VALERIE CAPRONI, United States District Judge:
Plaintiff James R. Gould ("Gould"), a Bank of America Corporation ("BofA" or the "Bank") shareholder since 1993, has filed this shareholder derivative complaint ("the Complaint") against BofA's Board of Directors (the "Board" or "Individual Defendants")
This lawsuit is one of many that has arisen out of a scheme, participated in by employees of various major banks, to manipulate the bid-ask spread of FX. For its FX traders' role in the scheme, in November 2014, BofA paid $250 million in fines to the Office of the Comptroller of the Currency ("OCC"). Compl. ¶ 107 (Dkt. 1). That fine was followed in April 2015 by an $180 million antitrust class action lawsuit settlement,
Gould also alleges that the Board made false and misleading statements in its 2014 and 2015 proxy statements ("Proxies").
On June 13, 2015, Gould demanded (the "Demand") that the Board conduct an independent investigation into and commence a civil action against certain current and former directors and executive officers. Compl. ¶ 133; Compl. Ex. A, at 12 (Dkt. 1-1). The Demand alleged that the Board had violated various state and federal laws by: (1) failing to manage and oversee the Bank's FX business; (2) failing "to establish and maintain adequate internal controls; and (3) disseminating allegedly "false, misleading, and/or incomplete information" to shareholders. Compl. Ex. A, at 11-12.
On July 28, 2015, BofA's Associate General Counsel and Assistant Secretary, Gale Chang ("Chang"), informed Gould that the Board had "authorized the Audit Committee to consider the Demand, undertake such steps as it determines to be advisable, and make recommendations to the Board." Compl. ¶ 134; Compl. Ex. B (Dkt. 1-2). On September 24, 2015, the Audit Committee met with in-house counsel to discuss the Demand, and it identified numerous reasons why it should not investigate the Demand's allegations. Compl. ¶ 146. One of the Audit Committee's reasons not to investigate was that the Bank's counsel had previously reviewed "substantial materials, including certain Board level materials from 2007-2014," relevant to Gould's Demand, and counsel had not found any evidence that the Bank's senior management or the Board were complicit in or aware of the FX misconduct. Compl. ¶ 147. Another reason was that an investigation into the Demand's allegations could have a "potential adverse effect" on the Bank's defenses and strategies in pending governmental investigations, regulatory actions, and civil litigation. Compl. ¶ 148. The Audit Committee decided that it would "continue to monitor the ongoing litigation and governmental investigations and regulatory actions relating to the same and/or related matters that are the subjects of the Demand" but "simultaneously resolved to not pursue such claims or take such actions at this time." Compl. ¶ 149. The Audit Committee recommended to the Board that it decline the Demand in light of the Audit Committee's determination that investigating the Demand's claims was "not in the best interests" of BofA. Compl. ¶ 150.
On October 22, 2015, the Board met to consider the Demand and adopted the Audit Committee's recommendation. Compl. ¶¶ 136, 150. On October 30, 2015, Chang informed Gould that the Board had formally refused the Demand. Compl. ¶ 136.
Chang explained that the Board took into account the following when deciding to refuse the Demand: (1) "the substantive difficulties in proving the Demand's proposed claims of purported mismanagement by the Board and the Corporation's executive officers;" (2) in the course of responding to regulatory inquiries, the Bank and its advisers had not identified any information suggesting the Board or senior management were complicit in or aware of the alleged misconduct, and the Demand alleged no facts indicating to the contrary; (3) the Bank's disclosures included warnings about compliance risk and the possibility of harm from employee misconduct; (4) the low likelihood of obtaining meaningful monetary recovery from the putative defendants because the Bank's certificate of incorporation exculpates the directors from liability to the Bank, except for acts or omissions made intentionally in violation of the law or not in good faith; and (5) undertaking a new investigation or pursuing claims could undermine the Bank's legal defenses and strategies and could negatively affect a proposed settlement in a civil matter pending court approval. Compl. Ex. C, at 1-2. The letter emphasized that the Demand had not included any facts that would justify the cost and disruption of investigating further and that the Demand had failed to provide "any reason to expect that the Corporation has, or could potentially develop, grounds for recovery against any particular individual director or executive officer...." Compl. Ex. C., at 2.
