Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_09-cv-00652/USCOURTS-casd-3_09-cv-00652-0/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1964 Racketeering (RICO) Act

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

Plaintiff and Defendants submitted several underlying documents. Bence Am. Decl.;

Giltner Decl. The complaint refers to these documents and they are integral to Plaintiff’s

claims, therefore, the Court considers them as being incorporated by reference. United States

v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003). Except for the Officers’ Stock Rights Plan,

the Court did not refer to most of the exhibits. In those instances when the Court relied on

information outside the complaint to decide this motion, this Order cites the specific document.

(continued...)

- 1 - 09CV0652

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

FOSTER RICH,

Plaintiff,

CASE NO. 09-CV-0652-MMA (WMc)

ORDER GRANTING DEFENDANTS’

MOTION TO DISMISS

[Doc. No. 21]

vs.

RALPH W. SHRADER, C.G. APPLEBY,

SAMUEL R. STRICKLAND, JOSEPH E.

GARNER, DENNIS O. DOUGHTY, et

al.,

Defendants.

Now before the Court is Defendants’ motion to dismiss the complaint for failure to

state a claim. Fed. R. Civ. P. 12(b)(6). The Court submitted the motion on the written

briefs. Local Civ. R. 7.1(d)(1). For the reasons stated below, the Court GRANTS

Defendants’ motion.

I. FIRST AMENDED COMPLAINT

Plaintiff Foster Rich compiled rambling speculations into a lengthy First Amended

Complaint (“FAC”) that alleges his former partners destroyed the firm’s honor code and

cheated him out of a fortune.1

 Rather than repeat the 531 paragraphs, the Court

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 1 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

(...continued)

As requested, the Court also takes judicial notice that other Booz Allen executives have

filed similar lawsuits on the same fact pattern. Fed. R. Evid. 201; Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). These include the Nemec action in Delaware, see infra

footnote 2, and five suits in the Southern District of New York. Pl.’s Exs. 1-5. 

2

Because this matter is before the Court on a motion to dismiss, the Court must accept as true

the allegations of the complaint in question. Hospital Bldg. Co. v. Rex Hospital Trustees, 425 U.S.

738, 740 (1976).

- 2 - 09CV0652

summarizes Plaintiff’s basic contentions as follows. 

Defendant Booz Allen Hamilton, Inc. (hereinafter “Booz Allen” or “BAH”) is a

strategy and technology consulting firm. [FAC ¶ 9.]2 The company was formed as a

partnership in 1914, but it re-organized as a corporation (under Delaware law) in 1964. 

[Id.] Plaintiff was hired in 1987 as a Vice President. [Defs.’ Ex. C.] Part of his

compensation was the right to purchase stock. [Id. at 4.] Plaintiff alleges that Booz Allen

“retained the attitude and culture of a partnership, owned and led by a relatively small cadre

of corporate officers.” [FAC ¶ 9; id. ¶ 27 (in 2003, Booz Allen had 44 senior vice

presidents).] Plaintiff ascribes the collegial atmosphere at Booz Allen to its bedrock

principles and values, including, “an oath that BAH would never be sold, and was held in

trust by the current partners for the benefit of future partners.” [Id. ¶ 9; id. ¶ 59 & 100

(guiding financial principle that “The Firm will owned by the Partners, with no outside

control.”).]

In September 2003, Booz Allen evaluated Plaintiff’s job performance. Defendant

Ralph Shrader (Chairman and Chief Executive Officer) falsely attacked Plaintiff’s

performance on a 1992 Warbreaker program. [Id. ¶¶ 166-69.] Although Plaintiff believed

that program had been a success, he thought the evaluation would focus only on the past

ten years. [Id. ¶¶ 168 & 170.] The written assessment contained positive remarks, but

ultimately found that Plaintiff was “[n]ot on track” and recommended that he retire within

two years. [Id. ¶¶ 170-74.] Plaintiff alleges that at the time he received the evaluation, he

disagreed with Shrader’s opinion, but he believed that the recommendation to retire was

accurate and he planned accordingly.

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 2 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

The Complaint does not explicitly reveal the value. In a parallel action, executives alleged that the book value in 2008 was $162, but the Carlyle Group paid $700 a share. Nemec

v. Shrader, C.A. Nos. 3878 & 3934 (Del. filed Apr. 6, 2010). By that math, the book value of Plaintiff’s 30,500 shares was approximately $5 million; whereas the Carlyle group would have

paid over $21 million.

- 3 - 09CV0652

The complaint is ambiguous as to whether Plaintiff voluntarily retired or was forced

to retire. [Compare id. ¶ 527 (“Plaintiff ‘retired’”) with ¶ 175 (“He was terminated”).] In

October 2004, Plaintiff decided to accelerate his retirement date from September 2005 to

March 2005. [Id. ¶ 417.] Defendant Dennis Doughty, President of the government

division, offered to reverse the retirement recommendation if Plaintiff agreed to stay

through September 2005. [Id. ¶¶ 417-20.] Because Plaintiff was unhappy with the 2003

evaluation process, he rejected that offer and “proceeded to complete his voluntary

retirement on March 31, 2005.” [Id. ¶ 422 (emphasis added); see id. at 1 (Plaintiff

“elected” to accelerate retirement date).]

Plaintiff owned 30,500 shares of Booz Allen stock. [Id. ¶ 176.] Plaintiff had been

granted and purchased those shares throughout his employment pursuant to the Officers’

Stock Rights Plan. [Id. ¶ 67; Defs.’ Exs. A & B.] The Plan provided, in part:

In the event an Officer ceases to be an employee of the Company or its

subsidiaries by virtue of retirement, death, or disability, the Company shall have

the right, exercisable at any time following the expiration of 24 months from

such event, to purchase all or any portion of the Common Stock held by Officer

(or the Officer’s estate) at the Repurchase Price in effect at the date of exercise

of the Company’s right.

[Defs.’ Ex. B, ¶ 7(b) (approved in 1988); Defs.’ Ex. A ¶ 10 (as amended in 2006).] Two

years after Plaintiff retired, Booz Allen exercised its right and repurchased all of Plaintiff’s

stock for millions of dollars in 2007. [FAC ¶ 494-98.] 

All would have been well, but for the announcement in May 2008 that Booz Allen

sold its government division to the Carlyle Group for $2.54 billion. [Id. ¶ 2.] Under the

terms of that leveraged buyout, the outstanding shares were repurchased at a materially

higher value than book value.3

 [Id.] Booz Allen had approximately 300 shareholders, and

approximately 44 of them were senior executives. [Id. ¶ 9 (in 2007).] The senior

executives received substantial sums for the shares, which they had acquired pursuant to

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 3 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 4 - 09CV0652

the Stock Rights Plan during their lengthy service at the firm. [Id. ¶¶ 33, 260.] Plaintiff

alleges that had Booz Allen told him it was going to sell the government division, he would

have not have retired in 2005 but would have waited until the deal closed in July 2008 and

he would have received an additional $16 million for his shares. [Id. ¶ 2.] Plaintiff talked

to other retired executives about his suspicion that his former colleagues had cheated him,

and his investigation revealed the hidden agenda of greed that forms the basis of this action. 

[Id. ¶¶ 437-43.]

