Operative Plasters' and Cement Masons' Local Union Officers' and Employees' Pension Fund et al v. Hooley et al

Filing 37

Judge George A. OToole, Jr: OPINION AND ORDER entered granting 14 Motion to Dismiss (Danieli, Chris)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 12-10767-GAO
OPERATIVE PLASTERERS’ AND CEMENT MASONS’ LOCAL UNION OFFICERS’ AND
EMPLOYEES’ PENSION FUND,
Derivatively on Behalf of State Street Corporation,
Plaintiff,
v.
JOSEPH L. HOOLEY, EDWARD J. RESCH, RONALD E. LOGUE, CHARLES R.
LAMANTIA, KENNETT F. BURNES, ROBERT E. WEISSMAN, DAVID P. GRUBER,
RICHARD P. SERGEL, LINDA A. HILL, GREGORY L. SUMME, RONALD L. SKATES,
AMEILA C. FAWCETT, PETER COYM, PATRICK DE SAINT-AIGNAN, ROBERT S.
KAPLAN, PAMELA D. GORMLEY, MAUREEN J. MISKOVIC, TENLEY E. ALBRIGHT,
NADER F. DAREHSHORI, ARTHUR L. GOLDSTEIN, and DIANA CHAPMAN WALSH,
Defendants,
and
STATE STREET CORPORATION,
Nominal Defendant.

OPINION AND ORDER
September 30, 2013
O’TOOLE, D.J.
The plaintiff Fund, holder of shares of stock of State Street Corporation (“State Street”),
has brought this derivative action against the individual named defendants, members of the State
Street board of directors at relevant times, alleging breach of fiduciary duty, waste of corporate
assets, and unjust enrichment. The provisions of the Massachusetts Business Corporation Act
pertaining to derivative actions apply because State Street is a Massachusetts corporation. See
Mass. Gen. Laws ch. 156D, §§ 7.40-7.47. The defendants have moved to dismiss the action
pursuant to § 7.44 of that statute, as well as Federal Rule of Civil Procedure 12(b)(6).

I.

Background
In December 2009, a class action lawsuit was filed against State Street and certain
of its officers alleging liability under federal securities laws. Subsequently two additional
actions were brought, one alleging the same or similar securities law claims and the other
alleging a substantially similar claim under the Employee Retirement Income Security
Act (“ERISA”). The actions were consolidated and are currently pending before this
Court. Hill v. State Street Corp., No. 09-12146-GAO. There is also a separate case
pending in which similar ERISA claims are made. Kenney v. State Street Corp., No. 0910750-DJC. The claims in those suits pertain in general to two sets of allegations: first,
that the defendants failed to disclose material adverse financial information relating to the
value of State Street’s investment assets, including those assets held in off-balance-sheet
conduits, and second, that the defendants failed to prevent misleading practices with
respect to State Street’s foreign exchange transactions. Some of the defendants in this
case were added as defendants in the Hill case by subsequent amendment.
Between 2009 and 2011, three separate shareholders sent derivative action
demand letters to State Street requesting investigation and prosecution of claims against
officers and directors relating to the claims alleged in the securities and ERISA litigation.
In response to each letter, the State Street board of directors appointed a special
committee of independent directors to investigate the demands, assisted by outside,
independent counsel. With respect to each demand, the committee recommended against
pursuing the demanded litigation, and the board approved the recommendation.

