Holt et al v. Golden et al
Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: For the reasons stated in the attached memo and order, Nominal Defendant Smith &Wessons Motion to Dismiss (Dkt. No. 5 ) is hereby ALLOWED. The clerk will enter judgment of dismissal. This case may now be closed. See the attached memo and order for complete details. (Lindsay, Maurice)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
FRANK HOLT and
NORMAN HART, derivatively
on behalf of SMITH &
WESSON HOLDING CORP.,
MICHAEL F. GOLDEN, AMARO
GONCALVES, P. JAMES
DEBNEY, MITCHELL A. SALTZ,
ROBERT L. SCOTT,
JEFFREY D. BUCHANAN,
JOHN B. FURMAN, I. MARIE
BARRY M. MONHEIT,
SMITH & WESSON HOLDING
C.A. No. 11-cv-30200-MAP
MEMORANDUM AND ORDER REGARDING
NOMINAL DEFENDANT SMITH & WESSON’S MOTION TO DISMISS
(Dkt. No. 5)
July 25, 2012
Nominal Defendant Smith & Wesson Holding Corp. (“S&W”),
a Nevada corporation, is a firearms manufacturer with its
principal place of business in Springfield, Massachusetts.
Its former director of international sales, Amaro Goncalves,
was indicted in the District of Columbia for violating the
Foreign Corrupt Practices Act of 1977 (“FCPA”).1
Plaintiffs, Frank Holt and other shareholders, seek to sue
members of the board of S&W and company officers
derivatively on behalf of the corporation for failing to
have effective FCPA controls and oversight, thereby
breaching their duty of care under In re Caremark Int’l
Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
Plaintiffs did not make a pre-suit demand on the S&W
board under Nevada Rules of Civil Procedure (“NRCP”) Rule
23.1,2 but they contend that such a demand would have been
futile because the S&W board was not disinterested.
Defendant argues that a demand was required and has moved to
dismiss on the grounds that Plaintiffs have not adequately
pled demand futility.
It points to a decision by a Hampden
County Superior Court judge in another derivative action
against S&W to the effect that a demand upon the S&W board
was not futile.
This decision, Defendant says, operates to
preclude any claim of demand futility in this court.
Notably, the Department of Justice subsequently
dropped all charges against Goncalves. See United States v.
Goncalves, No. 09-335 (D.D.C. Feb. 22, 2012).
In a derivative action state law supplies the futility
and demand standards required in a pleading. Kamen v.
Kemper Fin. Servs., 500 U.S. 90, 101-03 (1991).
alternative, Defendant argues that, even in the absence of
the prior state court decision, Plaintiffs have not pled
with sufficient particularity facts that would allow the
court to conclude that demand would have been futile.
As the discussion below will demonstrate, either of
Defendant’s arguments alone would support dismissal.
preclusion bars any claim of demand futility here, and
Plaintiffs have, in any event, failed to plead sufficient
facts to support their position that demand would have been
Defendant’s motion to dismiss will therefore be
Amaro Goncalves was hired by S&W in 2004 as part of
S&W’s strategy to “step up [its] efforts in the law
enforcement and international markets.” (Dkt. No. 1, Ex. A,
Compl. ¶ 48.)
Mr. Goncalves was apparently successful: in 2006 the
company won over $20 million in government business,
including the sale of over 73,000 pistols to the Afghanistan
National Police and Border Patrol.
At the same time, in
2006 the company saw growth of over 58 percent in
international sales. (Id. ¶ 51.)
As a result of this
success, Mr. Goncalves was promoted to Vice President of law
enforcement, international, and U.S. government sales. (Id.
Mr. Goncalves was indicted in the U.S. District Court
for the District of Columbia on December 11, 2009 for
violating the FCPA, conspiring to commit violations of the
FCPA, conspiring to commit money laundering, and aiding and
abetting. (Id. at ¶ 56.)
As noted, the charges against him
were dropped in early 2012.
See note 1, supra.
This suit was originally filed in the District Court,
Clark County, Nevada on September 3, 2010, and subsequently
re-filed in this court on July 20, 2011.
(Id. ¶ 69.)
that time S&W’s board consisted of seven directors, all
named as individual defendants in this lawsuit.
complaint also alleges breaches of fiduciary duty by two
additional non-director defendants, Goncalves and P. James
Plaintiffs allege that the directors caused S&W to fail
to institute and maintain internal controls and thereby
permitted S&W to engage in systematic violations of the
FCPA, which, Plaintiffs say, resulted in the now-dropped
indictment against Goncalves.
