Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust v. Stumpf et al

Filing 81


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1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 9 United States District Court For the Northern District of California 10 11 PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST, and CITY OF WESTLAND POLICE AND FIRE RETIREMENT SYSTEM, derivatively on behalf of WELLS FARGO & CO., Plaintiffs, 12 13 14 15 16 17 No. C 11-2369 SI ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS THE VERIFIED COMPLAINT AND GRANTING DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE v. JOHN G. STUMPF, et al., Defendants, -andWELLS FARGO & CO., a Delaware corporation, Nominal Defendant. / 18 19 On January 27, 2012, the Court held a hearing on defendants’ motion to dismiss plaintiffs’ 20 verified complaint. After consideration of the parties’ papers and arguments, defendants’ motion to 21 dismiss is GRANTED IN PART and DENIED IN PART. If plaintiffs wish to amend the complaint, the 22 amended complaint must be filed by February 24, 2012. The Court also GRANTS defendants’ request 23 for judicial notice. 24 25 BACKGROUND 26 This is a shareholder derivative action on behalf of nominal party Wells Fargo & Company 27 against its board of directors, alleging claims for breach of fiduciary duty, abuse of control, gross 28 mismanagement, and corporate waste. Wells Fargo & Company (the “Company”) is a diversified financial services company that 2 provides retail, commercial, and corporate banking services principally in the United States. Verified 3 Consolidated Shareholder Derivative Complaint for the Breach of Fiduciary Duty, Abuse of Control, 4 Gross Mismanagement, and Corporate Waste, (“Compl.”) ¶ 32. Wells Fargo is incorporated in 5 Delaware. Id. At the time of filing,1 Wells Fargo’s Board (the “Board”) consisted of fifteen directors. 6 Fourteen of those directors are named individual defendants in this action: John G. Stumpf (“Stumpf”), 7 John D. Baker II (“Baker”), John S. Chen (“Chen”), Lloyd H. Dean (“Dean”), Susan E. Engel (“Engel”), 8 Enrique Hernandez, Jr. (“Hernandez”), Donald M. James (“James”), Mackey J. McDonald 9 (“McDonald”), Cynthia H. Milligan (“Milligan”), Nicholas G. Moore (“Moore”), Phillip J. Quigley 10 United States District Court For the Northern District of California 1 (“Quigley”), Judith M. Runstad (“Runstad”), Stephen W. Sanger (“Sanger”), and Susan G. Swenson 11 (“Swenson”). Id. at ¶¶ 33-48. A past board member, Richard D. McCormick (“McCormick”), and 12 former Chief Financial Officer and Executive Vice President Howard I. Atkins (“Atkins”), are also 13 named defendants.2 Id. at ¶¶ 34, 41. Of the named directors, only Stumpf is an inside or management 14 director. Id. at ¶ 33. Current board member Elaine L. Chao (“Chao”) is not a named defendant because 15 her appointment occurred a month after the filing of the original complaint. Wells Fargo’s Certificate 16 of Incorporation contains an exculpatory provision limiting its directors’ liability for breaches of 17 fiduciary duty to actions involving disloyalty, bad faith, or improper personal benefits. Declaration of 18 Marc P. Wolf Ex. D. Art XIV. 19 Plaintiffs Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and City of 20 Westland Police and Fire Retirement System are both current shareholders of Wells Fargo. Compl. ¶¶ 21 30-31. They have held shares since January 26, 2009, and May 2009 respectively. Id. 22 As early as 2007, Wells Fargo and its subsidiaries began home foreclosure proceedings around 23 the country. Id. at ¶ 74. Wells Fargo implemented a policy of mass processing the declarations or 24 affidavits to be submitted in court proceedings to accelerate these proceedings. Id. Plaintiffs allege that 25 this policy, known as “robo-signing,” had the effect of recklessly avoiding “the work and cost associated 26 27 1 The original complaint was filed May 13, 2011. 28 2 McCormick left the Board on May 3, 2011. Compl. ¶ 41. 