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The first such demand, by a shareholder named Lazar, demanded that State Street bring
an action against certain officers and directors in response to the Kenney case. The board
appointed a committee comprised of outside directors Kennett F. Burnes, Amelia C. Fawcett,
and Robert S. Kaplan to investigate and make a recommendation to the board. The committee
hired the law firm Simpson Thacher & Bartlett LLP (“Simpson Thacher”) to assist with the
investigation. Over the course of five months, the committee met nine times, interviewed State
Street executives, reviewed thousands of documents, and analyzed management and decision
making relating to the conduits. The committee concluded that it would not be in the best interest
of State Street to pursue the demanded litigation and conveyed that conclusion as a
recommendation to the board, which accepted it.
In September 2010, another shareholder, Himmel, demanded an investigation and
initiation of litigation relating to the conduit, portfolio, and foreign exchange allegations in the
Hill complaint. The directors appointed the same committee, who again retained Simpson
Thacher as outside counsel. Over five months, the committee met seven times, conducted eleven
interviews, reviewed thousands of documents, and analyzed pertinent public disclosures, all in
investigation of the allegations made in the demand letter. Simpson Thacher also updated its
prior investigation relating to conduits, conducted in response to the Lazar demand.
Again, the committee concluded that litigation would not be in the best interest of State
Street and its shareholders. It relied on its analysis of management decisions concerning conduits
and the investment portfolio from the Lazar demand and additionally concluded that “no State
Street individual personally benefited from the Company’s rational and standardized process” for
the pricing of foreign exchange transactions. (Defs.’ Mem. in Supp. of Mot. to Dismiss at 7 (dkt.
no. 15).) The committee found no evidence of a scheme to overcharge clients for foreign

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exchange transactions and no defendants to target or meritorious claims to assert. The committee
concluded that seeking to impose liability for good faith business decisions would discourage the
risk taking necessary to yield future returns for shareholders. Based on the committee’s
recommendation, the directors voted not to initiate litigation.
After the board had rejected their demands, neither Lazar nor Himmel took any further
action. However, on October 13, 2011, the same counsel who had represented Himmel sent a
demand letter to State Street on behalf of the plaintiff in this case. The demand letter is
substantially similar to the Himmel demand. Specifically, the plaintiff demanded suit against
State Street officers and directors based on the foreign exchange, conduit, and asset portfolio
allegations stated in the Hill complaint.
The directors appointed the same committee, who again retained Simpson Thacher. The
committee met six times and reviewed the essentially the same evidence that it investigated in
response to the Himmel demand, since the two demand letters were virtually identical, except
that the Fund’s demand noted that the Hill complaint had, after rejection of the Himmel demand,
survived a motion to dismiss for failure to state a claim. Neither the committee nor the board
regarded that additional development as significant enough to warrant a different conclusion, and
again the directors unanimously agreed that litigation was not in the best interest of the company
or the shareholders. 1
The Fund thereupon filed this case, purporting to act on behalf of the corporation and
alleging that the directors all had breached their fiduciary duty to the corporation by failing to
adequately supervise State Street’s foreign exchange business and investment assets, particularly
mortgage backed securities.
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The board’s vote was unanimous. The only director who was not an outsider, Joseph L. Hooley,
recused himself from participation in the consideration of the committee’s recommendation.
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II.

Discussion
As noted earlier, the defendants have moved to dismiss this action pursuant to Mass. Gen.

Laws ch. 156D, § 7.44, which provides that a derivative action “shall be dismissed on motion by
the corporation” if a majority of independent directors have “determined in good faith after
conducting a reasonable inquiry . . . that the maintenance of the derivative proceeding is not in
the best interests of the corporation.” M.G.L. ch. 156D, § 7.44(a)(1). If a corporation moves to
dismiss a derivative suit, “it shall make a written filing with the court setting forth facts to show
(1) whether a majority of the board of directors was independent at the time of determination by
the independent directors and (2) that the independent directors made the determination in good
faith after conducting a reasonable inquiry upon which their conclusions are based.” Id., §
7.44(d). The defendants have submitted the declarations of Kennett F. Burnes, who served as
chair of the special committee that conducted the investigation in response to the Fund’s
demand, and Paul C. Curnin, Esq. of Simpson Thacher, who served as counsel to the special
committee. A court is to “accept this information unless it is rebutted with particularity by the
plaintiff.” Id., § 7.44 cmt. 3. A court “shall dismiss the suit unless the plaintiff has alleged with
particular facts rebutting the corporation’s filing in its complaint, or an amended complaint or in
a written filing with the court.” Id., § 7.44(d). Here, the plaintiff relies on its complaint to rebut
the defendants’ filing.
A.