In mid-2008, in a case filed in Hampden County Superior
Court captioned In re Smith & Wesson Holding Corp., No.
2008-0099, another plaintiff filed a derivative complaint
against S&W for making misleading statements about the
company’s financial condition.
This state court case also
alleged that pre-suit demand would be futile.
The state court suit had five counts: (1) breach of
fiduciary duty for improper financial reporting; (2) breach
of fiduciary duty for insider selling and misappropriation
of information; (3) breach of fiduciary duty for “abuse of
control”; (4) breach of fiduciary duty for gross
mismanagement; (5) waste of corporate assets; and (6) breach
of fiduciary duty for gross mismanagement.
See In re Smith
and Wesson Holding Corp., No. 2008-0099, slip op. at 6
(Mass.Super.Ct. Jan. 6, 2009) (Kinder, J.) (the “state court
At the time of the state court case, one current member
of the S&W board (and defendant in this case), Mitchell A.
Saltz, was not a member of the board.
Id. at 2.
of S&W’s board was otherwise identical.
In his order, Judge Kinder found that demand on the S&W
board would not have been futile and dismissed the
He concluded that the plaintiff had not raised a
reasonable doubt as to whether at least four of S&W’s
board’s seven members could have properly exercised their
independent and disinterested business judgment.
that, under these circumstances, the plaintiff was required
to make a pre-suit demand and, failing that, the suit should
Defendant argues that the Massachusetts state court
case precludes Plaintiffs from arguing that demand upon the
S&W board would have been futile.
The court agrees.
It is undisputed that Massachusetts issue preclusion
standards apply here.
Parsons Steel, Inc. v. First Alabama
Bank, 474 U.S. 518, 523 (1986).
In Massachusetts, issue preclusion applies when (1)
there was a final judgment on the merits in a prior
adjudication; (2) the party against whom issue preclusion is
asserted was a party, or in privity with a party, to the
prior adjudication; (3) the issue in the prior adjudication
was identical to the issue in the current adjudication; and
(4) the issue decided in the prior adjudication was
essential to the earlier judgment.
In re Sonus Networks,
499 F.3d 47, 56-57 (1st Cir. 2007), citing Kobrin v. Bd. of
Registration in Med., 832 N.E.2d 628, 634 (Mass. 2005).
Plaintiffs challenge Defendant’s issue preclusion
argument only in connection with the third requirement: this
case and the state court case, they say, lack issue identity
in two ways.
First, the state court opinion was issued on
January 6, 2009 while the alleged misconduct in this case
was not publicly revealed by the Department of Justice until
December 11, 2009.
Second, according to Plaintiffs, the
misconduct alleged here –- namely, failure to prevent
violations of the FCPA –- was different from the misconduct
alleged in the state case, which involved issuance of
misleading financial statements.
However, as Defendant points out, the core issue in the
state court case, as in this one, was whether the S&W board
was capable of impartially resolving a shareholder demand.
The S&W board of directors in place at the time of the state
court decision was identical to the board in place at the
time this lawsuit was filed, save for one person.
words, at least four of the seven directors that Judge
Kinder found were disinterested were still on the board at
the time this lawsuit was filed and would still make up a
While the charged misconduct may be
different, the material issue -- the disinterestedness of
essentially the same S&W board -- was precisely identical in
both the state court case and this one.
Plaintiffs, relying on the First Circuit’s Sonus
decision, argue that there has been a change in the
availability of information to plead demand futility and
that this new information supports a different decision
A close look at this “new” information, however,
reveals that it is no more than a re-hashing of information
that was available at the time of the state court lawsuit.
As in Sonus, this re-casting of information previously
available “by no means transfigures the demand futility
issue so that issue preclusion is inappropriate.”
In sum, Defendant is entitled to dismissal by operation
of the doctrine of issue preclusion.
Failure to Plead.
Even if the doctrine of issue preclusion did not
provide clear support for dismissal here, the pleadings
would, substantively, fall far short of the necessary
threshold to excuse demand under NRCP 23.1.
Rule 23.1 requires a plaintiff seeking to sue a
corporation derivatively to state with particularity his or
her reasons for not first making a demand on the company’s
board if he or she chooses not to do so.