Plaintiff complains that Booz Allen changed from a “friendly 44 person quasipartnership” into a “normal corporation.” [Pl.’s Opp. Br. at 10.] Plaintiff’s theory is that

Shrader, with his close associates, engineered a secret plan to split Booz Allen into two

divisions so they would control the company. The scheme commenced in 2003 (or earlier)

and culminated in 2008 when Carlyle bought the government division. Shrader’s group

forced sixteen senior executives to retire. [Id. ¶¶ 177-260.] Plaintiff now believes that his

treatment during his 2003 performance evaluation was a part of this scheme. [ Id. ¶¶ 3, 164-

65 (alleging assessment process was changed to further “plan to seize control of the

Government Sector by providing a mechanism to purge” opponents), 170-71 (alleging

Shrader had assessment altered and Defendant Joseph Garner went along with false

review).] Because Booz Allen re-purchased the shares of its former executives at book

value, the plan ensured that Shrader’s group benefitted financially when the company was

split up and sold to Carlyle. The Delaware Supreme Court aptly described the financial

aspect: “the pre-Carlyle transaction redemption of [the retired-executive’s] shares reduced

the number of ‘slices’ into which the Carlyle transaction ‘cake’ (a fixed amount) would be

cut, thereby enlarging each ‘slice’ [of the remaining working stockholders].” Nemec,

supra, at 20. Shrader allegedly ensured the success of his hidden agenda by changing the

stock plan, implementing a Partnership Compensation Committee (“PCC”) to review

annual performance, re-structuring and weakening the commercial division, failing to

conduct a “bake off” with competing banks, and conducting a “sham” auction that

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 4 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

DeAnne Aguirre, Heather Burns, Mark Gerenscer, Francis Henry, Christopher Kelly,

Daniel Lewis, Joseph Mahaffee, John Mayer, Patrick Peck, Horacio Rozanski, Steven

Wheeler, David Knott, and Douglas Swenson filed this motion to dismiss. Five remaining

defendants, who live abroad, have not appeared (Shumeet Banerji, Peter Bertone, Christian

Berger, Helmut Meier, and Joe Saddi). 

- 5 - 09CV0652

undervalued the company and did not include an offer by a different strategic buyer

(SAIC). [E.g., id. ¶¶ 119-257.] 

Plaintiff alleges breach of fiduciary duty and breach of contract claims as well as

federal racketeering and securities fraud. Plaintiff sued the corporate entity and 23

directors. [Id. ¶ 2 (labeling the 23 collectively as “Director Defendants”).] The FAC

specifically mentions only five executives – Defendants Shrader, Doughty, C.G. Appleby,

Samuel Strickland, and Garner. [See id. ¶ 3 (labeling this subgroup as “Individual

Defendants”).] The FAC barely mentions the remaining eighteen directors.4

 

II. MOTION TO DISMISS

A complaint must contain sufficient factual matter, accepted as true, to “state a claim

to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007). “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.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). “Threadbare recitals

of the elements of a cause of action, supported by mere conclusory statements, do not

suffice.” Id. “[C]onclusory allegations of law and unwarranted inferences will not defeat a

motion to dismiss for failure to state a claim.” Miranda v. Clark Cnty., 279 F.3d 1102,

1106 (9th Cir. 2002). “While legal conclusion can provide the framework of a complaint,

they must be supported by factual allegations.” Iqbal, 129 S. Ct. at 1950. 

When the complaint is based upon fraud, the circumstances “shall be stated with

particularity.” Fed. R. Civ. P. 9(b). The complaint must be “specific enough to give

defendants notice of the particular misconduct which is alleged to constitute the fraud

charged so that they can defend against the charge and not just deny that they have done

anything wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). “The pleader

must state the time, place, and specific content of the false representations as well as the

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 5 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 6 - 09CV0652

identities of the parties to the misrepresentations.” Schreiber Distrib. Co. v. Serv-Well

Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).

Ordinarily, leave to amend is granted to allow the plaintiff an opportunity to correct

the failure to state a claim; however, a court may deny leave to amend when “the allegation

of other facts consistent with the challenged pleading could not possibly cure the

deficiency.” Id.

III. BREACH OF CONTRACT

Plaintiff’s breach of contract claim is based upon his employment contract with

Booz Allen. He alleges that the company “was obligated to provide [him] with an

assessment of his performance that was based upon and consistent with the opinion and

recommendation of numerous co-workers.” [FAC ¶ 524.] Plaintiff contends that Booz

Allen breached that contract in September 2003. [Id. ¶ 525.] The company did not base his

performance review on his co-workers’ evaluations (the assessor interviewed twelve

employees), which were “very positive,” but instead relied on Shrader’s false accusation

concerning Plaintiff’s deficient performance on the Warbreaker project eleven years earlier. 

[Id. ¶¶ 146-76, 415-25, 526.] The “Partner Assessment Summary” form was altered to

include this false comment and, as a result, to recommend that Plaintiff retire in two years. 

[Id. ¶¶ 166-76.] 

Plaintiff was upset by the faulty assessment, but believed the exercise of business

judgment permitted management to replace him, and he “retired.” [Id. ¶¶ 415-25, 436,

527.] The leveraged buy out in 2008 prompted Plaintiff to investigate whether his

retirement had been engineered by an improper motive of self-enrichment. [Id. ¶ 436-443.] 

Plaintiff alleges that he discovered in March 2009 the corrupt motive and the details of how

his performance assessment had been altered. [Id. ¶ 443.] 

A. Statute of Limitations

Plaintiff filed his original complaint on April 1, 2009. Defendants argue that the

breach of contract accrued in September 2003, when Plaintiff received the assessment. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 6 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 - 09CV0652

They contend the claim is barred by the four year statute of limitation which expired in

September 2007. Cal. Civ. Proc. Code § 337. 

Plaintiff invokes the discovery rule to postpone the date the limitations period began

to run until July 2008, which he contends is when he knew or should have known, with the

exercise of reasonable diligence, of the wrongful conduct at issue. Fox v. Ethicon EndoSurgery, Inc., 35 Cal. 4th 797, 807 (2005); Kline v. Turner, 87 Cal. App. 4th 1369, 1375

(2001) (delayed discovery rule provides cause of action does not accrue until plaintiff

suspects or should have suspected defendant’s wrongdoing). 

The current pleading is both factually and legally insufficient. Because the

discovery rule is an exception, the plaintiff must plead facts to show the time and manner of

discovery and the inability to have made the discovery earlier despite reasonable diligence. 

Fox, 35 Cal. 4th at 920-21; McKelvey v. Boeing N. Am. Inc., 74 Cal. App. 4th 151, 160

(1999). The FAC alleges that Plaintiff was aware, on September 11, 2003, that Defendant

Shrader was not a member of his assessment group, that Shrader made false accusations at

the meeting, and that Defendant Garner also knew the Warbreaker program had been a

success. [FAC ¶¶ 166-69.] On September 30, 2003, Plaintiff received the written

assessment form that notified him “Not on track, not recommended for L3; initiate

retirement plan with objective between October 04 and October 05.” [Id. ¶ 172.] Plaintiff

contends that this conclusion was inconsistent with other laudatory comments by other

partners, and therefore “false and completely contradictory.” [Id. ¶ 174.] These plain

allegations indicate that Plaintiff should have been aware that something was amiss in

2003.

 Plaintiff attempts to save his claim by arguing he was not aware of the deceptive

practice at the time he received his review because Shrader kept his corrupt motive a secret. 

The Court agrees with Defendants’ analysis. Motive is not an element of a breach of

contract action. Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 517

(1994) (“the law generally does not distinguish between good and bad motive for breaching

a contract”); Ruscigno v. Am. Nat’l Can Co., Inc., 84 Cal. App. 4th 112, 126 (2000)

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 7 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 8 - 09CV0652

(employment contract). It does not matter that Plaintiff did not suspect that Defendant

Shrader had an allegedly secret plan to force out equity partners in order to seize control of

Booz Allen for personal financial gain. Plainly, Plaintiff was aware of the injury (the

initiation of a retirement plan) and the cause of the injury (the negative performance

review) when he received the assessment in September 2003. Plaintiff continued to work

at Booz Allen until March 2005 and thus had the opportunity to investigate the reason for

the negative assessment. The flaw is apparent on the face of the pleading. 

