Master Docket No. 12 MD 2335(LAK) | S.D.N.Y. | Jul 2, 2013
OPINION
Plaintiffs bring this consolidated shareholder derivative action against current and former officers and directors of the Bank of New York Mellon Corporation (“BNY Mellon Corp.” or the “Company”). The complaint alleges that these individual defendants are liable in connection with the foreign exchange standing instruction service of the Company’s subsidiary, Bank of New York Mellon (“BNY Mellon”). Based on the same underlying allegations, this Court has held that one of BNY Mellon’s customers adequately pled claims of breach of contract and breach of fiduciary duty
Defendants move to dismiss, contending that plaintiffs were obligated to make a demand on the Company’s board to pursue the action in its own right. Plaintiffs argue that a demand would have been futile because the directors consciously allowed the alleged misconduct to occur. In the last analysis, this case is a “replay of other similar cases where the plaintiff failed to allege with particularity any facts from which it could be inferred that particular directors knew or should have been on
Background
The Court assumes familiarity with its prior opinions that lay out the principal allegations against BNY Mellon and the Company.
Without making demand on the board, plaintiffs Iron Workers Mid-South Pension Fund and Marilyn Clark filed separate derivative complaints on November 22, 2011 and December 2, 2011, respectively, purportedly on behalf of the Company.
The AC brings claims of breach of fiduciary duty, corporate waste, and unjust enrichment against current and former members of the Company’s management, including chief executive officer and chairman of the board Gerald L. Hassell,
Discussion
I. Governing Law
Under Delaware law,
First, when a claim involves “a contested transaction i.e., where it is alleged that the directors made a conscious business decision in breach of their fiduciary duties,” then under the Aronson test, plaintiff must allege “particularized facts creating a reason to doubt that (1) the directors are disinterested and independent or that (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”
Second, when the suit regards “not a business decision of the Board but rather a violation of the Board’s oversight duties,” then the Rales test “requires that the plaintiff allege particularized facts establishing a reason to doubt that the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”
This derivative complaint is governed also by Fed.R.Civ.P. 23.1, which requires a complaint to “ ‘state with particularity ... any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from
The Court addresses first the breach of fiduciary duty claim and then considers the corporate waste and unjust enrichment claims.
II. Breach of Fiduciary Duty
Plaintiffs advance three theories for excusing demand with regard to their breach of fiduciary duty claims. First, they contend that demand is excused under the second prong of Aronson because the board was aware of the allegedly fraudulent scheme but consciously chose not to prevent the scheme from continuing.
The Court considers each of plaintiffs theories in turn.
A. Business Judgment
Defendants first maintain that demand is not excused under Aronson’s second prong because the allegations do not support an inference that the directors were aware of any fraudulent conduct.
To assess whether the complaint adequately alleges that defendants were aware of the alleged fraudulent scheme, one must be clear about what precisely may have been fraudulent about it. This Court repeatedly has made clear that BNY Mellon’s pricing methodology and its failure to provide transparency, in and of themselves, did not constitute fraud and were not otherwise wrongful.
Thus, the Court may assume arguendo that the AC adequately alleges that the board was aware (1) of BNY Mellon’s “technical pricing operations” including its practice of “pricfing] FX trades at the high and low of the day, depending on which one is against the client,” (2) of BNY Mellon’s “policy of not disclosing its SI practices to clients,” (3) “of the importance of the SI pricing practices to the [Company’s] overall profitability,” and (4) of the facts that “BNY [Mellon]’s management believed that the Company’s SI pricing sys
The fundamental problem is that the AC fails to allege that the board, prior to 2011, was aware of facts indicating that BNY Mellon was acting wrongfully — i.e., that they were aware that the Bank was misrepresenting the nature and quality of its services to its customers.
To be sure, once lawsuits against the Company were unsealed or filed over the course of 2011, the board surely had a basis for being aware of the alleged misrepresentations. But it would eviscerate the demand requirement to conclude that, once the facts come to light, demand is excused simply because the board had not acted before shareholder suits began.
B. Misleading Statements
Alternatively, plaintiffs contend that demand is excused because the Outside Di
C. Antagonism to Claims
Finally, plaintiffs allege that the board has shown its hostility to the claims through a purported public campaign to discredit the allegations and that demand therefore would be futile.
III. Corporate Waste and Unjust Enrichment Claims
As plaintiffs concede, the unjust enrichment and corporate waste claims are “inexorably linked” to the breach of fiduciary duty claim.
