKesson, Inc. v. Provident
Sec. Co., 423 U.S. 232, 251 (1976), and that courts should not “exceed a literal,
mechanical application of the statutory text in determining who may be subject to
liability,” Gollust v. Mendell, 501 U.S. 115, 122 (1991) (internal quotation marks
omitted). In light of that guidance, we will not abandon the plain text of the publicoffering documents – which defines and limits Hudson Bay’s “right to acquire
beneficial ownership,” 17 C.F.R. 240 § 13d–3(d)(1)(i) – for an uncertain standard
focused on how the blockers could have functioned ineffectively in practice, absent
specific allegations that they in fact did so.
Not surprisingly, we have interpreted and assessed contracts by looking to
their text. See Levy, 263 F.3d at 17–18. And while Butterfly criticizes the district
court for engaging in analysis that would “give[] a free pass to essentially any
competently drafted blocker,” Butterfly Br. at 18, a comprehensive and legally
binding blocker should generally insulate a defendant from section 16(b) liability.
It is only when the parties have ignored the terms of their contract and allowed
the investor to “exceed[] the conversion cap” that we will look beyond the
otherwise binding language of the blocker. Levy, 263 F.3d at 12. Thus, to survive
15
a motion to dismiss, a plaintiff must allege that a facially unambiguous and selfexecuting blocker has in fact failed in practice – not merely speculate that the parties
could hypothetically waive the blocker or that the investor could breach the
contract without the other knowing about it until after the fact.
C. The Blockers Were Not Part of an Evasive Scheme.
In a last-ditch effort to invalidate the blockers, Butterfly turns to SEC Rule
13d-3(b). See 17 C.F.R. § 240.13d-3(b). That Rule kicks in whenever an investor
“plan[s] or scheme[s] to evade” various statutory “reporting requirements,” see 15
U.S.C. §§ 78m(d) & (g), which are triggered by beneficial ownership above certain
percentages. To thwart such schemes, the Rule treats “[a]ny person” who uses
“any . . . contract, arrangement, or device” to “prevent[] the vesting of” beneficial
ownership as, in fact, enjoying such ownership. Pointing to this Rule, Butterfly
contends that Hudson Bay used the blockers to “execute a comprehensive plan of
disclosure evasion,” and that Hudson Bay should thus be deemed the beneficial
owner of BBBY’s common stock. Butterfly Br. at 19.
But Butterfly confuses “plan[s] or scheme[s],” 17 C.F.R. § 240.13d-3(b), that
conceal a defendant’s effective ownership with contractual provisions that prevent
an investor from owning a security in the first place. That difference figured
16
prominently in Judge Winter’s lengthy concurrence in CSX Corp. v. Children's
Investment Fund Management (UK) LLP, 654 F.3d 276 (2d Cir. 2011) – which both
parties cite approvingly, see, e.g., Butterfly Br. at 48; Hudson Bay Br. at 49. There,
Judge Winter explained that Rule 13d-3(b) applies only when “the transaction . . .
[involves a] substantial equivalence of the rights of ownership relevant to control, or
include[s] steps that stop short of, or conceal, the vesting of ownership, while
nevertheless ensuring that such ownership will vest at the signal of the would-be
owner.” CSX Corp., 654 F.3d at 305 (Winter, J., concurring) (emphasis added). Not
surprisingly, Judge Winter focused on secret side deals, informal arrangements
with straw buyers, and similar “sham[s]” designed to obscure an investor’s control
and contravene the Rule. Id. at 304. Judge Winter distinguished those nefarious
transactions from benign arrangements in which “the underlying transaction does
not provide the party with the substantial equivalence of the rights of ownership
relevant to control.” Id. at 305.
Judge Winter’s view aligns with Supreme Court precedent, which expressly
allows “investor[s] [to] structure[] . . . transaction[s] with the intent of avoiding
liability under [section] 16(b).” Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418,
422 (1972). And we ourselves have blessed the use of effective blockers. See Levy,
17
263 F.3d at 12. An investor is thus clearly free to limit its ownership rights so as
not to take on regulatory responsibility; what it may not do is “conceal[] the vesting
of ownership” to evade its duties. CSX Corp., 654 F.3d at 305.
Recognizing this problem, Butterfly makes one final bid to save its
complaint by arguing that Hudson Bay was hiding such de facto ownership rights.
In Butterfly’s telling, the Side Letter secretly superseded the terms of the publicoffering documents, giving Hudson Bay the unlimited “right to acquire” as much
stock as it wanted – despite the blockers’ ten-percent cap. Butterfly Br. at 49
(noting that Side Letter “said something very different” from public-offering
documents). But that is simply not what the Side Letter did: that ancillary contract
(i) expressly required BBBY to “honor” Hudson Bay’s requests to exercise its
warrants or convert its preferred stock only “in accordance with the terms” of the
public-offering documents (including the blockers); and (ii) noted that its terms
did not supersede or in any way alter the public-offering documents. J. App’x at
221–22, 225 (emphasis added). So, while the Side Letter required BBBY to hand
over its common stock “in such amounts as [Hudson Bay] specified,” that term
was clearly subject to BBBY’s and Hudson Bay’s other agreements. Id. at 222.
18
In short, far from covertly poking a hole in the blockers, the Side Letter
expressly preserved them. And because these blockers prevented Hudson Bay
from ever enjoying “the substantial equivalence” of beneficial ownership, CSX
Corp., 654 F.3d at 305, Rule 13d-3(b) plays no role here.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court
dismissing Butterfly’s claim.
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