In addition to the hurdle of pleading the facts required to invoke the discovery rule

to his claim, Plaintiff faces a legal problem. The discovery rule generally applies to tort

claims. It may apply to a breach of contract claim where plaintiff shows the defendant

concealed its improper conduct, the injury or the act causing it would be difficult for

plaintiff to detect, the defendant was in a superior position to comprehend the act and

injury, and the defendant had reason to believe the plaintiff remained ignorant he had been

wronged. Gryczman v. 4550 Pico Partners, Ltd., 107 Cal. App. 4th 1, 4-6 (2003); April

Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 825-33 (1983) (applying discovery rule to

breach of contract action when breach committed in secret and plaintiff would not

reasonably discover harm until a future time). The FAC does not allege the facts necessary

to trigger the use of the discovery rule on his employment contract. See Gryczman, 107

Cal. App. 4th at 4-6; April, 147 Cal App. 3d at 825-33; El Pollo Loco, Inc. v. Hashim, 316

F.3d 1032, 1039 (9th Cir. 2003) (“There is no need for the discovery rule to apply in the

typical breach of contract case” but rule may apply in “unique” cases); Perez-Encinas v.

Amerus Life Ins. Co., 468 F. Supp. 2d 1127, 1134-37 (N.D. Cal. 2006) (in summary

judgment context, finding no basis to apply discovery rule to breach of contract claim). 

B. Elements

Defendants next argue that the plain terms of the employment contract did not

impose a duty on Booz Allen to assess performance “based upon and consistent with the

opinion and recommendation of numerous co-workers.” [FAC ¶ 524.] Defendants refer to

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 8 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 - 09CV0652

the 1987 letter that offered Plaintiff the job, which does not contain that promise. [Defs.’

Ex. C at 3 (listing 5 categories of performance standards).]

This argument fails at this stage of the proceedings. Plaintiff’s claim is based upon

written personnel policies including the “360 Assessment Process” and a “New Assessment

Process” that created implied-in-fact promises. [FAC ¶¶ 153-63.] California law allows an

employee to state a claim for breach of certain personnel policies and official guidelines

that limit the employer’s power to terminate an employee. Guz v. Bechtel Nat’l, Inc., 24

Cal. 4th 317, 344-45 (2000). Under this standard, Plaintiff has pleaded an implied-in fact

contract and its breach. Foley v. Interactive Data Corp., 47 Cal. 3d 654, 681-82 (1988). 

Defendants attack the breach of contract claim for failing to show that the breach

was the proximate cause of Plaintiff’s damage. “A proximate cause of loss or damage is

something that is a substantial factor in bringing about that loss or damage.” U.S. Ecology,

Inc. v. Cal., 129 Cal. App. 4th 887, 909 (2005). Defendants argue that the facts alleged

demonstrate there was an intervening event that broke the chain of causation. California v.

Superior Court, 150 Cal. App. 3d 848, 857 (1984) (citing Cal. Civ. Code § 3300). Namely,

Plaintiff “concedes that despite his qualms with his review and the initial recommendation

concerning a plan for retirement, Booz Allen ‘offered to cancel the forced retirement,’ and

that his retirement was in the end wholly ‘voluntary.’” [Defs.’ Mot. at 41 (quoting FAC ¶¶

1, 422).]

Plaintiff argues in his opposition brief that he alleged the offer of reinstatement was

inadequate to put him in the position he was in before the negative assessment. [Pl.’s Opp.

Br. at 54.] He states that he suffered emotional distress from the false information in that

unfair assessment and seeks consequential damages. [FAC ¶ 527; see id. ¶ 418.] 

Defendants’ position is well taken. Even construing the allegations that are set forth

in the complaint in Plaintiff’s favor, the facts reveal that Booz Allen offered to retract the

recommendation to retire if Plaintiff would not accelerate his retirement from September to

March 2005. [Id. ¶¶ 416-20.] “Plaintiff Rich proceeded to complete his voluntary

retirement on March 31, 2005.” [Id. 422 (emphasis added).] Plaintiff explicitly identified

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 9 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 10 - 09CV0652

the intervening event that broke the chain of causation between the alleged breach and his

ultimate decision to retire. Franklin v. Murphy, 745 F.2d 1221, 1228-29 (9th Cir. 1984)

(court may dismiss complaint that discloses a fact that necessarily defeats plaintiff’s claim),

abrogated on other grounds by, Neitzke v. Williams, 490 U.S. 319, 324 & n.3 (1989),

superceded by statute as recognized in Spivey v. Godinez, 1997 U.S. Dist. LEXIS 15255,

*2 n.1 (N.D. Ill. 1997).

Moreover, the damages that Plaintiff seeks are not recoverable in a contract action. 

Applied Equip., 7 Cal. 4th at 516 (emotional distress damage is not an available contract

remedy).

Further, the Court agrees with Defendants’ observation that to the extent Plaintiff

attempts to recover consequential damages by measuring the profit he would have made if

he had sold his shares to the Carlyle Group, it fails on its face. California law measures

damages for a breach of contract by those which were reasonably foreseeable at the time

the contract was formed. 999 v. C.I.T. Corp., 776 F.2d 866, 872 (9th Cir. 1985) (citing

California authorities). “If special circumstances result in an unusual injury, damages

cannot be recovered unless those circumstances were known or should have been know by

the breaching party at the time the contract was made.” Id. (emphasis added). Booz Allen

entered the employment contract with Plaintiff in 1987. The leveraged buyout took place

twenty years later. The Court holds, as a matter of law, that Plaintiff’s theory violates the

rule of law measuring contract damages. 

For all of the above reasons, the Court GRANTS Defendants’ motion to dismiss the

breach of contract cause of action.

IV. TORTIOUS INTERFERENCE WITH CONTRACT

In a related claim, Plaintiff alleges that Defendants Shrader and Doughty interfered

with his employment contract with Booz Allen when they reviewed his job performance in

bad faith. [FAC ¶¶ 515-22.] This claim is based upon the same facts as Plaintiff’s breach

of contract claim. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 10 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 11 - 09CV0652

“[A] stranger to a contract may be liable in tort for intentionally interfering with the

performance of the contract.” Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d

1118, 1126 (1990) (citations omitted).

The elements which a plaintiff must plead to state the cause of action for

intentional interference with contractual relations are (1) a valid contract

between plaintiff and a third party; (2) defendant's knowledge of this contract;

(3) defendant's intentional acts designed to induce a breach or disruption of the

contractual relationship; (4) actual breach or disruption of the contractual

relationship; and (5) resulting damage.

Id. (citations omitted).

Defendants move to dismiss the claim on the ground that Shrader and Doughty, as

agents of Booz Allen, are not strangers or third-parties to their principal’s employment

contract. Applied Equip., 7 Cal. 4th at 516-17. 

The Court agrees. Agents and employees of a corporation who act in their official

capacities on behalf of the corporation “cannot be liable for inducing a breach of the

corporation’s contract since being in a confidential relationship to the corporation their

action in this respect is privileged.” Wise v. S. Pac. Co., 223 Cal. App. 2d 50, 72-73

(1963), abrogated on other grounds by Applied Equip., 7 Cal. 4th at 512 n.4 & 510-18. 

Plaintiff argues that he has pled around this restriction because he alleges that these

senior executives were acting in their personal financial interest and in violation of their

fiduciary duty to shareholders. Doctors’ Co. v. Superior Court, 49 Cal. 3d 39, 47 (1989). 

Plaintiff’s theory is that by repurchasing Plaintiff’s shares, Defendants increased the

percentage of the company that Carlyle would buy, which increased the payout to the

directors. [E.g., FAC ¶¶ 5, 50.] 

To the extent Plaintiff relies on his naked allegation that Shrader and Doughty

breached their fiduciary duty to the shareholders in connection with the sale to Carlyle, the

Court rejects that argument for the reasons stated in the Nemec decision. As discussed in

more detail below, the Delaware Supreme Court rejected the state law claims against Booz

Allen on the same facts involved in the instant case. All of Booz Allen’s shareholders

profited from the Carlyle transaction. “The directors did nothing unfair and breached no

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 11 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 12 - 09CV0652

fiduciary duty by causing the Company to exercise its absolute contractual right to redeem

the retired stockholders’ shares at a time that was most advantageous to the Company’s

working stockholders.” Nemec, supra, at 13-14. “The fact that some directors were in the

group of working stockholders who received a pro rata share of the [value of the stock

repurchased from retired employees] did not make it an interested transaction.” Id. at 14. 