2 1 with obtaining facts or documents representing ownership, standing and the right to foreclose on 2 properties.” Id. at ¶ 75. Therefore, plaintiffs allege, this policy had the effect of concealing the 3 possibility that title and standing could not be perfected and would require Company employees to cause 4 Wells Fargo to file false affidavits with courts and state agencies. Id. at ¶¶ 75, 77. Plaintiffs allege that 5 several Wells Fargo employees routinely executed affidavits without personal knowledge of their 6 contents. Id. at ¶¶ 83-85, 86-89. This policy is alleged to have continued into the period in which 7 plaintiffs owned Wells Fargo stock. Id. at ¶ ¶ 78, 86, 172. In 2010, two Wells Fargo employees testified that they signed unverified affidavits. On January 9 4, 2010, Stanley Silva (“Silva”) testified that he routinely executed notices of default without verifying 10 United States District Court For the Northern District of California 8 the accuracy of the information contained therein. Id. at ¶ 88. On March 9, 2010, Xee Moua (“Moua”) 11 testified that she signed Wells Fargo loan documents without verifying their contents other than her 12 name and title. Id. at ¶ 83. Later in 2010 news articles regarding Wells Fargo’s alleged fraudulent 13 mortgage practices were published. On October 2, 2010, dailyfinance.com published an article entitled 14 “Robo-signing: Documents Show Citi and Wells Also Committed Foreclosure Fraud” which discussed 15 Wells Fargo’s robo-signing practices. Id. at ¶ 104. On October 13, 2010, the Star Tribune published 16 an article summarizing the above evidence. Id. at ¶ 108. The Financial Times published a similar 17 article on October 14, 2010. Id. at ¶ 109. 18 In a conference call on October 20, 2010, defendant Atkins stated that the robo-signing policy 19 was designed by the Company, that the Company had confidence that the policy was sound and 20 accurate, and that the Company did not plan to initiate a moratorium on foreclosures to investigate the 21 policy. Id. at ¶¶ 16, 77, 107. During the call defendant Stumpf stated at least twice that the person who 22 signed the affidavits and the person who reviewed them for accuracy was the same individual. Id. at 23 ¶ 112. One week later, on October 27, 2010, Wells Fargo issued a press release admitting that its 24 foreclosure processes did not adhere to its formal policy and that a review of more than 55,000 25 foreclosure affidavits was underway. Id. at ¶ 114. 26 On January 6, 2011, the New York City Comptroller sent a letter to Moore, Chairman of the 27 Audit Committee, calling on the Audit Committee “to conduct an independent review of the Company’s 28 internal controls related to loan modifications, foreclosures, and securitizations.” Id. at ¶ 137. The 3 1 Audit Committee is responsible for ensuring compliance with legal and regulatory requirements. Id. 2 at ¶ 138. On January 9, 2011, the Comptroller issued a press release calling on the Audit Committee 3 of the Board of Wells Fargo, among other banks, to launch an investigation into their foreclosure 4 practices. Id. at ¶ 140. 5 On February 25, 2011, the Company filed its Annual Report to the SEC in which it stated that 6 the “Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure 7 controls and procedures were effective.” Id. at ¶ 144. On March 21, 2011, the Company filed its §14(a) Proxy Statement with the SEC. Id. at ¶ 148. 9 Contained in the statement was a stockholder proposal calling for the Board’s Audit Committee to 10 United States District Court For the Northern District of California 8 conduct an independent review of the company’s internal controls related to foreclosures. Id. The 11 Board recommended that shareholders vote against the proposal because it “has already undertaken 12 comprehensive self assessments and reviews of our mortgage servicing processes,” and “[a]n additional 13 independent review would not constitute an effective use of the Company’s resources and could distract 14 our efforts to cooperate with reviews undertaken by our federal banking regulators.” Id. at ¶ 149. 15 Plaintiffs allege, however, that Wells Fargo was in fact not cooperating with government 16 inquiries. Id. at ¶ 165. According to the complaint, on May 17, 2011, Sense on Cents issued an article 17 entitled “Sense on Cents Calls Out Jamie Dimon, Vikram Pandit, Brian Moynihan, Michael Carpenter, 18 and John Stumpf,” stating that the banks, including Wells Fargo, had been filing motions to quash 19 discovery and appeals in order to stall the United States Trustee’s investigations. Id. Plaintiffs also 20 allege that the banks, including Wells Fargo, have refused to provide details on their overall policies and 21 procedures to government investigators. Id. at ¶¶ 165-66. Furthermore, Wells Fargo is alleged to have 22 continued robo-signing even after stating that the practice had been halted more than six months before. 