Plaintiffs have not alleged that the board was aware of wrongful activity. They therefore have not alleged facts giving rise to a reasonable doubt that the decision to pay allegedly wrongdoing officers was a valid exercise of business judgment.
Conclusion
For the foregoing reasons, defendants’ motion [DI 216] is granted.
SO ORDERED.
. Se. Pa. Transp. Auth. v. Bank of New York Mellon Corp., 921 F.Supp.2d 56 (S.D.N.Y.2013) ("SEPTA”).
. United States v. Bank of New York Mellon, 941 F. Supp. 2d 438" court="S.D.N.Y." date_filed="2013-04-24" href="https://app.midpage.ai/document/united-states-v-bank-of-new-york-mellon-8708080?utm_source=webapp" opinion_id="8708080">941 F.Supp.2d 438 (S.D.N.Y.2013) ("DOT”).
. Wood v. Baum, 953 A.2d 136" court="Del." date_filed="2008-07-01" href="https://app.midpage.ai/document/wood-v-baum-2197726?utm_source=webapp" opinion_id="2197726">953 A.2d 136, 143 (Del.2008).
. See DOJ, 941 F. Supp. 2d 438" court="S.D.N.Y." date_filed="2013-04-24" href="https://app.midpage.ai/document/united-states-v-bank-of-new-york-mellon-8708080?utm_source=webapp" opinion_id="8708080">941 F.Supp.2d at 443-50; SEPTA, 921 F.Supp.2d at 62-63.
. AC ¶¶ 3-4.
. Id. ¶¶ 63-64.
. Id. ¶¶ 68-70.
. Id. ¶ 67.
. Id. ¶¶ 80-81, 91.
. Id. ¶¶ 88-89.
. See In re: The Bank of New York Mellon Corp. S’holder Derivative Litig., No. 11 Civ. 8471, Dkt. 1; see also Clark v. Hassell, No. 11 Civ. 8810, Dkt. 1.
. DI 120.
. DI 196.
. The other members of management that are defendants in this action are Thomas P. Gibbons, Arthur Certosimo, James P. Palermo, Robert Kelly, and Richard Mahoney. AC ¶¶ 20-24, 36-37.
. The Outside Directors include Wesley W. von Schack, Catherine A. Rein, Richard J. Kogan, William C. Richardson, Samuel C. Scott III, Michael J. Kowalski, John A. Luke, Jr., Mark A. Nordenberg, Nicholas M. Donofrio, Ruth E. Bruch, Edmund F. Kelly, and John P. Surma. Id. ¶ 162. Surma left the
. Id. ¶ 186.
. Id. ¶ 192.
. Id. ¶ 196.
. The parties agree that the law of the state of incorporation — here, Delaware — governs the standard for assessing demand futility. Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133" court="2d Cir." date_filed="2004-08-17" href="https://app.midpage.ai/document/april-scalisi-v-fund-asset-management-787394?utm_source=webapp" opinion_id="787394">380 F.3d 133, 138 (2d Cir.2004).
. Braddock v. Zimmerman, 906 A.2d 776" court="Del." date_filed="2006-09-12" href="https://app.midpage.ai/document/braddock-v-zimmerman-2360416?utm_source=webapp" opinion_id="2360416">906 A.2d 776, 784 (Del.2006) (internal quotation marks omitted).
. Wood, 953 A.2d 136" court="Del." date_filed="2008-07-01" href="https://app.midpage.ai/document/wood-v-baum-2197726?utm_source=webapp" opinion_id="2197726">953 A.2d at 140 (footnotes and internal quotation marks omitted).
. Aronson v. Lewis, 473 A.2d 805" court="Del." date_filed="1984-03-01" href="https://app.midpage.ai/document/aronson-v-lewis-2379496?utm_source=webapp" opinion_id="2379496">473 A.2d 805, 812 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244" court="Del." date_filed="2000-02-09" href="https://app.midpage.ai/document/brehm-v-eisner-2206496?utm_source=webapp" opinion_id="2206496">746 A.2d 244 (Del.2000); see also Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 34 A.3d 1074" court="Del." date_filed="2011-12-28" href="https://app.midpage.ai/document/sagarra-inversiones-sl-v-cementos-portland-valderrivas-sa-4965217?utm_source=webapp" opinion_id="4965217">34 A.3d 1074, 1082 (Del.2011) ("The entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine’s applicability.” (internal quotation marks and alterations omitted)).