All of the director stockholders, including Shrader and Doughty, “received the same pro

rata benefit as all other stockholders similarly situated.” Id. (footnote omitted). “The

directors made a rational business judgment.” Id. Those stockholders who retired before

the deal closed were not entitled to special treatment. Id. 

This claim’s second problem is causation. Proximate cause is an element of this

tort. Dryden v. Tri-Valley Growers, 65 Cal. App. 3d 990, 997-98 (1977). The complaint

itself states that Plaintiff voluntarily reject the offer to be reinstated without the retirement

recommendation and voluntarily retired. Like the breach of contract claim just discussed,

the pleading shows a break in the chain of causation.

In addition, the connection between the 2008 leveraged buy-out and the 2003

performance evaluation is tenuous. The complaint is rather vague on when Booz Allen

first considered selling its government business to the Carlyle Group, but the

announcement to shareholders states it was first discussed in the months leading up to

November 2007. [FAC ¶¶ 255 (alleging early 2007), 389 (quoting Information Circular);

but see id. ¶ 421 (alleging sale was “actively” considered in 2004).] The current pleading

contains no facts to suggest the Carlyle transaction was reasonably foreseeable in 2003. 

Finally, this claim fails for a third and separate reason. California’s two year statute

of limitation governs the tort claim of interfering with a contract. Cal. Civ. Proc. Code §

339; Anderson v. Allstate Ins. Co., 630 F.2d 677, 683 (9th Cir. 1980). As discussed in

connection with the breach of contract claim, the claim is barred on the face of the

complaint. Though Plaintiff argues that he is invoking the discovery rule to delay the

commencement of the statute of limitation, the current pleading lacks factual support for

that doctrine. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 12 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

It is unclear who Plaintiff is suing in these three claims, especially when compared to

the arguments in the briefs. By its express terms, the Officer’s Stock Plan is an agreement with

the corporate entity. The Plan delegates certain responsibilities and discretion to the Board of

Directors, but Plaintiff would have to allege a breach of this contract that is connected to a

specific obligation in order to name any of the directors as defendants. 

- 13 - 09CV0652

The Court GRANTS Defendants’ motion to dismiss this claim.

V. CLAIMS GOVERNED BY THE NEMEC DECISION

The complaint alleges three state law claims based on Booz Allen’s Stock Rights

Plan.5

 The parties agree that Delaware law applies to claims arising out of the Officer’s

Stock Rights Plan because it contains a Delaware choice-of-law provision. [Def.’s Ex. A ¶

18 & Ex. B ¶ 14.] The parties further agree that the decision by the Delaware Supreme

Court affirming the Chancery Court’s dismissal of parallel claims in the Nemec action

controls. 

A. Breach of Implied Covenant of Good Faith and Fair Dealing

Plaintiff alleges that Defendants breached the covenant of good faith and fair dealing

implied in the Officer’s Stock Rights Plan. [FAC ¶ 493.] Plaintiff alleges Booz Allen

breached the duty when it re-purchased his shares in 2007 because the leveraged buyout by

Carlyle “was all but certain to occur.” [Id. ¶ 494.] Plaintiff alleges that the $16 million he

would have realized from the Carlyle transaction “went directly to the pockets of the

Director Defendants.” [Id. ¶ 496.] 

For the reasons stated by the Delaware Supreme Court in the parallel action, the

Court concludes Plaintiff’s breach of the implied covenant claim fails as a matter of law. 

Nemec, supra, at 10-16. Booz Allen’s Plan explicitly authorized it to purchase its shares at

book value two years after an executive retired. [Defs.’ Ex. A ¶ 10 & Ex. B ¶ 7(b).] 

Plaintiff “‘cannot base a claim for breach of the implied covenant on conduct authorized by

the agreement.’” Nemec, supra, at 10 (quoting Dunlap v. State Farm Fire & Cas. Co., 878

A.2d 434, 441 (Del. 2005)). The bare allegation that the directors were acting in their own

self-interest does not save the claim. Booz Allen and the Directors owe a fiduciary duty to

all 300 shareholders, and they could not make a special exception for a small group of

shareholders who had worked for the company but had already retired. Id. at 13-14.

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 13 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

In his opposition brief, Plaintiff raises on employment contract to bolster his claim.

[Pl.’s Opp. Br. at 55.] The Court does not address this new theory because the third count does

not rely on that separate contract. [Cf. FAC ¶¶ 491-98.] Plaintiff’s wholesale incorporation

of more than four hundred other paragraphs does not give fair notice of this theory. See

McHenry v. Renne, 84 F.3d 1172 (9th Cir. 1996). 

- 14 - 09CV0652

The Court GRANTS Defendants’ motion to dismiss count three with prejudice.6

B. Breach of Fiduciary Duty

Plaintiff alleges a breach of fiduciary duty claim against the Director Defendants on

the theory that they decided to repurchase Plaintiff’s 30,500 shares when they knew the

Carlyle deal was “almost certain” to close and impact the value of the common stock. FAC

¶¶ 499-504. 

The Court again adopts the analysis of the Delaware Supreme Court in Nemec. 

Plaintiff’s breach of fiduciary duty claim fails as a matter of law because the Plan explicitly

authorized Booz Allen to repurchase shares from retired executives. The Plan controlled

the timing of Booz Allen’s right (two years after retirement) and the purchase price (book

value). [Defs.’ Ex. A ¶ 10 & Ex. B ¶ 7(b).] Consequently, the contract supercedes and

forecloses the breach of fiduciary duty claim. Moreover, Plaintiff has not alleged facts to

show that the named Defendants had any role in Booz Allen’s routine exercise of its

contractual right to repurchase its stock. Nor do the alleged facts demonstrate conduct in

the Directors’ self-interest that was adverse to the financial interests of the corporation and

its shareholders. 

The Court GRANTS Defendants’ motion to dismiss this claim with prejudice.

C. Unjust Enrichment

Plaintiff’s unjust enrichment claim against the Director Defendants is also based

upon the Officer’s Stock Rights Plan, and consequently is governed by the Nemec decision. 

Plaintiff did not oppose the motion to dismiss this cause of action. The Court agrees with

the analysis in Nemec that this claim fails as a matter of law. Plaintiff complains about

conduct that is clearly governed by the contract with Booz Allen, thus, there is no valid

claim in tort. In addition, the Carlyle deal benefitted all stockholders equally – the

executives who had already retired were not entitled to special treatment.

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 14 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

The Ninth Circuit’s decision in Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d 353 (9th Cir. 2005) does not assist Defendants. In that case, the plaintiff named the

(continued...)

- 15 - 09CV0652

The Court GRANTS Defendants’ motion to dismiss this claim with prejudice.

VI. RICO

“The Racketeer Influenced and Corrupt Organizations Act (‘RICO’) provides a

private civil action to recover treble damages for injury ‘by reason of a violation of’ its

substantive provisions.” Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 481 (1985)

(quoting 18 U.S.C. § 1964(c)). “A civil RICO claim requires allegations of the conduct of

an enterprise through a pattern of racketeering activity that proximately caused injury to the

plaintiff.” Swartz v. KPMG LLP, 476 F.3d 756, 760-61 (9th Cir. 2007); Grimmett v.

Brown, 75 F.3d 506, 510 (9th Cir. 1996) (identifying elements). 

A. Alternative Theories

The FAC set forth two alternate theories under the RICO statute, but Plaintiff

withdraws the association-in-fact theory pending further factual development. [Pl.’s Opp.

Br. at 30 & 33; see generally Odom v. Microsoft Corp., 486 F.3d 541, 548 (9th Cir. 2007)

(discussing associated-in-fact enterprise).] The Court DISMISSES the RICO claim

labeled “Count One – RICO” and the dependent conspiracy claim labeled “Count Two –

RICO Conspiracy.” [FAC ¶¶ 444-56 & 469-79.] 

