What Happened 

In Hunton’s 2025 Capital Markets Year-In-Review, we reported on two important cases under Section 16 of the Securities Exchange Act of 1934 (Exchange Act) from the US District Court for the Southern District of New York. The first—20230930-DK-Butterfly-1, Inc. (f/k/a Bed Bath & Beyond Inc.) v. HBC Investments LLC, No. 24-cv-03370, 2025 WL 2782334 (SDNY Sept. 30, 2025)—addressed beneficial ownership blockers. The second—Augenbaum v. Anson Investments Master Fund LP, No. 22-cv-249, 2025 WL 2780854 (SDNY Sept. 30, 2025)—concerned the existence of a group.

Following an appellate decision in Butterfly and a jury verdict and various settlements in Augenbaum, we have important updates to each case. In brief:

• In Butterfly, the Second Circuit ruled that a properly constructed blocker is generally effective to prevent the vesting of beneficial ownership and will not be considered to be evasive under Rule 13d-3(b) unless there is some element of non-compliance with the terms or concealment of actual beneficial ownership.
• The staff in the SEC’s Division of Corporation Finance separately issued new guidance affirming that cash-settled total return swaps do not create beneficial ownership in the reference securities absent the creation of a false appearance or an illusion contrary to the actual facts.
• In Augenbaum, notwithstanding a jury verdict in favor of two defendants, the settlements by other former defendants keep open important questions for investors who invest in parallel with one another.

The Bottom Line(s)

20230930-DK-Butterfly-1, Inc. v. HBC Investments LLC

As we reported previously, the district court’s decision in Butterfly concerned a complex set of transactions between Bed, Bath & Beyond, Inc. (BBBY) and HBC Investments LLC, an investment fund (HBC). The transactions were conceived in an effort by BBBY to raise cash and stave off bankruptcy and involved BBBY’s sale to HBC of several different derivative securities convertible into BBBY common stock. These instruments had “blocker” provisions limiting the number of shares that HBC could acquire following exercise or conversion, designed so that HBC would beneficially own less than 10 percent of the shares outstanding at any given point in time. Ultimately, HBC was able to acquire (though not all at one time) and sell a number of shares of common stock amounting to more than 10 times the number of BBBY shares outstanding immediately prior to the initial sale of derivative securities to HBC.

The plaintiff’s counsel argued that the blockers employed by HBC were defectively drafted and that, in any event, HBC did not follow the terms thereof. Insofar as drafting defects, the plaintiff identified the absence of any sort of compliance mechanism so that BBBY could stop HBC from acquiring too many shares at one time; indeed, BBBY was expressly precluded from even inquiring into HBC’s holdings. The district court found that the blockers were not defective. Insofar as non-compliance, the court observed that, under T+2 settlement, HBC retained title to certain shares HBC sold pending settlement. However, the court concluded that HBC did not “beneficially own” the sold shares pending settlement of the trades.

The plaintiff appealed the district court’s decision to the US Court of Appeals for the Second Circuit. On July 7, 2026, a unanimous three-judge panel strongly endorsed the district court’s conclusions as they related to the blockers. See 20230930-DK-Butterfly-1, Inc. (f/k/a Bed Bath & Beyond Inc.) v. HBC Investments LLC, Case No. 25-2728, slip op. (2d Cir. July 11, 2026). Although the plaintiff had contended in its appeal brief that the district court’s ruling would improperly give “a free pass to essentially any competently drafted blocker,” the panel responded in effect that the alleged “free pass” was no problem. The court wrote: “a comprehensive and legally binding blocker should generally insulate a defendant from section 16(b) liability.”

The plaintiff’s appellate brief also contended that the BBBY blockers at issue were, in effect, irrelevant because the defendants were beneficial owners of the underlying securities under Rule 13d-3(b). That provision states that, if a person uses any contract “as part of a plan or scheme to evade the reporting requirements of section 13(d) or (g), [that person] shall be deemed for purposes of such sections to be the beneficial owner of such security.”

The Second Circuit had last addressed Rule 13d-3(b) in CSX Corp. v. Children’s Investment Fund Management (UK) LLP, 654 F.3d 276 (2d Cir. 2011). That case involved cash-settled total return swaps (TRS). A cash-settled TRS gives one party (the long party) the economics of owning the the referenced number of shares through cash payments by the counterparty to the long party (share price gains and dividends) and payments by the long party to the counterparty (share price losses).

CSX Corp. argued in the district court that the defendants should have—but did not—include the cash-settled TRSs they owned in their beneficial ownership reports. The district court declined to decide CSX Corp.’s argument that the defendants’ ownership of the long side of a TRS amounted to actual voting or dispositive control over the stock referenced by the TRS. In other words, there was no finding that the defendants did or did not beneficially own such stock under Rule 13d-3(a). However, the district court agreed with the plaintiff that the defendants were “deemed” to beneficially own those shares pursuant to Rule 13d-3(b). In other words, the district court determined that—at least in this particular case—the defendants’ use of TRSs amounted to a scheme to evade.

The parties appealed the case to the US Court of Appeals for the Second Circuit. Unfortunately, the issues in the case proved so divisive at the time that the three-judge panel could not agree on whether the swaps at issue did (or did not) constitute a scheme to evade. The case was remanded to the district court (on mostly ancillary issues) and eventually it settled.