23 Id. at ¶ 172. 24 As part of their mortgage practice, Wells Fargo hired Mortgage Electronic Registration System, 25 Inc. (“MERS”) to simplify the tracking of individual mortgages. Id. at ¶ 51. On April 13, 2011, MERS 26 and its parent corporation MERSCORP entered into a consent order with government regulators 27 regarding irregularities in its mortgage documentation practices. Id. ¶ 162. 28 Defendants Stumpf and Atkins were awarded millions of dollars in bonuses for fiscal year 2010. 4 1 Id. at ¶ 150. 2 3 LEGAL STANDARD Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it 5 fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, 6 the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. 7 Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff 8 to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” 9 Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). While courts do not require “heightened fact pleading 10 United States District Court For the Northern District of California 4 of specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative 11 level.” Twombly, 550 U.S. at 544, 555. 12 In deciding whether the plaintiff has stated a claim upon which relief can be granted, the Court 13 must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the 14 plaintiff’s favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the Court 15 is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, 16 or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). 17 If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The 18 Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no request 19 to amend the pleading was made, unless it determines that the pleading could not possibly be cured by 20 the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations and internal 21 quotation marks omitted). 22 23 DISCUSSION 24 As a preliminary matter, defendants ask the Court to take judicial notice of Wells Fargo’s 25 Certificate of Incorporation as well as three of its past SEC filings pursuant to F.R.E. Rule 201(b). 26 “[F]acts subject to judicial notice may be considered on a motion to dismiss.” Mullis v. United States 27 Bankr. Court, 828 F.2d 1385, 1388 (9th Cir. 1987). “In a securities action, a court may take judicial 28 notice of public filings when adjudicating a motion to dismiss a complaint for failure to state a claim 5 1 upon which relief can be granted.” In re Calpine Corp., 288 F. Supp. 2d 1054, 1076 (N.D. Cal. 2003) 2 (citing In re Nuko Information Sys., Inc. Sec. Litig., 199 F.R.D. 338, 341 (N.D. Cal. 2000) (citing In re 3 Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999), and MGIC Indem. Corp. v. 4 Weisman, 803 F.2d 500, 504 (9th Cir. 1986)); see also Parrino v. FHP Inc., 146 F.3d 699, 706 (9th Cir. 5 1988) (“We therefore hold that a district court ruling on a motion to dismiss may consider a document 6 the authenticity of which is not contested, and upon which the plaintiff's complaint necessarily relies.”). 7 The Court GRANTS defendants’ request for judicial notice of documents Wells Fargo filed with 8 the SEC, including forms 8-K (Wolf. Decl. Ex. A, B), 14A (Wolf Decl. Ex. C), and 10-Q (Wolf Decl. 9 Ex. D). United States District Court For the Northern District of California 10 To sustain a derivative shareholders suit at the pleading stage, plaintiffs must adequately allege 11 (1) that they contemporaneously owned Wells Fargo stock at the time of the wrongful acts and continue 12 to own stock through the suit, (2) that they made a demand to the Board for corrective action or that 13 demand was futile, and (3) adequate and particularized facts necessary to support their claims. Fed. R. 14 Civ. Proc. 23.1. 15 16 I. Contemporaneous stock ownership 17 Defendants argue that plaintiffs did not contemporaneously own stock at the time of the alleged 18 wrongful acts. Federal Rule of Civil Procedure 23.1 requires that plaintiffs in a derivative action allege 19 that they were shareholders of the company at the time of the alleged wrongful acts and that they retain 20 ownership of the stock for the duration of the lawsuit. Lewis v. Chiles, 719 F.2d 1044, 1047 (9th 21 Cir.1983). A plaintiff has no standing to sue for alleged misconduct that took place before he became 22 a shareholder of the company. Kona Enters., Inc. v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999). 