B. Person and Enterprise Elements

Defendants move to dismiss the “alternative” RICO count on the ground that it does

not allege an enterprise that is distinct from the persons who conducted the pattern of

racketeering activity. [Id. ¶¶ 458-68 & 480-90.] Defendants argue that employees who act

in the normal course of their employment are inseparable from the corporation. [Defs.’

Mot. at 20.] 

The Supreme Court has rejected this argument. “[T]o establish liability under §

1962(c) one must allege and prove the existence of two distinct entities: (1) a ‘person’; and

(2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name.” 

Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001).7

 The statute expressly

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 15 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

(...continued)

corporate entity as the “person”, and incorrectly identified the corporation plus its law firms

as the “enterprise.”

- 16 - 09CV0652

defines “enterprise” to include a corporation. 18 U.S.C. § 1961(4). Here, Plaintiff alleges

that the “enterprise” is the Booz Allen corporation, and that the “persons” are Shrader and

his four “collaborators” Appleby, Strickland, Garner, and Doughty. [FAC ¶¶ 459-60.] A

corporation is a separate legal entity from its employees. Cedric, 533 U.S. at 163

(“incorporation’s basic purpose is to create a distinct legal entity, with legal rights,

obligations, powers, and privileges different from those of the natural individuals who

created it, who own it, or whom it employs.”); id. at 164 (RICO “protects the public from

those who would unlawfully use an ‘enterprise’ (whether legitimate or illegitimate) as a

‘vehicle’ through which ‘unlawful . . . activity is committed”) (citations omitted); Sever v.

Alaska Pulp Corp., 978 F.2d 1529, 1534 (9th Cir. 1992) (corporate entity qualifies as

distinct RICO “enterprise” when officers who operate it are the alleged “persons”). “A

corporate employee who conducts the corporation’s affairs through an unlawful RICO

‘pattern of activity,’ § 1962(c), uses that corporation as a ‘vehicle’ whether he is, or is not,

its sole owner.” Cedric, 533 U.S. at 164-65; Sever, 978 F.2d at 1534. The Supreme Court

applied this RICO provision to high-ranking employees who act outside the scope of their

authority. Cedric, 533 U.S. at 165. Based on this authority, Plaintiff has pled two distinct

entities in his Alternative RICO count.

C. Pattern of Predicate Acts

Congress defined “racketeering activity” as “any act or threat involving murder,

kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or

dealing in a controlled substance . . . which is punishable by imprisonment for more than

one year” and other serious crimes, such as fraud. 18 U.S.C. § 1961(1). A “pattern of

racketeering activity” requires at least two predicate acts. § 1961(5). “A plaintiff or

prosecutor must show that the racketeering predicates are related, and that they amount to

or pose the threat of continued criminal activity.” H.J., Inc. v. Northwestern Bell Tel. Co.,

492 U.S. 229, 239 (1989).

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 16 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 17 - 09CV0652

Plaintiff attempts to plead a pattern of predicate acts solely by reciting the elements

of the RICO statute and incorporating his entire complaint. [FAC ¶¶ 461-62.] The

complaint states that Defendants violated the mail and wire fraud statutes and committed

extortion. [Id.] Defendants combed through the verbose complaint to find conduct to

match these generic allegations. Plaintiff’s opposition does not dispute the Defendants’

interpretation of the complaint. [Pl.’s Opp. Br. at 20.] Plaintiff relies on three alleged acts

of mail and wire fraud and two acts of extortion. 

1. Mail and Wire Fraud

Plaintiff alleges the first predicate act was a March 18, 2003 “mailing.” [FAC ¶

120.] He alleges the five key Directors caused the Board of Booz Allen to reduce by onethird the amount of stock to be distributed under the Officer’s Stock Rights Plan. [Id. ¶

119.] Plaintiff alleges that the notice gave a false reason for the change. [Id. ¶¶ 121-26.] 

He alleges the real reason was to “maintain Individual Defendants’ relative voting strength

and make a split-up recapitalization easier of accomplishment.” [Id. ¶ 126.] 

The second predicate act allegedly occurred on September 30, 2003, when Plaintiff

received his assessment document. [Id. ¶ 173.] He alleges it falsely stated that he should

retire, which was part of the overall scheme to gain control of Booz Allen by “purging”

executives. [Id. ¶¶ 172, 174-75.]

Third, on December 12, 2004, Defendant Shrader sent an email stating that Booz

Allen continued to follow the “One Firm” policy. [FAC ¶ 426.] Plaintiff alleges the

statement was false because Shrader was considering selling part of the company. [Id. ¶¶

427-34.] 

Plaintiff alleges the first act violated the federal mail fraud statute, 18 U.S.C. § 1341,

and the second and third violated the wire fraud statute, 18 U.S.C. § 1343. FAC ¶ 462. To

plead a predicate act of mail or wire fraud, the complaint must show that defendants (1)

formed a scheme to defraud; (2) used the United States mails or wires in furtherance of the

scheme; and (3) had the specific intent to deceive. Schreiber Distrib., 806 F.2d at 1399-

1400. The specific intent element is satisfied by “the existence of a scheme which was

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 17 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

Plaintiff has these documents, as he attached them to a declaration. Pl.’s Exs. 6-8.

- 18 - 09CV0652

‘reasonably calculated to deceive persons of ordinary prudence and comprehension.’” Id.

(quoting United States v. Green, 745 F.2d 1205, 1207 (9th Cir. 1985)). 

When a plaintiff relies on charges of wire and mail fraud as the predicate acts of a

RICO claim, the factual circumstances of the fraud itself must be pled with particularity as

required by Rule 9(b). Odom, 486 F.3d at 554; Lancaster Cmty. Hosp. v. Antelope Valley

Hosp. Dist., 940 F.2d 397, 405 (9th Cir. 1991). “Rule 9(b) does not allow a complaint

merely to lump multiple defendants together but requires plaintiffs to differentiate their

allegations . . . and inform each defendant separately of the allegations surrounding his

alleged participation in the fraud.” Swartz, 476 F.3d at 764-65 (quotations and alterations

omitted); Moore v. Kayport Package Express, Inc., 885 F.2d 531, 541 (9th Cir. 1989)

(plaintiff must identify role of each defendant in the alleged RICO scheme). 

The Court agrees with Defendants that Plaintiff has not provided the requisite details

of who sent the March 18, 2003 mailing to whom. And while Plaintiff asks the Court to

infer that the March 18 notice was sent via United States mail and the September 30

document was sent by email, any amended pleading should be specific and eliminate any

guess work. Similarly, Plaintiff has not identified the recipients of the December 12, 2004

email. As written, the FAC violates Rule 9(b).8

 

More importantly, the instant pleading fails to allege a plausible scheme to defraud. 

Shrader’s conduct to restructure Booz Allen constituted normal operations of a for-profit

corporation. See Nemec, supra, at 13-16 & 18-21 (noting, among other flaws, that the

retired executives’ legal position sought special treatment, whereas Booz Allen’s conduct

benefitted all shareholders equally). The Court agrees with Defendants’ criticism that

Plaintiff’s “allegations are woefully inadequate and unsubstantiated.” [Defs.’ Mot. at 10.] 

To plead fraud as a predicate act of racketeering, Plaintiff must provide more than “a

jumble of accusations and suspicions.” [Id.] Plaintiff’s attack on Shrader’s business

decisions is based on hindsight, unreasonable inferences, and labels of illegitimate motives. 

See, infra, pages 31-33 (discussing securities fraud cause of action).