Dissatisfied with that response, Gould sent another letter to Chang, this one seeking to "obtain clarification and insight" regarding the refusal and the Board's and Audit Committee's investigation. Compl. ¶ 139; Compl. Ex. D (Dkt. 1-4). Gould requested copies of all documents reviewed in connection with the Board's consideration of the Demand, a list of all witnesses interviewed during the investigation into the Demand's allegations, and a list of all factors not specifically provided as a basis for the refusal. Compl. ¶ 140; Compl. Ex. D. After the Board and Gould entered into a confidentiality agreement, on February 5, 2016, Gould was provided with a redacted document production that included Board's and Audit Committee's meeting minutes. Compl. ¶¶ 141-150.
Gould takes issue with the Board's handling of his Demand. He criticizes the Board and the Audit Committee for failing to investigate any of the Demand's allegations. Compl. ¶¶ 138, 144-146. In addition, he alleges that the Board's response to the Demand was unfounded, essentially because the Bank had been required to pay large fines and because the Federal Reserve had concluded that the Bank lacked adequate firm-wide governance and compliance policies and procedures. Compl. ¶ 147. Gould also maintains that the Audit Committee was not a "suitable investigatory committee" because every member of the Audit Committee had served as director during some period of the wrongdoing alleged in the Demand (which was also true of the Board) and because the Audit Committee oversaw and reviewed the Bank's legal and regulatory compliance, the adequacy of which was at the heart of the Demand's allegations. Compl. ¶ 152. Finally, Gould found the Board's response lacking because neither the Audit Committee nor the Board prepared a formal report detailing their conclusions. Compl.
On April 28, 2016, Gould filed a derivative complaint in New York State Supreme Court, alleging breach of fiduciary duty and unjust enrichment. BAC Mem. 6; Board Mem. 5.
Gould alleges three claims in his Complaint. First, he claims the Board breached its fiduciary duty to ensure that the Bank operated lawfully because it willfully or recklessly ignored "the obvious and pervasive problems" caused by the Bank's internal control practices and failed to make a good faith effort to correct those problems, ultimately resulting in regulatory enforcement and civil litigation. Compl. ¶¶ 156-157, 161-163. The Board also allegedly breached its fiduciary duty to ensure that the Bank disseminated accurate and complete information to its shareholders by allowing the Bank to include materially misleading information in its SEC filings and proxy statements. Compl. ¶¶ 158-160. Second, Gould claims the Board was unjustly enriched by its compensation. Compl. ¶¶ 167-168. Lastly, Gould claims the Board violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9, 17 C.F.R. § 240.14a-9, because it knew or should have known that the Bank included false and misleading statements in its 2014 and 2015 Proxies. Compl. ¶¶ 170-177.
The Board and BofA have moved separately to dismiss these claims pursuant to Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure. Dkts. 14, 17. BofA argues that the Court should dismiss Gould's Complaint because Gould has failed to allege with particularity that the Board wrongfully refused his Demand, as required by Delaware law in order to bring a shareholder derivative action. In addition, the Board argues not only that Gould's Section 14(a) claim is time-barred but also that Gould has failed to allege that the statements in BofA's Proxies were false or misleading, that any alleged omissions were material, or that the purported misstatements or omissions caused harm to BofA. Lastly, the Board argues that Gould has failed to state a claim for breach of fiduciary duty or for unjust enrichment.
Rule 23.1 of the Federal Rules of Civil Procedure imposes a heightened
Fed. R. Civ. P. 23.1(b)(3). The pleading requirements under Rule 23.1 are "atypically rigorous." In re SAIC Inc. Derivative Litig., 948 F.Supp.2d 366, 384 (S.D.N.Y. 2013), aff'd sub nom. Welch v. Havenstein, 553 Fed.Appx. 54 (2d Cir. 2014); see also Fink v. Weill, No. 02 CIV. 10250 (LTS) (RLE), 2005 WL 2298224, at *3 (S.D.N.Y. Sept. 19, 2005) ("[Rule 23.1] imposes a pleading standard higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6)." (citing In re Trump Hotels S'holder Derivative Litig., Nos. 96 Civ. 7820 (DAB), 96 Civ. 8527 (DAB), 2000 WL 1371317, at *6 (S.D.N.Y. Sept. 21, 2000))).