Judge Winter, however, had written a detailed concurring opinion, which has stood the test of time. Many practitioners and market participants have treated that concurrence as the leading case on Rule 13d-3(b)—even though the decision was not technically binding precedent. The panel on appeal in Butterfly effectively adopted Judge Winter’s concurrence in CSX as the law in the Second Circuit. In Judge Winter’s view, 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.” Or, as the Butterfly panel wrote:

“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, 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." [Emphasis in original.]

After the Second Circuit in Butterfly, it appears clear that a properly constructed blocker—and a cash-settled total return swap—will not be considered to be evasion under Rule 13d-3(b) unless there is some element of non-compliance with the terms or concealment of actual beneficial ownership.

Interestingly, just two days after the Second Circuit’s decision in Butterfly, the SEC Staff published a Corporation Finance Interpretation (CFI) that echoes the same ideas with respect to Rule 13d-3(b) and its application to swaps. Below are the Q&As the staff adopted:

Question 105.08
Question: In connection with a standard total return equity swap that settles exclusively in cash, only refers to a class of equity securities (as described in Rule 13d-1(i)(1)) for purposes of identifying a reference security, and otherwise does not confer any voting or investment power with respect to—or any right to acquire—such class (a “TRS”), would the purchaser of the TRS be deemed to acquire beneficial ownership (as determined under Section 13(d) and Rule 13d-3), of the reference securities, including any equity securities the counterparty may hold for hedging purposes, solely as a result of entering into the TRS?
Answer: No. A person who simply enters into a TRS, as defined above, does not acquire beneficial ownership of the reference securities, including any equity securities the counterparty may hold to hedge its risk. In addition, entry into a TRS, absent any arrangement that confers such power or rights outside of the terms of the TRS, is not, by itself, evidence of a plan or scheme to evade the Section 13(d) or 13(g) beneficial ownership reporting obligations as described in Rule 13d-3(b).

Question 105.09
Question: Under what circumstances would a person who enters into a TRS (as defined in CFI 105.08) be “deemed” a beneficial owner of the reference securities, including any equity securities held by a counterparty to hedge its risk, pursuant to Rule 13d-3(b)?
Answer: A person may be “deemed” a beneficial owner of equity securities pursuant to Rule 13d-3(b) if the person uses an arrangement with the purpose or effect of preventing the vesting of beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g). Given that a standard TRS confers no voting or investment power or right to acquire the reference securities, the TRS would need to be directly or indirectly used in connection with an “arrangement” to prevent the vesting of beneficial ownership by the purchaser of the TRS in order to be part of a plan or scheme to evade reporting obligations. For example, if a person uses a TRS as a means to direct the counterparty how to vote any equity securities used in the counterparty’s hedge or to pre-arrange the acquisition of such securities, the person may be deemed a beneficial owner under Rule 13d-3(b). Entry into a TRS solely for economic exposure to the reference security, without more, does not prevent the vesting of, or create a false appearance regarding, beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g) for purposes of Rule 13d-3(b). 

Question 105.10
Question: What mental state, if any, is contemplated by the term “plan or scheme to evade” as used in Rule 13d-3(b) and, in particular, with respect to entry into a TRS (as defined in CFI 105.08)?
Answer: The mental state contemplated by the words “plan or scheme to evade” is generally the intent to enter into an arrangement that creates a false appearance or an illusion contrary to the actual facts. See Letter from Brian V. Breheny, Deputy Dir., Div. of Corp. Fin., SEC, to Hon. Lewis A. Kaplan, U.S. Dist. Judge, S.D.N.Y. (June 4, 2008), in CSX Corp. v. Children’s Inv. Fund Mgmt, L.L.P., et al., No. 08-Civ. 2764. Therefore, with respect to a TRS, the relevant inquiry under Rule 13d-3(b) would focus on whether the person knew or was reckless in not knowing that use of the TRS would create a false appearance or illusion that the person’s interest is economic alone. For example, entry into a TRS for the purpose or effect of indirectly acquiring the power to vote or a future right to acquire the reference equity security may be viewed as part of a “plan or scheme to evade” as that term is used in Rule 13d-3(b).

Augenbaum v. Anson Investments Master Fund LP

The district court in Augenbaum had found that the question of whether the defendants had formed a “group”—and thus that each member of that group was subject to Section 16 disgorgement—was a disputed factual issue that would have to be resolved at trial. Several defendants settled before trial. Others settled during trial. Only two defendants remained in the case through verdict. Those defendants prevailed and were found by the jury not to have been part of any group.

The outcome here is a mixed bag for investors trying to understand what does or does not constitute a group. Represented by well-qualified law firms, certain defendants here settled and agreed to pay Genius Brands, the nominal plaintiff, nearly $80 million in total. So, they clearly thought there was a material risk that they might lose at trial. Although two defendants prevailed at trial, it is difficult to determine the precise reasons for their success before the jury, and whether the facts of those successful cases were materially different from those of the cases that settled.

In sum, Augenbaum continues to bespeak caution to investors who invest in parallel with each other, particularly when the parties engage in multiple separate transactions over an extended period.