Independence

A director is “independent” within the meaning of § 7.44 if he is “disinterested” “in the
sense of not having a personal interest in the transaction being challenged” and “independent”

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“in the sense of not being influenced in favor of the defendants by reason of personal or other
relationships.” Id., § 7.44 cmt. 1. The plaintiff challenges the directors’ independence in the
former sense, but not the latter. The directors cannot be considered “disinterested,” the plaintiff
says, because they themselves are accused in this case of breaching their fiduciary duty of loyalty
to the corporation. 2
The statute further provides that a director will not be found to lack independence simply
because of “(1) the nomination or election of the director by a person who is a defendant in the
derivative proceeding or against whom action is demanded; (2) the naming of the director as
defendant in the derivative proceeding or as a person against whom an action is demanded; (3)
the approval by the director of the act being challenged in the derivative proceeding or demand if
the act resulted in no personal benefit to the director.” Id., § 7.44(c)(1)-(3). “A presumption of
propriety must be the starting point in the absence of clear allegations to the contrary.” In re
Sonus Networks, Inc. Derivative Litigation, 2004 WL 2341395, at *4 (Mass. Super. Ct. Sept. 27,
2004) (citing Aronson v. Lewis, 473 A.2d 805, 812, 815 (Del. 1984)).
The defendants assert that the directors were independent in the relevant sense when they
acted on the Fund’s demand and therefore the present action should be dismissed. None of the
twelve outside directors had ever been employed by State Street or any of its subsidiaries nor had
any business dealings with State Street. As part of the investigation, Simpson Thacher prepared a
questionnaire which was completed by each director. The questionnaire was designed to identify
any potential lack of independence with respect to the specifics of the plaintiff’s demand by
reference to both State Street’s corporate governance guidelines and the guidelines in the New
York Stock Exchange’s listing requirements. The questionnaires revealed no compromise of
2

The directors are exculpated under the corporate charter for any breach of their duty of care.
The plaintiff does not contend otherwise.
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independence based on those standards. (Curnin Decl., Ex. 8 at 5-6 (dkt. no. 15-8).) Cf. Pinchuck
v. State Street Corp., 2011 WL 477315 at *12 (Mass. Super. Ct. Jan. 19, 2011) (weighing use of
questionnaires in determining board independence).
As noted above, the directors are not to be considered not independent simply because
they are named as defendants in this case or because they approved an act being challenged in
this case. Mass. Gen. Laws ch. 156D, § 7.44 (c)(2), (3); Pinchuck, 2011 WL 477315 at *11. The
plaintiff argues that the directors were not independent because ten directors who voted to deny
the demand are also named as defendants in the Hill action, including two of the special
committee members. It further asserts that the Hill claims have, since the rejection of the
Himmel demand, received some validation because a motion to dismiss those claims was denied.
Finally, the plaintiff argues that the directors were not independent because the demand was that
they sue themselves for breach of their fiduciary duties as directors, as the derivative complaint
now alleges.
There is not much Massachusetts case law interpreting § 7.44 or addressing directors’
independence, and in addition to considering the limited local decisional law, Massachusetts
courts have looked to the decisions of courts in other states (frequently Delaware since many
corporations are chartered there) that address similar issues. See, e.g., Pinchuck, 2011 WL
477315, at *11 (citing Aronson, 473 A.2d at 812-16). The decisions of the various jurisdictions
are generally in harmony.
There seems to be consensus that a “mere threat” of personal liability “is insufficient to
challenge either the independence or disinterestedness of directors.” Aronson v. Lewis, 473 A.2d
805, 815 (Del. 1984). Rather, there must be shown a “substantial likelihood” of liability in order
to conclude that a director’s otherwise apparent independence is compromised. Caviness v.