"The adequacy of a complaint alleging wrongful refusal of a stockholder demand is determined under the law of the state of incorporation...." Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, 807 F.3d 502, 505 (2d Cir. 2015). Under Delaware law, which the parties agree applies, whether a plaintiff has adequately alleged a wrongful refusal "starts from the premise that the decision to initiate a lawsuit is an internal corporate matter within the board's discretion." Id. Thus, "[b]y its very nature the derivative action impinges on the managerial freedom of directors." Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
A shareholder can only bring a derivative action if he or she alleges with particularity that either: (1) he or she made a demand on the board of directors to initiate litigation and was wrongfully refused, or (2) a demand is excused as futile in light of the directors' inability to decide impartially whether to initiate the litigation. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 366-67 (Del. 2006). Because Gould submitted the Demand to the Board, the only issue here is whether Gould has alleged with adequate particularity that the Board wrongfully refused the Demand. Moreover, having made the Demand on the Board, Gould conceded that a majority of the Board was independent for the purpose of responding to the Demand. Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990) ("By electing to make a demand, a shareholder plaintiff tacitly concedes the independence of a majority of the board to respond.").
In order to allege successfully that a board of directors wrongfully refused a shareholder's demand, the shareholder-plaintiff must overcome the business judgment rule. "The business judgment rule presumes that the board
Gould argues that his allegations overcome the presumption created by the business judgment rule because: (1) the Board did not commence a new investigation in response to the Demand; (2) the Board's refusal is based on an "inexplicable" conclusion; and (3) the Board's process for addressing the Demand was deficient. Pl. Opp. 15-24. The Court agrees with the Board that Gould has not rebutted "the strong presumption that the [B]oard's decision not to take action was a valid exercise of its business judgment." Espinoza, 807 F.3d at 505 (internal quotation marks and citation omitted).
Gould argues that the Board's refusal was unreasonable and made in bad faith because neither it nor the Audit Committee conducted a substantive investigation into the Demand prior to refusing it. Pl. Opp. 15-18. According to Gould, failure to investigate a demand automatically indicates that the Board acted in bad faith. Id. at 14, 15, 18. Gould dismisses the Board's explanation that it had already considered the issues raised in the Demand and the relevant evidence in the course of responding to regulatory investigations and civil lawsuits as an inadequate "excuse." Id. at 15. In drawing on its prior knowledge and experience, the Board purportedly shirked its responsibility to investigate the Demand because the allegations in the Demand were more expansive than the allegations at issue in the prior investigations and lawsuits. See id.
Delaware law does not require a board to conduct a substantive, formal investigation into a demand's allegations. There is "no prescribed procedure a board must follow" when evaluating a demand; instead, Courts look to whether the board of directors has fulfilled its "duty to act on an informed basis." Levine v. Smith, 591 A.2d 194, 214 (Del. 1991), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The three cases relied
Based on Gould's allegations in the Complaint, the Board was adequately informed when it refused the Demand. For nearly two years prior to Gould's Demand, BofA — with oversight from the Board — had been responding to significant regulatory investigations and civil lawsuits regarding the scheme to manipulate FX. See Compl. ¶¶ 105-107, 109-111. The Board explained clearly when it refused the Demand that it was drawing on its prior knowledge, stating that "in the course of responding to regulatory inquiries into the foreign exchange practices of the Corporation's affiliates, the Corporation and its advisors have not identified any information to the Board which would suggest that the Board or senior management were complicit in any wrongdoing or made aware of any alleged misconduct." Compl. Ex. C, at 1; see also Merrill Lynch, 773 F.Supp.2d at 349 (holding the board refused the demand on an informed basis in part because it "was already quite familiar with the allegations in plaintiff's letters from its consideration of the various other proceedings referred to in the letters"); Mount Moriah Cemetery on Behalf of Dun & Bradstreet Corp. v. Moritz, No. CIV.A.11431, 1991 WL 50149, at *4 (Del. Ch. Apr. 4, 1991) (unpublished opinion) (board was adequately informed in part because issues raised in the demand letters were well known to the board given two class actions, numerous individual suits, and widespread media attention regarding the issues raised in the demand letters), aff'd, 599 A.2d 413 (Del. 1991).