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 18 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 19 - 09CV0652

Moreover, the FAC does not notify Defendants Appleby, Strickland, Garner, and

Doughty of their role in the alleged fraudulent scheme; instead, Plaintiff lumps these

Directors into a group of “collaborators” with CEO Shrader. [E.g., FAC ¶ 119 (referring to

“the Individual defendants” as a group); id. ¶ 182 (same, despite identification of only three

defendants in ¶ 177); id. ¶¶ 205, 405.] The sparse allegations against these four executives,

like those against Shrader, are conclusory. [E.g., id. ¶ 144-45 (labeling Garner and

Doughty as “Shrader loyalists”); id. ¶ 169 (alleging Garner “knew” Shrader’s evaluation of

Warbreaker program was “false”); id. ¶ 211 (labeling Garner as “one of Shrader’s

lieutenants”).] Plaintiff labels conduct as wrongful, when the stated facts appear either

wholly innocent, well-within the discretion and job duty of the executive, or unrelated to

the theory of his case. [E.g., id. ¶¶ 83 & 346 (Strickland was “acquainted with the

mechanics” of a leveraged buy out from prior work experience), id. ¶ 99 (Strickland

discussed a change in the stock plan that was rejected); id. ¶ 172 (Doughty completed

Plaintiff’s retirement recommendation form); id. ¶¶ 293-306 (Strickland was part of an

operations team that rejected a proposal without giving a reason); id. ¶¶ 315-18 (executives

bought expensive homes in Florida and commute to work on private jet); id. ¶ 413 (listing

high salaries); id. ¶ 419 (Doughty offered to reinstate Plaintiff).] Consequently, the FAC

does not adequately allege that these four directors had the specific intent to deceive or that

they joined a scheme to defraud. The FAC fails to plead the RICO claim against each

defendant. Swartz, 476 F.3d at 765 (granting motion to dismiss conclusory RICO

allegations against group of defendants); Moore, 885 F.2d at 541-42 (granting motion to

dismiss RICO claim for failing to specify the role of each defendant). 

2. Extortion

Plaintiff alleges two acts of extortion. He relies on the forced retirement of two 

senior executives at Booz Allen. [E.g., FAC ¶¶ 6 & 8.]

Bruce Pasternack joined Booz Allen in 1976 and retired in 2004. [Id. ¶¶ 188-204.] 

During his 28-year tenure, he accumulated 74,000 shares of common stock. [Id. ¶ 204.] In

1998, Defendant Shrader was chosen as CEO over Pasternack. [Id. ¶ 188.] After a

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 19 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 20 - 09CV0652

performance evaluation in 2004, Pasternack was told to transition to a part-time consulting

position. [Id. ¶ 192.] Pasternack disagreed with the negative assessment, but at the time,

believed it was an independent, unbiased evaluation. [Id. ¶¶ 191, 193-94, 202.] Plaintiff

alleges that Pasternack was told “in no uncertain terms that he must sign the voluntary

retirement forms immediately or termination would be initiated.” [Id. ¶ 197.] 

Reginald Boudinot joined Booz Allen in 1991 and retired in 2007. [Id. ¶¶ 205, 219.] 

Plaintiff alleges that, in 2005, Defendant Garner informed Boudinot that his evaluation was

“going very poorly; so poorly in fact that members of the PCC [partners compensation

committee] were discussing his forced termination for cause.” [Id. ¶ 214.] “Garner made

an explicit threat to Boudinot that unless Boudinot immediately retired and granted BAH

the option to purchase his shares at book value in two years, BAH would ruin him

professionally and financially.” [Id. ¶ 221.] Garner advised Boudinot that he could save

valuable employment-related benefits and his reputation if he voluntarily retired. [Id. ¶¶

215-16.] “Out of fear of the economic consequences, Boudinot acceded to the demand of

Garner and submitted his retirement.” [Id. ¶ 219.] As with the other senior executives,

Plaintiff alleges the negative assessment was false and was part of Shrader’s scheme to take

control of Booz Allen. [Id. ¶¶ 222.] 

The RICO Act expressly recognizes an act or threat involving extortion as a

predicate act. 18 U.S.C. § 1961(1)(A); Wilkie v. Robbins, 551 U.S. 537, 563 (2007). The

federal extortion statute, known as the Hobbs Act, defines extortion as “the obtaining of

property from another, with his consent, induced by wrongful use of actual or threatened

force, violence, or fear, or under color of official right.” 18 U.S.C. § 1951(b)(2). The

“obtaining” requirement includes the deprivation of property from a victim and the

acquisition of that property by the other. Scheidler v. NOW, Inc., 537 U.S. 393, 404

(2003). The property must have some value. Id. at 405 (something “they could exercise,

transfer, or sell”). The extortionist must act with the wrongful intent to obtain money or

property that he knew he was not entitled to receive or knew he lacked a lawful claim to it. 

Streck v. Peters, 855 F. Supp. 1156, 1163 (D. Haw. 1994) (citations omitted).

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 20 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 21 - 09CV0652

When state law punishes extortion as a felony, “it cannot qualify as a predicate

offense for a RICO suit unless it is ‘capable of being generically classified as extortionate’”

in the traditional sense. Wilkie, 551 U.S. at 567 (quoting Scheidler, 537 U.S. at 402-03)). 

“[S]uch ‘generic’ extortion is defined as ‘obtaining something of value from another with

his consent induced by the wrongful use of force, fear, or threats.’” Scheidler, 537 U.S. at

409-10 (quoting United States v. Nardello, 393 U.S. 286, 290 (1969)).

“The threat to do that which one is contractually permitted to do is not extortion and

cannot possibly fall within any imaginable criminal definition of extortion.” Zaro

Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276, 283 (S.D.N.Y. 1991); Peterson v.

Philadelphia Stock Exch., 717 F. Supp. 332 (E.D. Pa. 1989) (dismissing RICO claim

because defendants’ use of contractual privileges is not wrongful within meaning of

extortion).

The Court must accept as true Plaintiff’s allegations that the executives were forced

out of the company under false pretenses; however, the Court does not accept his legal

conclusion that these facts constitute extortion. Sprewell v. Golden State Warriors, 266

F.3d 979, 988 (9th Cir. 2001); Rothman v. Vedder Park Mgmt., 912 F.2d 315, 317-18 (9th

Cir. 1990) (affirming dismissal of RICO claim based on extortion). The alleged facts

describe classic tort and contract claims. Plaintiff cannot transform them into acts of

extortion, with the prospect of trebling damages, simply by labeling them as racketeering. 

“[T]he purpose of civil RICO liability does not extend to deterring any illegal act such as

retaliatory firings for which there are state and common law remedies.” Hecht v.

Commerce Clearing House, Inc., 897 F.2d 21, 22-24 (2d Cir. 1990) (collecting

employment cases pled as RICO violations, even when employee was fired for refusing to

cooperate with his employer’s racketeering activity); Flowers v. Cont’l Grain Co., 775 F.2d

1051, 1052-54 (8th Cir. 1985) (dismissing RICO complaint alleging threat of economic

loss due to poor job performance, which, if anything, stated a tort claim); Cardwell v. Sears

Roebuck & Co., 821 F. Supp. 406, 408-09 (D. S.C. 1993) (threat of being fired from job is

not extortion); Kovian v. Fulton Cnty. Nat’l Bank & Trust Co., 647 F. Supp. 830, 835 n.7

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 21 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

Defendants question whether Pasternack and Boudinot had a property right in

continued employment if they were “at will” employees. Plaintiff’s counter argument is that

Booz Allen threatened to fire the executives for cause. To the extent Plaintiff relies on

implied-in-fact promises concerning performance standards (discussed above in the breach of

contract claim), Plaintiff adequately alleged wrongful conduct. [FAC ¶¶ 202 & 220.] 

10Plaintiff relies on the terms of the leveraged buy-out to show that Directors who held

shares benefitted “by eliminating a number of persons who would share in the profit.” [FAC

¶ 46; see e.g., id. ¶¶ 5, 50-57, 258-60, 320, 390, 405.]

- 22 - 09CV0652

(N.D.N.Y. 1986) (disregarding conclusory allegations of extortion as predicate acts in civil

RICO action). On the facts alleged, Plaintiff’s allegation that the executives were deprived

of employment does not satisfy the traditional definition of extortion.9

 Scheidler, 537 U.S.

at 405-10. 