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Evans, 229 F.R.D. 354, 359 (D. Mass. 2005) (quoting Rales v. Blasband, 634 A.2d 927, 936
(Del. 1993)).
The State Street board has three times in recent years considered and rejected demands
that the corporation sue various officers and directors on causes of action arising out of the
foreign exchange trading and alleged misstatement of financial information. The only potentially
significant development since the rejection of the Himmel demand was the denial of the motion
to dismiss in Hill. That development does not have the significance the plaintiff would attribute
to it. The claims in the Hill case against the directors who voted on the demand are that they are
liable as signers of SEC filings by the corporation that allegedly contained misstatements of
omissions. There is no claim in Hill that the directors themselves are primarily liable for any
misstatement or omission. In fact, the Hill complaint specifically disclaims any allegations of
fraud against the independent directors. It is hardly surprising (and thus not particularly
significant) that where the motion judge found plausibly actionable claims of misstatement or
omission by others to have been sufficiently pled, she left the Section 11 and 15 claims in the
case as well. The fact the directors were defendants in Hill at the time they considered and
rejected the plaintiff’s litigation demand does not establish their lack of independence. See
Seminaris v. Landa, 662 A.2d 1350, 1355 (Del. Ch. 1995) (“I cannot agree with plaintiff that the
threat of liability in a related actions has a greater impact on the directors’ discretion than the
threat of liability in this derivative action. Plaintiff is merely uttering a slightly altered version of
the discredited refrain – ‘you can’t expect the directors to sue themselves.’”) (internal citations
omitted).
I find that the defendants have sufficiently shown, prima facie, that the voting directors
who rejected the plaintiff’s demand were independent within the meaning of § 7.44.

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Accordingly, it falls to the plaintiff to rebut that showing “with [factual] particularity.” Mass.
Gen. Laws ch. 156D, § 7.44(d). This the Fund has not done.
The Complaint, upon which the plaintiff relies for its rebuttal, does not set forth
particularized allegations that support a conclusion that there is a “substantial likelihood” of
liability on the part of the directors. “[T]o establish oversight liability a plaintiff must show that
the directors knew they were not discharging their fiduciary obligations or that the directors
demonstrated a conscious disregard for their responsibilities such as by failing to act in the face
of a known duty to act. The test is rooted in concepts of bad faith; indeed, a showing of bad faith
is a necessary condition to director oversight liability.” In re Citigroup Inc. Shareholder
Derivative Litigation, 964 A.2d 106, 123 (Del. Ch. 2009) (emphasis in original).
The plaintiff asserts that the directors face a substantial likelihood of liability with respect
to the foreign exchange trading because the directors were aware of the alleged wrongdoing and
“approved and oversaw an illicit business strategy that spanned a decade,” (Pl.’s Opp’n to
Defs.’s Mot. to Dismiss at 15 (dkt. no. 22)), and that “State Street’s FX scheme thrived because
of the Individual Defendants’ blatant and utter failure to implement risk management policies
and internal controls designed to prevent and uncover fraud.” (Compl. at ¶ 81 (dkt. no. 1).) The
complaint lacks particularized facts that would support these conclusory statements. Cf.
Seminaris, 662 A.2d at 1355 (complaint that directors failed to supervise employees that merely
alleged that the directors “looked the other way” was insufficient to show a substantial likelihood
of liability).
The defendants have alternately moved under Rule 12(b)(6) to dismiss the complaint for
failure state a claim upon which relief can be granted. In light of my disposition of the matter
under the Massachusetts Business Corporation Act, I do not formally decide that question. I do

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note, however, relative to the question whether the plaintiff has shown a particularized basis for
finding a substantial likelihood of liability on the part of the directors, the following observation
by the Supreme Court in Ashcroft v. Iqbal:
A claim has facial plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged. The plausibility standard is not akin to a “probability
requirement,” but it asks for more than a sheer possibility that a defendant has
acted unlawfully. Where a complaint pleads facts that are “merely consistent
with” a defendant’s liability, it “stops short of the line between possibility and
plausibility of ‘entitlement to relief.”
556 U.S. 662, 678 (2009) (internal citations omitted) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555-56). The plaintiff here may have made conclusory allegations that are
“consistent with” liability on the part of the directors, but those allegations are well short of a
showing of a substantial likelihood of liability that is necessary to rebut the directors’ initial
showing of independence.
B.

