Lee v. Pincus et al
MEMORANDUM AND ORDER. Signed by Judge Sue L. Robinson on 12/23/2013. (fms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
WENDY LEE, individually and on
behalf of all others similarly situated,
MARK PINCUS, et al.,
) Civ. No. 13-834-SLR
MEMORANDUM AND ORDER
At Wilmington this 23rd day of December, 2013, having reviewed plaintiff's
motion to remand and defendants' motion to dismiss, as well as the papers filed in
connection therewith; the court issues its decision based on the following analysis:
1. Background. Plaintiff filed the instant litigation against Zynga, Inc. and
certain of its officers, directors, and executives in the Court of Chancery for the State of
Delaware. (D.I. 1) The focus of the complaint is the March 2012 secondary public
offering (the "second offering") of Zynga stock and the subsequent drop in Zynga's
stock price. In her complaint, plaintiff "challenges defendants' selective, discriminatory
waiver of lockup agreements that they required present and former employees and
other shareholders of [Zynga] to enter into in connection with Zynga's initial public
offering (the 'IPO')." According to the complaint, the lockup agreements barred sales by
substantially all of Zynga's shareholders, including all of its officers and directors, for
165 days following the December 16, 2011 IPO. Less than 90 days after the IPO,
however, Zynga announced that its Chairman, Chief Executive Officer and controlling
shareholder, 1 together with other members of Zynga's board of directors and certain
other senior executives and private equity investors, would sell over 40 million shares of
stock in the second offering, and that their lockup agreements would be waived to allow
the sales to occur. The second offering was completed two weeks later. While the
second offering allowed members of Zynga's senior management and members of the
board of directors to cash out early, the same opportunity was not extended to Zynga's
non-executive and former employees. The second offering yielded certain of the
defendants net proceeds of millions of dollars. 2 Beginning immediately after the
second offering, Zynga's share per price began a precipitous decline so that, by the
time the lockup agreements had expired and plaintiff and other former employees were
first allowed to dispose of their shares, Zynga's share price had dropped 49.3% from
the second offering price.
2. Based on the above course of conduct, plaintiff asserts two state law claims,
one for breach of fiduciary duty (against the former directors), and one for aiding and
abetting the breach of fiduciary duty (against the underwriter defendants). Defendants
removed the action to federal court premised on their contention that the federal
Securities Litigation Uniform Standards Act ("SLUSA:), codified in relevant part at 15
U.S.C. § 77bb, authorized such. More specifically, SLUSA authorizes removal and
immediate dismissal of any (a) "covered class action," (b) involving a "covered security,"
Defendant Mark Pincus.
For example, the second offering yielded defendant Pincus net proceeds of
(c) "based upon the statutory or common law of any State," and (d) alleging "a
misrepresentation or omission of a material fact in connection with the purchase or sale
of a covered security," or "that the defendant used or employed any manipulative or
deceptive device or contrivance in connection with the purchase or sale of a covered
security." 15 U.S.C. § 78bb(f)(1 )-(2). According to defendants, the above action
satisfies each element, thus justifying dismissal. Plaintiff contends otherwise, and has
moved for remand.
3. Analysis. SLUSA was enacted to close a "loophole" that allowed plaintiffs to
evade the more stringent procedural and substantive requirements imposed by the
Private Securities Litigation Reform Act of 1995 by filing securities fraud class actions in
state court. See Golub v. Hilb, Toga/ & Hobbs Co., 379 F. Supp. 2d 639, 642 (D.Del.
2005). Both the Supreme Court and the Third Circuit have recognized, however, that
SLUSA was not intended to bar traditional state law causes of action. Merrill Lynch,
Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 88 (2006); Rowinski v. Salomon
Smith Barney, Inc., 398 F.3d 294, 301 (3d Cir. 2005). To this end, the Third Circuit has
held that claims are precluded under SLUSA only if misrepresentation is a "factual
predicate" of the claim; "[t]o be a factual predicate, the fact of a misrepresentation must
be one that gives rise to liability, not merely an extraneous detail." LaSala v. Bordier et
Cie, 519 F.3d 121, 141 (3d Cir. 2008). Significantly, "a defendant may not recast
plaintiff's complaint as a securities fraud class action so as to have it preempted by
SLUSA." Wilson v. Wells Fargo Advisors, LLC, Civ. No. 11-511-SLR/SRF, 2012 WL
5240815, at *5 (D. Del. Sept. 25, 2012) (internal quotation marks omitted), adopted by
Wilson v. Wells Fargo Advisors, LLC, Civ. No. 11-511-SLR/SRF, D.l. 19 (D. Del. Nov.
4. Despite defendants' attempts to recast plaintiff's complaint to be preempted
by SLUSA, the court finds that plaintiff has pled a core breach of the fiduciary duty of
loyalty claim - whether executives can discriminate in favor of their own interests in
waiving post-IPO lockup agreements that equally affect their share and the shares of
other employees and outside investors. As the complaint shows, defendants told
plaintiff and the world exactly what they were doing in the registration statement for the
second offering - the only issue in the case is whether defendants were in fact entitled
to favor their own interests in the manner they did under Delaware law. The court
agrees with plaintiff that "fully disclosed trading" does not constitute "manipulation,"
"deceptive conduct," or a misrepresentation or omission. See Santa Fe Industries, Inc.
v. Green, 430 U.S. 462, 476 (1977); GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189,
205 (3d Cir. 2001); Biesenbach v. Guenther, 588 F.2d 400, 402 (3d Cir. 1978).
5. Conclusion. Given the court's conclusion that plaintiff's claims are not
preempted by SLUSA, defendants' motion to dismiss is denied and plaintiff's motion to
remand is granted. An appropriate order shall issue.
United States D tnct Judge