Kartoon Studios PIPE Indemnity Ruling: Winning Investors Still Pay Their Own Fees

Two Funds Won the Section 16(b) Trial and Still Lost the Fee Fight

Kartoon Studios does not have to cover $10 million in legal fees for two investment firms that won a federal jury trial over short-swing profits, according to Law360's October 15, 2026 report on a New York trial court ruling. Law360 reported that the court found the indemnity provisions in the parties' agreements cover only the investors' purchase of Kartoon securities, not later share sales.

This was not a case of investors losing on the merits. Empery Asset Management and Brio Capital won.

For any fund that invests in PIPEs, the lesson is direct: the indemnity you negotiate at the purchase may not follow you to the exit.

What the Plaintiff Alleged

The plaintiff, Todd Augenbaum, brought a Section 16(b) claim under the Securities Exchange Act against eight investors that participated in a 2020 PIPE transaction with Kartoon's predecessor company, according to Freshfields' June 2026 announcement. Per Freshfields, Augenbaum alleged that the investors formed a "group" and sought disgorgement of nearly $500 million in alleged short-swing profits. Freshfields described the case as the first Section 16(b) group jury trial. On June 18, 2026, the jury found for Empery and Brio.

The Verdict and the Settlements

Per Kartoon's Q2 2026 Form 10-Q, trial in Augenbaum v. Anson Investments Master Fund LP ran June 8–18, 2026, and the jury returned a verdict for the two non-settling defendants and awarded no damages. The same filing reports that Kartoon and plaintiff's counsel settled with six of the eight defendants for approximately $78.5 million in aggregate, and the settling defendants waived indemnity claims against Kartoon.

Empery and Brio were the two defendants that did not settle. They went to trial, and they won.

From the Indemnity Suit to the Ruling

The fee fight began before the trial. Per Kartoon's Q1 2026 Form 10-Q, on February 12, 2026, four Empery entities sued Kartoon in New York Supreme Court, New York County, seeking about $3.5 million in damages at filing plus a declaration that Kartoon must advance ongoing defense expenses.

On October 15, 2026, Law360 reported that New York's trial court ruled Kartoon does not have to cover $10 million in legal fees for the two investment firms that won the federal trial. The court found the indemnity provisions cover only the investors' purchase of Kartoon securities, not later share sales.

What the Ruling Means for PIPE Deal Terms

In business terms, Law360 reports that the court tied the indemnity to the purchase, not to what happened after it. The investors bought the securities, later sold shares, and were sued over the trading. The protection they negotiated did not reach that litigation.

A fund manager makes two decisions at signing. First, whether the indemnity scope reaches only the purchase, or also the post-closing holding and disposition of the securities. Second, whether the indemnity covers litigation brought because of the investment, including Section 16(b) claims. Kartoon shows that an indemnity tied to the purchase may not reach litigation over later share sales.

Funds that negotiate PIPE purchase agreements should have the indemnity scope reviewed as part of their private fund legal work.

Key Takeaways for PIPE Investors

Winning at trial does not trigger reimbursement. Empery and Brio won a jury verdict with no damages awarded, and Law360 reports they still did not recover the $10 million in fees they sought.

Indemnity scope is set at signing. Law360 reports the court read the indemnity to cover the purchase of Kartoon securities, not later share sales.

Settling defendants gave up indemnity claims. Kartoon's Q2 2026 10-Q reports that the six settling defendants waived indemnity claims against Kartoon.

Check advancement language, not only indemnity. Empery's state-court suit sought a declaration that Kartoon must advance ongoing defense expenses. Advancement determines who funds the defense while the case is pending.