. Aronson, 473 A.2d 805" court="Del." date_filed="1984-03-01" href="https://app.midpage.ai/document/aronson-v-lewis-2379496?utm_source=webapp" opinion_id="2379496">473 A.2d at 812.
. Wood, 953 A.2d 136" court="Del." date_filed="2008-07-01" href="https://app.midpage.ai/document/wood-v-baum-2197726?utm_source=webapp" opinion_id="2197726">953 A.2d at 140 (footnotes and internal quotation marks omitted).
. Halebian v. Berv, 590 F.3d 195" court="2d Cir." date_filed="2009-12-29" href="https://app.midpage.ai/document/halebian-v-berv-1434347?utm_source=webapp" opinion_id="1434347">590 F.3d 195, 204 (2d Cir.2009) (quoting Fed.R.Civ.P. 23.1).
. Loveman v. Lauder, 484 F. Supp. 2d 259" court="S.D.N.Y." date_filed="2007-05-02" href="https://app.midpage.ai/document/loveman-v-lauder-2445360?utm_source=webapp" opinion_id="2445360">484 F.Supp.2d 259, 266 (S.D.N.Y.2007) (recognizing that demand futility should be assessed claim-by-claim, and that relevant test may vary by claim).
. Opp. 11-27.
. Opp. 27-29.
. Opp. 31-33.
. Defendants more broadly challenge plaintiff’s reliance on Aronson altogether, contending that plaintiffs’ claim amounts to an oversight claim that should be analyzed under Rales. But see In re Abbott Laboratories Deriv. Shareholders Litig., 325 F.3d 795" court="7th Cir." date_filed="2003-05-27" href="https://app.midpage.ai/document/in-re-abbott-laboratories-derivative-shareholders-litigation-781551?utm_source=webapp" opinion_id="781551">325 F.3d 795, 805-7 (7th Cir.2003) (distinguishing between "unconsidered failure to act” due to poor oversight mechanisms that would be subject to Rales and “conscious inaction” that would be subject to Aronson). Because plaintiffs’ claim fails even under their own chosen standards, the Court need not address this dispute.
. DOJ, 941 F. Supp. 2d 438" court="S.D.N.Y." date_filed="2013-04-24" href="https://app.midpage.ai/document/united-states-v-bank-of-new-york-mellon-8708080?utm_source=webapp" opinion_id="8708080">941 F.Supp.2d at 481-82; SEPTA, 921 F. Supp. 2d 56" court="S.D.N.Y." date_filed="2013-01-23" href="https://app.midpage.ai/document/southeastern-pennsylvania-transp-auth-v-bank-of-new-york-mellon-corp-8705750?utm_source=webapp" opinion_id="8705750">921 F.Supp.2d 56, 88 n. 186. The AC contains no allegations warranting a different conclusion here.
. Opp. 17-19; see generally AC ¶¶ 94-102 (setting forth, allegations that senior management understood that standing instruction trading was profitable because of lack of price transparency)
The AC alleges that in October 2009, an action was unsealed charging State Street Bank & Trust Co. with "systematically overcharging] pension funds for their FX transactions." AC ¶ 100. The AC alleges that current and former Bank employees expressed dismay at this news and that an executive vice president emailed senior personnel to direct them to "put a team together to examine our practices” and to "[a]ssume disposition of this case will shine a light on SI FX and best execution practices.” Id. ¶ 101. The AC alleges that the board "received reports regarding these matters because they concerned the Company’s own compliance with laws and regulations.” Id.
. To whatever extent such knowledge may be imputed to Hassell as a member of management, plaintiffs do not dispute that they must show that Aronson is satisfied with respect to at least half of the directors. Opp. 11 (citing Conrad v. Blank, 940 A.2d 28" court="Del. Ch." date_filed="2007-09-07" href="https://app.midpage.ai/document/conrad-v-blank-1968225?utm_source=webapp" opinion_id="1968225">940 A.2d 28, 36 (Del.Ch.2007)). The Court thus focuses its attention on the Outside Directors.
. The AC is silent as to the nature of the overlap between the practices of State Street and BNY Mellon. In any event, it does not appear that "best execution” or other misrepresentations at issue in this case were involved specifically in the State Street cases. Cf. Hill v. State Street Corp., No. 09 Civ. 12146(NG), 2011 WL 3420439, *10-*12 (D.Mass. Aug. 3, 2011).