23 Plaintiffs purchased stock in January and May of 2009. Compl. ¶¶ 30-31. While plaintiffs 24 allege, as background, wrongful acts by defendants beginning in 2007, the substantive allegations of the 25 complaint challenge misconduct in 2010 and 2011. 26 (“Substantive Allegations”). Plaintiffs allege that the robo-signing policy continued into 2011, id. at 27 ¶¶ 86, 172, that defendants refused to admit that the robo-signing policy was flawed in 2010, id. at ¶¶ 28 110-12, and that defendants misled investors in a proxy statement in 2011. Id. at ¶ 149. All of these 6 Id. ¶¶ 74-93 (“Background”); ¶¶ 94-177 1 alleged wrongful acts occurred during the time period in which plaintiffs owned Wells Fargo stock. 2 Plaintiffs’ opposition, consistent with the substantive allegations of the complaint, confirms that 3 plaintiffs’ claims for liability are not based upon allegedly wrongful acts that occurred prior to plaintiffs’ 4 stock ownership. Accordingly, the Court finds that plaintiffs have satisfied the contemporaneous 5 ownership requirement of Federal Rule of Civil Procedure 23.1. 6 7 II. Demand futility 8 Federal Rule of Civil Procedure 23.1 also requires a plaintiff to first demand action from the 9 nominal defendant’s directors or “plead with particularity the reasons why such demand would have United States District Court For the Northern District of California 10 been futile.” 11 “‘particularized factual statements that are essential to the claim. Such facts are sometimes referred to 12 as ‘ultimate facts,’ ‘principal facts’ or ‘elemental facts.’” Brehm v. Eisner, 746 A.2d 244, 254 (Del. 13 2000) (citing Black’s Law Dictionary 610–12 (7th ed.1999)). Silicon Graphics, 183 F.3d at 989. Pleadings in a derivative suit must state 14 Plaintiffs did not make a pre-suit demand. Instead they allege demand futility. Compl. ¶ 185. 15 Upon a pleading of demand futility, the court “‘must apply the demand futility exception as it is defined 16 by the law of the state of incorporation.’” In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1002 17 (N.D. Cal. 2007) (quoting Kamen v. Kemper Fin. Serv., Inc., 500 U.S. 90, 108-09 (1991)). Wells Fargo 18 is incorporated in Delaware. Compl. ¶ 32. 19 Under Delaware law, demand futility must be determined under the standards articulated in 20 either Aronson v. Lewis, 473 A.2d 805 (Del. 1984), or Rales v. Blasband, 634 A.2d 927 (Del. 1993). 21 Under the two-pronged Aronson test, which is used when the board considering the demand made the 22 challenged decision, demand is excused if the derivative complaint pleads particularized facts creating 23 a reason to doubt that “(1) the majority of the directors are disinterested and independent [or] (2) the 24 challenged transaction was otherwise the product of a valid exercise of business judgment.” Ryan v. 25 Gifford, 918 A.2d 341, 352 (Del. Ch. 2007) (citing Aronson, 473 A.2d at 814) The two prong Aronson 26 test is disjunctive. “If a derivative plaintiff can demonstrate a reasonable doubt as to the first or second 27 prong of the Aronson test, then he has demonstrated that demand would have been futile.” Seminaris 28 v. Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995). 7 “The essential predicate for the Aronson test is the fact that a decision of the board of directors 2 is being challenged in the derivative suit.” Rales, 634 A.2d at 933. In contrast, the Rales test applies 3 “where the board that would be considering demand did not make a business decision which is being 4 challenged in the derivative suit.” Id. at 933-34. Such situations arise in three principal scenarios: (1) 5 where a majority of the directors who made the decision have been replaced; (2) where the subject of 6 the suit is not a business decision of the board; and (3) where, as in Rales, the challenged decision was 7 made by the board of a different corporation. Id. at 934. Under Rales, demand is excused if the 8 particularized factual allegations create a reasonable doubt that at least half of the directors could have 9 properly exercised their independent and disinterested business judgment in responding to the demand. 