The BofA's Board did not "do nothing" in order to educate itself to respond to the
Gould's Demand did not disclose any new facts that might have suggested that the Bank's previous investigations had overlooked evidence implicating the Board or senior management in any of the alleged misconduct, and the Board noted that absence as an additional reason for its refusal. Compl. Ex. C, at 1 ("[T]he Demand letter fails to come forward with any information that would suggest misconduct by, or a basis for recovery from, any individual director or executive officer of the Corporation or its affiliates."). Without such allegations, the Board reasonably relied on the Audit Committee's recommendation and its existing knowledge developed over several years of responding to significant government investigations and civil litigation.
In sum, accepting as true the Complaint's well-pleaded allegations and drawing all reasonable inferences in favor of Gould, given the Board's explicit — and reasonable — reliance on its existing knowledge and given its consideration of the Audit Committee's recommendation, Gould has failed to allege that the Board was uninformed to the point of reckless indifference or beyond the bounds of reason when it refused his Demand.
Gould argues that the Board's refusal was "inexplicable" and thus made in bad faith. Pl. Opp. 18-20. Specifically, Gould argues that the Board's determination that it was not aware of any information suggesting that the Board or senior management were complicit in or aware of wrongdoing was inexplicable in light of the Federal Reserve's conclusion in its consent order that BofA "lacked adequate firm-wide governance, risk management, compliance, and audit policies and procedures." Id. at 19-20.
Even if Gould were correct on that single point (and for the reasons discussed below, he is not), as BofA points out, the fact that the Board had found no evidence of Board or senior management complicity in the alleged FX scheme was not the only reason the Board rejected the Demand. BAC Reply 6. The Board provided the following additional reasons: "the substantive difficulties in proving the Demand's
The Court also agrees with BofA that the Board's reliance on its prior investigations that found no evidence of Board or senior management complicity was "far from inexplicable." BAC Reply 7. Although Plaintiff contends that this is a case of "where there's smoke there's fire," nothing in the Complaint suggests that the misconduct — or knowledge of it — reached the most senior levels of the Bank. On the contrary, according to the Audit Committee, BofA's counsel did not identify any evidence of wrongdoing or awareness of misconduct by the Board when it previously reviewed "substantial materials, including certain Board level materials from 2007-2014." Compl. ¶ 147. In addition, the consent orders from the Federal Reserve and OCC indicated that the alleged wrongdoing was committed by "traders," not board members or senior management. Compl. ¶¶ 108, 112. As mentioned above, Gould's Demand did not provide any additional information or allegations that would have supported the notion that the Board or senior management was involved in or aware of the FX collusion. That the Federal Reserve concluded in its consent order that BofA "lacked adequate firm-wide governance, risk management, compliance and audit policies and procedures to ensure that the firm's Covered FX Activities complied with safe and sound banking practices, applicable U.S. laws and regulations, including policies and procedures to prevent potential violations of the U.S. commodities, antitrust and criminal fraud laws, and applicable internal policies,"
Gould also argues that the Board acted in bad faith because its process for evaluating the Demand was "fatally flawed." Pl. Opp. 20-24. First, Gould argues the process was fatally flawed because neither the Board nor Audit Committee created any formal report detailing their conclusions but instead prepared only an eight-page slideshow. Id. at 20-22. Gould contends that, given the lack of a report and the "perfunctory" slideshow, the Board has concealed its reasons for refusing the Demand and has made it impossible to discern whether the Board earnestly considered the Demand. Id. But, as explained above — and as Gould concedes — there is no prescribed procedure a board must follow when reviewing a shareholder demand. Levine, 591 A.2d at 214; see also Gatz v. Ponsoldt, No. CIV.A. 174-N, 2004 WL 3029868, at *5 (Del. Ch. Nov. 5, 2004) (unpublished opinion) ("[T]here is no authority that suggests that Delaware law requires a formal `report' as a matter of law...."). The facts as alleged indicate that the Board earnestly considered the Demand — it referred the matter to the Audit Committee, which met with in-house counsel to evaluate the substance of the Demand and took into account the Bank's knowledge gained from prior investigations on the same issue, Compl. ¶¶ 146-151; it reviewed and adopted the Audit Committee's recommendation,
Second, Gould argues the Board's process was fatally flawed because the Audit Committee was conflicted. Pl. Opp. 22-24. The Audit Committee's members were responsible for overseeing the Bank's compliance, and the Bank's compliance failures were the subject of Gould's Demand. Id. at 23. Although it is true that a shareholder-plaintiff concedes a board's independence when he or she submits a demand to the board, that is only a concession ex ante — a plaintiff-shareholder may still allege that the board failed to act independently ex post in response to the demand. Grimes v. Donald, 673 A.2d 1207, 1219 (Del. 1996), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); see also Scattered Corp., 701 A.2d at 74-75. Gould contends that the Audit Committee was not independent because its members faced potential liability pursuant to the Demand's allegations. That, however, is not an allegation that the Audit Committee failed to act independently ex post in responding to the Demand; that is a fact that existed ex ante to Gould's Demand, and it is an argument that courts have rejected. See, e.g., Halpert Enters., Inc. v. Harrison, No. 06 CIV. 2331 (HB), 2007 WL 486561, at *6 (S.D.N.Y. Feb. 14, 2007) (the allegation that the audit committee lacked independence because its members faced possible personal liability if the demand's allegations were true was insufficient standing alone to challenge the audit committee's independence), aff'd, No. 07-1144-CV, 2008 WL 4585466 (2d Cir. Oct. 15, 2008).