Plaintiff’s alternate claim that the executives were forced to relinquish company

stock also falls short of stating a claim. Booz Allen was entitled to re-purchase Boudinot’s

and Pasternack’s stock two years after they retired. As the Delaware Supreme Court stated

in the Nemec decision, the company as a whole (and all of its 300 shareholders whether

working or non-working) immediately benefitted from the exercise of that right, and when

the Carlyle deal closed in July 2008, all shareholders (including the approximately 100

shareholders who were Directors at Booz Allen) received the same pro rata benefit as all

other stockholders similarly situated. See Sosa v. DIRECTV, Inc., 437 F.3d 923, 939 (9th

Cir. 2006). There was no wrongful acquisition of property by the perpetrators. Scheidler,

537 U.S. at 404. Moreover, any connection to the premium price paid by the Carlyle

Group in 2008 is too tenuous to support a claim that the five Individual Defendants’

personally benefitted when Pasternack and Boudinot were told to retire.10 In any event,

RICO cannot be used to punish conduct in connection with the sale of a security, which

Plaintiff attempts to plead here. E.g., FAC ¶¶ 204, 219, & 429. The Court discusses this

bar next.

3. Securities Fraud is Not a Predicate Act of RICO

In 1995, Congress enacted the Private Securities Litigation Reform Act which

amended the RICO statute to eliminate securities fraud as a predicate offense capable of

supporting a RICO claim. The RICO statute now provides that “no person may rely upon

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 22 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 23 - 09CV0652

any conduct that would have been actionable as fraud in the purchase or sale of securities to

establish a violation of section 1962.” 18 U.S.C. § 1964(c). This bar prevents a plaintiff

from artfully pleading other acts (such as mail fraud or extortion) when the wrongful act is

based on conduct “in connection with” the purchase or sale of stock that would have been

actionable as securities fraud. Swartz, 476 F.3d at 761; accord Bald Eagle Area Sch. Dist.

v. Keystone Fin., Inc., 189 F.3d 321, 329-30 (3d Cir. 1999) (“a plaintiff cannot avoid the

RICO Amendment’s bar by pleading mail fraud, wire fraud and bank fraud as predicate

offenses in a civil RICO action if the conduct giving rise to those predicate offenses

amounts to securities fraud”). 

The clear gravamen of Plaintiff’s RICO claim is that he was deprived of the benefit

of selling his stock to Carlyle at a premium price in 2008 because Booz Allen bought his

shares in 2007. [E.g., FAC ¶¶ 466 & 488 (alleging he lost millions of dollars) & p. 121

(prayer for damages “believed to be in excess of $30 million, trebled pursuant to RICO”).] 

Plaintiff has calculated his damages by the value of his 30,500 shares if they had been part

of the leveraged buy-out. [Id. ¶ 2.] He explicitly states that Defendants’ actions to force

him to retire (and thus trigger Booz Allen’s right to repurchase his stock) without revealing

the potential plan to sell the government division “was a manipulative device in connection

with the sale of a security.” [Id. ¶¶ 415-29.]

Plaintiff argues that he should be allowed to plead his RICO claim as an alternative

theory to his securities claims until discovery shows whether or not the stock sale was

incidental to his RICO injury. However, the Ninth Circuit frequently dismisses securitiesbased allegations from a RICO cause of action at the pleading stage. Swartz, 476 F.3d at

760-61; see Howard v. Am. Online, Inc., 208 F.3d 741, 749 (9th Cir. 2000) (dismissing

RICO claim under Rule 12(b)(6) even though plaintiffs did not have standing to bring an

alternative claim for securities fraud); accord Bald Eagle, 189 F.3d at 328-29 & n.9

(plaintiff’s own words demonstrated RICO claim was barred and must be dismissed for

failure to state a claim). Here, the flaw is apparent from the current pleading. 

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 23 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11Defendants also argue the FAC fails to allege a “pattern” of racketeering activity.

Because each of the purported predicate acts has other problems, the Court reserves ruling on

this RICO element. H.J., Inc., 492 U.S. at 239-40. 

- 24 - 09CV0652

Plaintiff’s brief sets forth a theory that the linchpin of his RICO claim is that Booz

Allen failed to offer him a non-confidentiality agreement while he was employed. [Pl.’s

Opp. Br. at 15-20.] The Court will allow Plaintiff an opportunity to amend his complaint if

he disconnects the RICO claim from conduct that “would have been actionable” as

securities fraud.11 18 U.S.C. § 1964(c). 

D. Proximate Cause of Injury to Plaintiff’s Property

A RICO plaintiff must have standing. Sedima, 473 U.S. at 496. Standing is

conferred on a plaintiff whose business or property has been injured “by the conduct

constituting the violation.” Id.; 18 U.S.C. § 1964(c) (remedies available for injury “by

reason of” a RICO violation). The damages must have been proximately caused by the

racketeering conduct. Holmes v. Securities Investor Prot. Corp., 503 U.S. 258, 265-68 &

n. 11 (1992); Reddy v. Litton Indus., Inc., 912 F.2d 291, 293-94 (9th Cir. 1990).

1. Cognizable Injury to “Business or Property”

Defendants first argue that Plaintiff has not pled a cognizable injury as defined by

the RICO Act. The FAC alleges loss of employment (including salary and benefits and

future opportunities), emotional distress (including a ruined reputation), and millions of

dollars. [FAC ¶¶ 464 & 466.]

To the extent that Plaintiff seeks compensation under RICO for the infliction of

emotional distress, it is not a compensable injury as a matter of law. Berg v. First State Ins.

Co., 915 F.2d 460, 464 (9th Cir. 1990). Nor does RICO compensate for intangible harm to

one’s business reputation or the potential for future income. In re Teledyne Def.

Contracting Derivative Litig., 849 F. Supp. 1369, 1372 n.1 (C.D. Cal. 1993); see Berg, 915

F.2d at 464 (plaintiff cannot recover injury to intangible property interest in RICO claim). 

His claim of the loss of millions of dollars might be a concrete injury as defined by

RICO; however, to the extent that Plaintiff seeks to measure his financial loss by the price

Carlyle paid for Booz Allen shares, it is prohibited by the securities fraud bar. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 24 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 25 - 09CV0652

This leaves Plaintiff with the alleged injury of loss of employment and future

opportunities. The Ninth Circuit held loss of employment and interference with

employment opportunities can be a RICO injury in certain circumstances. Diaz v. Gates,

420 F.3d 897 (9th Cir. 2005) (en banc) (per curiam) (when Los Angeles Police Department

illegally arrested and unjustly incarcerated plaintiff as part of Rampart scandal, his inability

to pursue gainful employment was an injury to “business or property” as required by the

RICO Act); Hunt v. Weatherbee, 626 F. Supp. 1097, 1100-01 (D. Mass. 1986). The Court

DENIES Defendants’ motion to the extent that Plaintiff has artfully pled loss of

employment and employment opportunities as a type of injury recoverable under RICO. 

Diaz, 420 F.3d at 901-02.

2. Proximate Cause

Defendants further argue the alleged RICO violations did not cause the injuries that

Plaintiff suffered. A claim is cognizable under RICO only if there is proximate cause,

which “requires careful consideration of the ‘relation between the injury asserted and the

injurious conduct alleged.’” Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 462 (2006). 

Direct injuries suffice, but remote or attenuated injuries do not. Id. at 458-59; accord Hemi

Group, LLC v. New York, 130 S. Ct. 983, 988-91 (2010) (proximate cause for RICO claim

requires “direct relationship” between the fraud and the harm).

Defendants argue that Plaintiff’s claimed loss of employment and millions of dollars

was caused by his own voluntary decision to retire. They argue that the allegations of mail

and wire fraud were not connected to Plaintiff’s decision to retire, and the allegations of

extortion caused harm to third parties. Oregon Laborers-Employees Health & Welfare

Trust Fund v. Phillip Morris Inc., 185 F.3d 957, 963 (9th Cir. 1999) (proximate cause

lacking when alleged misconduct injured third parties) (citing Holmes, 503 U.S. at 268).

Taking the arguments in reverse order, the Court agrees with Defendants’ position

that the purported extortion of other executives (Pasternack and Boudinot) was not the

proximate cause of Plaintiff’s alleged RICO injuries. Phillip Morris, 185 F.3d at 963. 