10 United States District Court For the Northern District of California 1 Rales, 634 A.2d at 934. “That is, in those three circumstances described in Rales, the Court will apply 11 only the first (‘disinterest’ and ‘independence’) prong of Aronson.” In re Bally’s Grand Deriv. Litig., 12 Case No. 14644, 1997 WL 305803, at *3 (Del. Ch. June 4, 1997). For both tests, the date of the original 13 complaint in which each derivative claim was made is the relevant point in time to test whether making 14 a demand upon the board would have been futile. California Public Employees’ Retirement System v. 15 Coulter, No. Civ.A. 19191, 2002 WL 31888343, at *6 (Del. Ch. Dec. 18, 2002) (where the amended 16 complaint does not add any derivative claims that were not included in the original complaint, date of 17 the original complaint is controlling); Aronson, 473 A.2d at 810; Rales, 634 A.2d at 934. The original 18 complaint, filed May 13, 2011, contains all four derivative causes of action alleged here. 19 Plaintiffs advance four theories of demand futility. First, plaintiffs contend that they have 20 adequately alleged reason to doubt that defendants are disinterested because they face a substantial 21 likelihood of liability due to their actions. Second, plaintiffs contend that the challenged actions are not 22 the product of a valid exercise of business judgment. Third, plaintiffs argue demand is futile because 23 the Board has already refused a demand on the Company by encouraging stockholders to vote against 24 the proposal for an internal investigation. Finally, plaintiffs contend that a majority of defendants are 25 not independent of the Company. 26 An allegation that directors are not disinterested due to potential liability requires plaintiffs to 27 set forth particularized facts establishing not just a “mere threat” but rather a “substantial likelihood” 28 that the directors could be personally liable for the alleged wrongful acts. Rales, 634 A.2d at 936 8 (quoting Aronson, 473 A.2d at 815). Due to the exculpatory clause in the Company’s Certificate of 2 Incorporation, plaintiffs must also allege that defendants acted with scienter when they made these 3 allegedly wrongful acts. In re Extreme Networks, Inc. Shareholder Derivative Litigation, 573 F. Supp. 4 2d 1228, 1239 (N.D. Cal. 2008) (“If directors are exculpated except for claims based on ‘fraudulent, 5 illegal or bad faith conduct,’ then ‘plaintiff must also plead particularized facts that demonstrate that the 6 directors acted with scienter, i.e., that they had actual or constructive knowledge that their conduct was 7 legally improper.’”) (quoting Wood v. Baum, 953 A.2d 136, 141 (2008)). A plaintiff can allege a breach 8 of fiduciary duty, and therefore substantial likelihood of liability by, “for example, properly alleging 9 particularized facts that show that a director . . . consciously disregarded the duty to monitor and oversee 10 United States District Court For the Northern District of California 1 the business.” In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106, 125 (Del. Ch. 11 2009) (emphasis in original). At the time of the original complaint, the Wells Fargo Board consisted 12 of fourteen individuals.3 Compl. ¶ 184. Under Aronson, plaintiffs must raise a reasonable doubt that a 13 majority of these directors are either disinterested or independent. Aronson, 473 A.2d at 814. 14 The Court concludes that under either the Aronson or Rales test, plaintiffs have demonstrated 15 that demand would have been futile: plaintiffs have pled reason to doubt that defendants are 16 disinterested, because defendants face a substantial likelihood of liability for breach of fiduciary duty.4 17 Fiduciary duty requires honesty from corporate directors in their communications with the public and 18 shareholders about corporate matters. Malone v. Brincat, 722 A.2d 5, 9-10 (Del. 1998). Plaintiffs 19 allege that all fourteen board members breached their fiduciary duties of loyalty by advising 20 shareholders to vote against the proposal to undertake an internal investigation while omitting material 21 information regarding the proposal. In a proxy statement, the Board advised shareholders to vote against 22 a new internal investigation because “the Company has already undertaken comprehensive internal self- 23 assessments” and a new investigation “could distract the Company’s efforts to cooperate with the 24 reviews being made by its regulators.” Compl. ¶ 149. At the same time Wells Fargo was mounting an 25 26 27 28 3 Stumpf, Baker, Chen, Dean, Engel, Hernandez, James, McDonald, Milligan, Moore, Quigley, Runstad, Sanger, and Swenson. McCormick left the Board on May 3, 2011, the original complaint was filed May 13, 2011, and Chao became a member of the Board June 28, 2011. 