If a plaintiff pleads that demand is futile, Nevada
courts apply two different standards for evaluating the
Schoen v. SAC Holding Corp., 137 P.3d 1171,
1181-84 (Nev. 2006).
The first standard, which comes from
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), applies
when the claim involves a matter where the majority of the
The second standard, which comes from Rales v.
Blasband, 634 A.2d 927, 933-34 (Del. 1993), applies when the
claim involves a matter that was not subject to action by
the majority of the board.
In this case, both parties agree
that the Rales test governs.
Under Rales, demand is excused only when a plaintiff
pleads particularized facts creating a “reasonable doubt
that, as of the time the complaint is filed, the board of
directors could have properly exercised its independent and
disinterested business judgment.”
Id. at 934.
“substantial likelihood” that a director would face
liability can sometimes create this reasonable doubt.
Significantly, however, Nevada permits the
immunization of directors against personal liability for
both their duty of care and their duty of loyalty to the
Where such immunity exists, “interestedness
through potential liability is a difficult threshold to
Schoen, 137 P.3d at 1184; see also N.R.S. §
78.138(7); S&W Articles of Incorporation (Dkt. No. 7, Ex.
In general, director oversight liability requires a
Nevada permits courts considering motions to dismiss
to take judicial notice of documents that are public records
or incorporated by reference in the complaint. Breliant v.
Preferred Equities Corp., 858 P.2d 1258, 1261 (Nev. 1993).
The complaint refers extensively to S&W’s bylaws, which are
public records filed with the Nevada Secretary of State.
particularized pleading of facts showing that:
(a) the directors utterly failed to implement any
reporting or information system or controls; or
(b) having implemented such a system or controls,
consciously failed to monitor or oversee its
operations thus disabling themselves from being
informed of risks or problems requiring their
Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
At the hearing on this motion, Plaintiffs’ counsel
suggested that NRCP 23.1 requires fewer particularized facts
when the scope of a director’s potential liability is
Plaintiffs cited In re Massey Energy Corp.
Derivative Litig., No. 5430-VCS, 2011 WL 2176479, at *17
(Del.Ch. May 31, 2011), in support of this proposition.
Massey does not assist Plaintiffs here.
That case arose in
connection with a motion for a preliminary injunction where,
in the context of a merger, derivative plaintiffs sought to
preserve their pre-merger director liability claims.
essence of the derivative claim was that the company’s board
failed to oversee mine safety operations.
Id. at *19.
making a determination about the derivative plaintiffs’
eventual likelihood of success for purposes of the motion
for injunctive relief, the court found that the plaintiffs
had offered a strong case at the pleading stage.
in Massey, unlike in this case, the company itself had (1)
already pled guilty to criminal charges for a mine fire that
killed two people, (2) was caught trying to hide violations
of the law, and (3) had multiple civil settlements for mine
With this history, the company allegedly
continued to fail to take appropriate safety measures,
resulting in a catastrophe that killed twenty-five people
only two years after it had been convicted of safety
violations following the mine fire.
Id. at *20.
Far from announcing any flexible pleading standard, the
Massey decision merely pointed out the obvious fact that a
company that continued to be involved in criminal activities
was likely not well supervised and that the plaintiffs were
likely to prevail.
This lawsuit arises in an entirely
different procedural context, and it offers no allegation
that S&W’s board was aware of a long history of criminal
activity and failed to act.
In this case, the complaint alleges, in essence, that
the company enjoyed an increase in international sales and
then had an employee indicted for FCPA violations.
indictment, later dropped, supposedly evidenced a failure to
implement proper controls.
Even assuming that Massey stands
for the proposition that the requirements to show demand
futility may be relaxed where evidence of liability is
gross, the allegations offered here fall far short.
nothing offered in the complaint comes close to pushing the
case over the “difficult threshold” that NRCP 23.1 imposes.
See Schoen, 137 P.3d at 1184.
The complaint is flatly
devoid of any adequate justification for failing to make the
required pre-suit demand.
For the foregoing reasons, Nominal Defendant Smith &
Wesson’s Motion to Dismiss (Dkt. No. 5) is hereby ALLOWED.
The clerk will enter judgment of dismissal.
This case may
now be closed.
It is So Ordered.
/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge