Case Background
Plaintiff Todd Augenbaum, a shareholder of Genius Brands International, Inc. (formerly known as Kartoon Studios, Inc.), filed a lawsuit in the United States District Court for the Southern District of New York against a group of investment funds and a private investor. The case centered on alleged violations of Section 16(b) of the Securities Exchange Act of 1934, which requires corporate insiders who own more than 10% of a company's stock to return any profits made from buying and selling that company's stock within a six-month window a practice commonly called "short-swing trading."
Genius Brands, which traded on the Nasdaq Capital Market under the ticker symbol "GNUS," was a Nevada corporation that created and distributed children's entertainment programming. The company had been operating at a loss for years, relying on repeated rounds of private financing to keep its doors open.
Cause
The lawsuit arose from a March 2020 financing deal in which a group of investment funds purchased senior secured convertible notes and warrants from Genius Brands. Augenbaum argued that this group of investors acted together as a single unit — what he called the "Buyers Group" — making them collectively beneficial owners of more than 10% of the company's common stock. Under Section 16(b), that status as an insider would require them to hand back any profits earned from short-swing trades in the company's stock.
Injury
Augenbaum brought the lawsuit not for his own benefit but on behalf of Genius Brands itself. He argued the company was entitled to recover short-swing profits that the Defendant investors earned by buying and then selling large amounts of Genius Brands common stock within six months, at prices significantly higher than what they paid.
Damages Sought
Augenbaum sought a judgment requiring the Defendants to disgorge their short-swing profits to Genius Brands, along with pre-judgment and post-judgment interest.
Key Arguments and Proceedings
Augenbaum made a formal demand to the Genius Brands board of directors in October 2020, asking the company to pursue these claims itself. The board refused, which allowed Augenbaum to bring the lawsuit directly under Section 16(b).
The case went to trial before a jury in the Southern District of New York. By the time the case reached the jury, the remaining Defendants were Brio Capital Master Fund Ltd., Brio Select Opportunities Fund LP, Empery Asset Master Ltd., Empery Debt Opportunity Fund LP, Empery Tax Efficient LP, and Empery Asset Management LP. Kartoon Studios, Inc. (formerly Genius Brands International) appeared as the nominal Defendant, since any recovery would go to the company.
Legal Representation
Plaintiff: Todd Augenbaum
· Counsel for Plaintiff: Jeffrey S. Abraham | Michael J. Klein | Evan Mandel | Robert Allen Glunt | Alyssa L Vickers | Brice Jastrow
· Experts for Plaintiff: Max Holmes | Andrew Chin
Defendants: Brio Capital Master Fund Ltd | Brio Select Opportunities Fund, LP | Empery Asset Master, Ltd | Empery Debt Opportunity Fund, LP | Empery Tax Efficient, LP | Empery Asset Management, LP
· Counsel for Defendant(s): Richard M. Asche | Dennis H. Tracey, III | Andrew David Gladstein | Catherine Bratic | Peter Martinez | John Brilling Horgan | Joanna Rebecca Cohen
Key Arguments or Remarks by Counsel
Claims
Augenbaum argued that the investment funds did not act independently when they invested in Genius Brands. Instead, he said they coordinated their actions through a series of interrelated agreements — including a Securities Purchase Agreement, a Voting Agreement, a Lock-Up Agreement, a Master Netting Agreement, and later a Leak-Out Agreement — that together showed they were acting as a group for the purpose of acquiring, holding, voting, and selling the company's common stock.
He pointed to several specific actions that he said showed coordinated conduct: the funds jointly purchased convertible notes in March 2020 with Anson Investments serving as the lead investor and collateral agent for the entire group; they collectively required certain major shareholders to sign a voting agreement as a condition of the deal; they jointly agreed to limit how they sold shares once the stock price rose; and they entered a conversion agreement together when they decided to convert their notes into common stock.
Augenbaum further argued that within weeks of the March 2020 deal closing, Genius Brands made a series of optimistic public announcements — including news about a Stan Lee intellectual property joint venture and an Arnold Schwarzenegger-related deal — that drove the company's stock price well above the $2.00 per share threshold set in the Leak-Out Agreement. The investment funds then sold large volumes of shares at those elevated prices, generating substantial profits, all within six months of their initial purchases at prices as low as $0.21 per share.
Defense
The Brio and Empery entities denied that they formed a Section 16(b) group. M3A LP, which filed a detailed answer to the amended complaint before apparently settling or being dismissed before trial, argued that it was not an insider subject to Section 16(b), that it received no profits subject to disgorgement, and that Augenbaum identified no matching purchases and sales. M3A also raised defenses including unclean hands, laches, lack of standing, and potential extraterritorial application of the statute.
The Defendants generally maintained that while they participated in the same securities purchase transaction, each fund made its own independent investment decisions and did not act as part of a coordinated group for purposes of Section 16(b).
Jury Verdict
The jury returned its verdict on June 18, 2026, answering two questions on the verdict form.
On Question 1, the jury found that Augenbaum did not prove by a preponderance of the evidence that Brio entered into a Section 16(b) group as defined in the Court's instructions. The jury answered No.
On Question 2, the jury found that Augenbaum did not prove by a preponderance of the evidence that Empery entered into a Section 16(b) group as defined in the Court's instructions. The jury also answered No.
Because the jury answered No to both questions, it did not proceed to determine the dates during which any group membership began or ended, and it did not award any damages.
The verdict form was signed and dated by the jury foreperson on June 18, 2026. The verdict was filed with the Court on June 23, 2026.
The jury's findings meant that neither Brio nor Empery were found to have been statutory insiders under Section 16(b), and therefore neither was required to disgorge any short-swing trading profits to Genius Brands.
Court documents are available upon request at [email protected]