4 Given this finding, the Court does not address the other demand futility theories. 9 1 “immense pushback” against those very reviews. Id. at ¶¶ 165-66. Prior to the proxy statement, the 2 Company, through Stumpf and Atkins, assured investors that the signer and reviewer of the affidavits 3 were one and the same. Id. at ¶ 112. At the time of these statements by Stumpf and Atkins, details of 4 trial testimony and depositions taken during investigations of foreclosure activities revealed that several 5 Wells Fargo Vice Presidents were signing affidavits while only verifying their dates, not the underlying 6 information. Id. at ¶¶ 83-85, 86-89, 104, 108. Even in light of these revelations, which appeared in 7 several news-media outlets, id. at ¶¶ 104, 108-09, the Board signed a statement verifying that “the 8 Company’s chief executive officer [Stumpf] and chief financial officer [Atkins] concluded that the 9 Company’s disclosure controls and procedures were effective.” Id. at ¶ 144. United States District Court For the Northern District of California 10 When issuing a proxy statement, “the board is obligated ‘to disclose fully and fairly all material 11 information within the board’s control.’” Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001) 12 (quoting Stroud v. Grace, 606 A.2d 75, 84–88 (Del. Sup. 1992)). An omitted fact is material if there 13 is a “substantial likelihood that a reasonable shareholder would consider it important in deciding how 14 to vote.” Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del.1994) (quoting TSC Indus. 15 v. Northway, Inc., 426 U.S. 438, 449 (1976)). In other words “there must be a substantial likelihood that 16 the disclosure of the omitted fact would have been viewed by the reasonable investor as having 17 significantly altered the ‘total mix’ of information made available.” Arnold., 650 A.2d at 1277 (quoting 18 TSC, 426 U.S. at 449). Failure to disclose a material fact is a breach of the Board’s fiduciary duty of 19 loyalty. Malpiede, 780 A.2d at 1086. 20 The Court concludes that plaintiffs have sufficiently alleged that defendants breached their duty 21 of loyalty by failing to disclose that, in the course of government investigations, Wells Fargo had 22 opposed discovery requests, filed motions to quash, and refused to provide details concerning the 23 Company’s policies. Defendants explicitly recommended that shareholders vote against the proposal 24 for a new internal investigation in order to ensure that the Company could fully cooperate with 25 government regulators. The fact that the Company was allegedly stymying the government regulators 26 is certainly material to stockholders when considering whether to authorize a more serious internal 27 investigation. If, as alleged, defendants did not disclose material information within the Board’s control, 28 defendants breached their duty of loyalty to the Company. Malpiede, 780 A.2d at 1086; Citigroup, 964 10 A.2d 125. The presence of the exculpatory clause requires plaintiffs to allege that defendants either 2 knew or should have known that their acts were legally improper. In re Extreme Networks, 573 F. Supp. 3 2d. at 1239. Given that the Board cited compliance with regulatory investigations in its proxy statement 4 and had already signed SEC statements certifying that the Company, through its CEO, was satisfied with 5 its own internal reviews, defendants either knew or should have known the status of the Company’s 6 own and outside regulatory investigations into its mortgage practices. If, as alleged, the Company was 7 delaying these investigations, defendants either knew or should have known that materially misstating 8 that fact in an SEC filing was legally improper. In light of all of the allegations in the complaint, 9 plaintiffs have adequately alleged that defendants face a substantial likelihood of liability for breach of 10 United States District Court For the Northern District of California 1 fiduciary duty by omitting material information in a proxy statement. Plaintiffs have established demand 11 futility in accordance with Rule 23.1. 12 13 III. Sufficiency of claims 14 Plaintiffs allege claims for breach of fiduciary duty (Count I), abuse of control (Count II), gross 15 mismanagement (Count III), and corporate waste (Count IV) against defendants. Defendants move to 16 dismiss these claims for failure to state a claim. 