Good Faith and Reasonable Inquiry

When it is found that a majority of directors are independent, as here, the business
judgment rule applies to the board’s decision to reject the plaintiff’s demand and the burden falls
to the plaintiff to prove that the directors did not make their determination in good faith after a
reasonable inquiry. M.G.L. ch. 156D, § 7.44 Cmt. 2; Pinchuck, 2011 WL 477315 at *14. See
also Solomont & Sons Trust v. New England Theatres Operating Corp., 93 N.E.2d 241 (Mass.
1950). The plaintiffs have not met their burden of rebutting the business judgment rule.
The record demonstrates that the State Street board thoroughly investigated the Fund’s
demand as it had previously done regarding the Lazar and Himmel demands. Across the three
demands, the committee met twenty two times, and independent counsel billed nearly 1,000
hours for investigating the demand and advising the committee. In response to the demands, the

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committee conducted interviews, reviewed contracts, considered thousands of pages of
documents, analyzed the investment portfolio, and investigated public disclosures. The
committee also evaluated the legal theories that could possibly be pursued and the prospects of
eventual recovery.
The plaintiff asserts that the inquiry was unreasonable because two of the committee
members were named as defendants in the Hill action. The plaintiff further argues that the
committee relied too heavily on investigative work previously performed by counsel for the
defendants in the Hill case, Wilmer Cutler Pickering Hale and Dorr LLP (“WilmerHale”).
The special committee was first appointed in response to the July 2007 Lazar demand.
The three members worked with Simpson Thacher on a five month investigation. It should be
noted that the Hill case had not been brought at that time. When the Himmel demand was
received in September 2010, it was not unreasonable to appoint the same committee. The
members were familiar with the issues, and both economy and efficiency were served by
appointing them to review the new, similar demand. There is nothing unreasonable about
legitimate concern for economy and efficiency. Likewise, when the Fund’s demand was received
about a year later, it was again reasonable to appoint the same committee to avoid a waste of
time and resources. As discussed above, the denial of the motion to dismiss in Hill was not a
significant event affecting the independence of the director defendants.
As for reliance on work performed by WilmerHale as defense counsel in the Hill action,
the plaintiff has not offered any evidence to show that Simpson Thacher and/or the committee
were improperly affected by considering that work. The simple fact that information has been
assembled and provided by an interested party does not mean it cannot be independently
evaluated by a neutral party. After all, that is what happens when a court evaluates the parties’

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submissions in considering a motion to dismiss. There is no indication that because WilmerHale
provided information the committee did no independent evaluation of it. Rather, the Curin
declaration states that the special committee “built on and evaluated the facts obtained by
WilmerHale as part of our inquiry.” (Defs.’ Mem. in Supp. of Mot. to Dismiss, Ex. 8 at 6 (dkt.
no. 15-8).) The plaintiff has not shown that the investigation was inadequate or incomplete, not
done in good faith, or that the conclusions, measured against the business judgment rule, were
unreasonable.
III.

Conclusion
In sum, pursuant to § 7.44, I find that the directors were independent and acted in good

faith after a reasonable inquiry when they rejected the plaintiff’s litigation demand. That being
so, the action must be dismissed.
The defendants’ Motion to Dismiss (dkt. no. 14) is GRANTED. This action is
DISMISSED pursuant to Mass. Gen. Laws ch. 156D, §7.44.
It is SO ORDERED.
George A. O’Toole, Jr.
United States District Judge

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