. See Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53" court="Del." date_filed="1989-12-22" href="https://app.midpage.ai/document/citron-v-fairchild-camera--instrument-corp-1981210?utm_source=webapp" opinion_id="1981210">569 A.2d 53, 66 (Del.1989) (assessing whether board decision was informed under gross negligence standard); Wood, 953 A.2d 136" court="Del." date_filed="2008-07-01" href="https://app.midpage.ai/document/wood-v-baum-2197726?utm_source=webapp" opinion_id="2197726">953 A.2d at 143 (noting that "red flags are only useful when they are either waved in one's face or displayed so that they are visible to the careful observer” (internal quotation marks omitted)).
. See In re infoUSA, Inc. S’holder Litig., 953 A.2d 963" court="Del. Ch." date_filed="2007-08-20" href="https://app.midpage.ai/document/in-re-infousa-inc-shareholders-litigation-2197976?utm_source=webapp" opinion_id="2197976">953 A.2d 963, 987 (Del.Ch.2007) ("Mere inaction on the part of the board ... does not relieve plaintiffs of the requirement to make demand.”).
. Wood, 953 A.2d at 141 n. 11 (citing Aronson, 473 A.2d 805" court="Del." date_filed="1984-03-01" href="https://app.midpage.ai/document/aronson-v-lewis-2379496?utm_source=webapp" opinion_id="2379496">473 A.2d at 814) (internal quotation marks omitted).
. Again, the Court need not consider Hassell because plaintiffs do not dispute that they must allege that at least half of the directors are incapable of considering a demand. Opp. 11.
. See generally AC ¶¶ 103-33 (setting forth allegedly improper statements).
. Id. ¶ 133.
. In re Citigroup, Inc. S'holder Derivative Litig., 964 A.2d 106" court="Del. Ch." date_filed="2009-02-24" href="https://app.midpage.ai/document/in-re-citigroup-inc-shareholder-derivative-litigation-1490563?utm_source=webapp" opinion_id="1490563">964 A.2d 106, 134 (Del.Ch.2009).
. Id.
. Id. ("Pleading that the director defendants 'caused' or 'caused or allowed’ the Company to issue certain statements is not sufficient particularized pleading to excuse demand”); see also Wood, 953 A.2d at 142 (suggesting that there is no substantial threat of personal liability when, inter alia, the complaint is "devoid of any pleading regarding the full board's involvement in the preparation and approval of the company's financial statements” (internal quotation marks omitted)).
. See generally AC ¶¶ 134-48 (discussing public revelations of Company's practices). The AC does allege that director Edmund Kelly made statements on an April 2011 earnings call suggesting that some of the reporting on the Company's EX practices was misleading and inaccurate. Id. ¶ 139. Defendants contend that the statement was actually made by then-CEO Robert Kelly, citing a transcript of the call indicating as such. See Portnoy Decl., Ex. 3. Plaintiffs’ opposition does not dispute defendants’ contention.
. Moreover, even assuming the statement purportedly made by Edmund Kelly is attributed to him, the Court concludes that this statement alone is not sufficient to render demand futile.
This case is distinguishable from the authorities plaintiffs cite, wherein it appears that the respective boards themselves took meaningful actions casting doubt on the merits of the litigation prior to the suit. See, e.g., Biondi v. Scrushy, 820 A.2d 1148" court="Del. Ch." date_filed="2003-01-16" href="https://app.midpage.ai/document/biondi-v-scrushy-2208565?utm_source=webapp" opinion_id="2208565">820 A.2d 1148, 1163 (Del.Ch.2003); Conrad v. Blank, 940 A.2d 28" court="Del. Ch." date_filed="2007-09-07" href="https://app.midpage.ai/document/conrad-v-blank-1968225?utm_source=webapp" opinion_id="1968225">940 A.2d 28, 37-38 (Del.Ch.2007).
. Opp. 29.
. See Brehm, 746 A.2d 244" court="Del." date_filed="2000-02-09" href="https://app.midpage.ai/document/brehm-v-eisner-2206496?utm_source=webapp" opinion_id="2206496">746 A.2d at 263 (noting limited circumstances in which corporate waste claim may lie).
. See Nemec v. Shrader, 991 A.2d 1120" court="Del." date_filed="2010-04-06" href="https://app.midpage.ai/document/nemec-v-shrader-2273298?utm_source=webapp" opinion_id="2273298">991 A.2d 1120, 1130 (Del.2010) (setting forth elements of unjust enrichment claim).