17 18 A. 19 Under Delaware law, directors are presumed to have acted on an informed basis and in good 20 faith. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993), modified, 636 A.2d 956 (Del. 21 1994). Plaintiff can overcome this presumption by alleging that defendants knowingly violated their 22 fiduciary duties. Citigroup, 964 A.2d at 125. As discussed supra, plaintiffs have pled particularized 23 facts alleging that defendants breached their duty of loyalty by omitting material facts in the proxy 24 statement to shareholders. Plaintiffs have adequately alleged a breach of fiduciary duty. Accordingly, 25 defendants’ motion to dismiss is DENIED as to Count I. Breach of fiduciary duty 26 27 B. 28 Delaware law does not “recognize an independent cause of action against corporate directors and Abuse of control and gross mismanagement 11 1 officers for reckless and gross mismanagement; such claims are treated as claims for breach of fiduciary 2 duty.” Citigroup, 964 A.2d at 115 n.6. In addition, claims for abuse of control are “often considered 3 a repackaging of claims for breach of fiduciary duties instead of being a separate tort.” Zoran, 511 F. 4 Supp. 2d at 1019. None of the three cases cited by plaintiffs stand for the proposition that a plaintiff can bring 6 independent claims for gross mismanagement and abuse of control. In Bodell v. General Gas & Electric 7 Corporation, the Delaware Court of Chancery noted that courts have in “cases of gross mismanagement 8 on the part of a board of directors . . . acted for the protection of stockholders.” 140 A. 264, 267 (Del. 9 Ch. 1927). There is no discussion in Bodell of whether Delaware law recognizes a claim for gross 10 United States District Court For the Northern District of California 5 mismanagement. In Rabkin v. Phillip A. Hunt Chem. Corp., the complaint alleged breach of fiduciary 11 duty, and the court held that standard of review for such a claim is whether the board’s actions were 12 grossly negligent. 547 A.2d 963, 970 (Del. Ch. 1986). Finally, in Cincinnati Bell Cellular Sys. Co. v. 13 Ameritech Mobile, the court merely characterized the conduct alleged in the complaint as gross 14 negligence and gross mismanagement. 1996 Del. Ch. LEXIS 116, at *40 (Del. Ch. 1996) (“In Counts 15 II and III of its amended and supplemental complaint, [plaintiff alleges that defendant] managed the 16 Partnership in a grossly negligent manner.”). However, the claims at issue were for breach of fiduciary 17 duty. Id. at *4. Accordingly, the Court GRANTS defendants’ motion and DISMISSES Counts II and 18 III without leave to amend. 19 20 C. 21 A claim for corporate waste requires allegations of “an exchange of corporate assets for 22 consideration so disproportionately small as to lie beyond the range at which any reasonable person 23 might be willing to trade.” Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997). Under Delaware 24 law, “‘directors are guilty of corporate waste only when they authorize an exchange that is so one sided 25 that no business person of ordinary, sound judgment could conclude that the corporation has received 26 adequate consideration.” Navellier v. Sletten, 262 F.3d 923, 937 (9th. Cir. 2001) (quoting Glazer v. 27 Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993)). 28 Corporate waste Here, plaintiffs claim that authorizing bonuses to Stumpf and Atkins after their false statements 12 1 to the public amounts to corporate waste. Compl. ¶¶ 150-52. Plaintiffs have not adequately alleged that 2 the payments to Stumpf and Atkins “served no corporate purpose,” or that “no consideration” was 3 received. Brehm, 746 A.2d at 263. Accordingly, the Court DISMISSES Count IV. Plaintiffs have 4 requested, and the Court grants, leave to amend. 5 6 CONCLUSION 7 For the foregoing reasons, defendants’ motion to dismiss is GRANTED IN PART and DENIED 8 IN PART. Docket No. 65. If plaintiffs wish to amend the complaint, the amended complaint must be 9 filed by February 24, 2012. The Court also GRANTS defendants’ request for judicial notice. United States District Court For the Northern District of California 10 11 IT IS SO ORDERED. 12 13 Dated: February 8, 2012 SUSAN ILLSTON United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13

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