For all these reasons, Gould has not satisfied the heightened pleading standard
In reviewing a Rule 12(b)(6) motion to dismiss, the Court accepts all of the non-movant's factual allegations as true and draws all reasonable inferences in the non-movant's favor. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Although all factual allegations contained in the complaint are assumed to be true, this tenet is "inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Twombly, 550 U.S. at 555, 127 S.Ct. 1955. To survive a Rule 12(b)(6) motion to dismiss, the complaint must "state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "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." Id.
Claims brought "pursuant to Section 14(a) must be brought within one year of the discovery of the [alleged] violation, and in no event more than three years from the issuance of the proxy statement at issue." Take-Two Interactive Software, Inc. v. Brant, No. 06CIV05279 (LTS), 2010 WL 1257351, at *5 (S.D.N.Y. Mar. 31, 2010); see also Bond Opportunity Fund v. Unilab Corp., 87 Fed.Appx. 772, 773 (2d Cir. 2004) (summary order) (applying one year statute of limitations to Section 14(a) claim). Gould alleges that the Individual Defendants violated Section 14(a) because the Bank's 2014 and 2015 Proxies failed to discuss the Bank's legal exposures with respect to the FX market. Compl. ¶¶ 117-121, 124, 128, 130-131. There is no dispute that Gould filed this Complaint more than one year after the discovery of the alleged material misstatements in the 2014 and 2015 Proxies. On June 13, 2015, Gould submitted his Demand to the Board, which cited public information regarding BofA's legal exposure with respect to the FX market. Compl. Ex A. Therefore, by at least June 13, 2015, Gould was aware of the alleged material misstatements. Gould filed this Complaint on October 6, 2016, more than one year after submitting his Demand. Dkt. 1.
The parties dispute whether the statute of limitations is tolled by a shareholder demand. See Pl. Opp. 34-35; Board Reply 2. The Court need not resolve that dispute,
For the foregoing reasons, Defendants' motions to dismiss are GRANTED, and Gould's Complaint is dismissed with prejudice. The Court does not grant Gould leave to amend because Gould has not indicated that he is aware of other facts that would rebut the presumption of the Board's valid business judgment in refusing his Demand. Moreover, even if Gould could allege such facts, his Section 14(a) claim would be dismissed as time-barred, and this Court would decline to exercise supplemental jurisdiction over Gould's remaining state law claims. The Clerk of Court is respectfully directed to terminate the open motions at docket entries 14 and 17 and to close the case.
Similarly, in Brosz v. Fishman, No. 1:13-CV-753, 2016 WL 7494883 (S.D. Ohio Dec. 29, 2016), on which Gould also relies, in response to the plaintiff's allegation that the individual defendants had engaged in a scheme to inflate their employer's share price while selling large numbers of shares, the board conceded that the individual defendants sold their stock but concluded that they had not breached any fiduciary duties. 2016 WL 7494883, at *1. The district court held that the board's "conclusory statement" that the individual defendants had not breached their fiduciary duties raised reasonable doubt about the board's business judgment in light of the admission that the individual defendants sold shares. Id. at *5. Here, there is no admission — or factual finding — that contradicts the Board's conclusion, based on counsel's previous review of materials, that no evidence implicated senior management or the Board in misconduct.