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 25 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 12The FAC names all “Defendants,” but Plaintiff states this was an error and that he only

meant to name the five key Directors and the company.

- 26 - 09CV0652

Second, as discussed above in connection with the breach of contract claim, the

Court found Plaintiff’s theory of causation suffers from the obvious intervening event of

deciding to retire voluntarily, rather than be reinstated without the recommendation to

retire. This same flaw affects Plaintiff’s RICO claim. His causation theory is tenuous in

both fact and logic. Hecht, 897 F.2d at 23-24 (loss of employment too tenuous to be

proximately caused by employee’s refusal to participate in employer’s racketeering

scheme). Nonetheless, the Court will allow Plaintiff leave to amend to cure the deficiency

in his proximate cause allegation relative to the loss of employment. Plaintiff’s opposition

brief describes a theory that purportedly shows the links between the negative assessment

review (which is alleged to be wire fraud) and the false belief that lead him to leave his

position at Booz Allen. [Pl.’s Opp. Br. at 30.] The Court will re-visit the proximate cause

issue if Plaintiff chooses to amend his RICO claim.

For all of the above-stated reasons, the Court GRANTS Defendants’ motion to

dismiss “Alternative Count One – RICO.”

E. RICO Conspiracy

Plaintiff’s RICO conspiracy claim depends upon the survival of a primary RICO

claim. Odom, 486 F.3d at 547; Avalos v. Baca, 596 F.3d 583, 593 (9th Cir. 2010) (to plead

RICO conspiracy, “plaintiff must show that defendants objectively manifested their

agreement to participate in a racketeering enterprise through the commission of two or

more predicate crimes”). Accordingly, the Court GRANTS Defendants’ motion to dismiss

“Alternative Count Two – RICO Conspiracy.” 

VII. SECURITIES FRAUD

 Plaintiff alleges the “Individual Defendants” violated federal and state securities

laws by failing to disclose “that certain fundamental long standing BAH policies were

under examination.”12 [FAC ¶ 511.] Specifically, Plaintiff relies on “the bedrock

principle” that Booz Allen would remain “One Firm.” [Id. ¶ 529.] Plaintiff alleges the

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 26 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 27 - 09CV0652

violation occurred in October 2004, when the partners recommended Plaintiff retire in two

years, and again in March 2005, when Plaintiff retired. [Id. ¶ 511; id. ¶ 429 (alleging splitup and plan to seize control were “in connection with the sale of a security”).] He alleges

that if he had been told that Defendants “had determined to explore and/or effect a Split-up

and sale of the Firm,” he would have delayed his retirement and benefitted from the sixfold increase in the value of his Booz Allen common stock. [Id. ¶ 434, 511, 512, 514, 531.]

A. Federal Securities Fraud Claim

“To state a claim under § 10(b) of the Securities and Exchange Act, 15 U.S.C. §

78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must show that there has been a

misstatement or omission of material fact, made with scienter, which proximately caused

his or her injury.” McCormick v. Fund Am. Co., Inc., 26 F.3d 869, 875-76 (9th Cir. 1994);

Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); Provenz v. Miller, 102 F.3d

1478, 1483 (9th Cir. 1996). 

A securities complaint must “specify each statement alleged to have been

misleading, [and] the reason or reasons why the statement is misleading, and if an

allegation regarding the statement or omission is made on information and belief, the

complaint must state with particularity all facts on which the belief is formed.” 15 U.S.C. §

78u-4(b)(1); No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. West

Holding Corp., 320 F.3d 920, 931 (9th Cir. 2003). In addition, Rule 9(b) requires a

plaintiff to allege fraud with particularity. In re Stat Elecs. Sec. Litig., 89 F.3d 1399, 1401

(9th Cir. 1996). 

“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic Inc.

v. Levinson, 485 U.S. 224, 239 n.17 (1988). The claim must “state with particularity facts

giving rise to a strong inference” that each defendant acted with the intent to defraud or

with deliberate recklessness. 15 U.S.C. § 78u-4(b)(2); Am. West, 320 F.3d at 931. The

Court accepts as true Plaintiff’s allegations; however, with regard to the element of

scienter, “the court must consider all reasonable inferences to be drawn from the

allegations, including inferences unfavorable to the plaintiffs.” Gompper v. VISX, Inc., 298

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 27 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 28 - 09CV0652

F.3d 893, 897 (9th Cir. 2002). “[T]he court ultimately reviews the complaint in its entirety

to determine whether the totality of facts and inferences demonstrate a strong inference of

scienter.” Id. at 895. The “inference of scienter must be more than merely plausible or

reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). 

1. Duty to Disclose

Plaintiff’s securities claim is based upon a failure to disclose information, as

opposed to an affirmative misstatement of fact; consequently, Plaintiff must identify a duty

to disclose. Basic, 485 U.S. at 239; Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d

1151, 1157 (9th Cir. 1996) (“Rule 10b-5 is violated by nondisclosure only when there is a

duty to disclose.”) (citation omitted). “The person who omitted the material information

must have had a duty to disclose it to the person supposedly harmed by the omission.” 

Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 939 (9th Cir. 2009).

Plaintiff intended to identify the five “Individual Defendants” (i.e., Shrader,

Appleby, Strickland, Garner, and Doughty) as the defendants. Defendants cite clear and

controlling authority that these executives did not, as a matter of law, owe any special duty

toward Plaintiff as a shareholder. E.g., In re Interactive Network, Inc. Sec. Litig., 948 F.

Supp. 917, 920 (N.D. Cal. 1996) (noting absence of any authority that corporation and vice

president had general duty to disclose non-public information). 

Moreover, the facts alleged contradict any argument that the Individual Defendants

were majority shareholders in relation to Plaintiff and thus owed him a special duty. 

Powers v. British Vita, P.L.C., 57 F.3d 176, 188-89 (2d Cir. 1995) (relationship of trust and

confidence and unique access to information can give rise to controlling shareholders’ duty

to disclose material information to fellow director/minority shareholder). The FAC states

the 23 “Director Defendants” collectively owned only 19% of the shares at the time of the

Carlyle transaction. [FAC ¶ 10.] Clearly, the smaller subgroup of five “Individual

Defendants” were minority shareholders. 

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 28 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 29 - 09CV0652

Plaintiff apparently recognizes this problem as his opposition brief states that the

claim is also against Booz Allen, the corporation. Plaintiff argues that the corporation is

liable for the misconduct of its executives under the theory of respondent superior. The

parties’ written briefs focused primarily on the five Individual Defendants. The Court will

reserve its ruling as to the duty of the corporation until the pleading expressly identifies

Booz Allen as the defendant. 

Plaintiff, however, faces a significant barrier in any attempt to sue Booz Allen for

securities fraud. Plaintiff suggests that he will rely on a line of cases in which a minority

shareholder, who was also an employee deciding when to retire, stated a claim against a

closely-held corporation. In those cases, the shareholder/executive was negotiating the

terms of his retirement with a corporation that would be exercising its option to re-purchase

its stock in accord with the terms of the employment contract. The courts held the closelyheld corporation had a duty to disclose material information, such as a planned merger, or

to refrain from repurchasing the executive’s shares at book value. E.g., McCormick v.

Fund Am. Co., Inc., 26 F.3d 869, 875-76 (9th Cir. 1994) (citing Smith v. Duff & Phelps,

Inc., 891 F.2d 1567, 1572-75 (11th Cir. 1990) (employee/shareholder retired from closelyheld corporation); Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435-39 (7th Cir. 1987)

(officer/shareholder resigned from closely-held corporation); Rizzo v. MacManus Group,

Inc., 158 F. Supp. 2d 297, 302-03 (S.D.N.Y. 2001) (CEO’s severance agreement from

privately-held corporation); see Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 175,

179 (2d Cir. 2001) (privately-held corporation conceded it had duty to disclose material

information to executive, who agreed to resign rather than be fired). 

Plaintiff describes Booz Allen as a corporation. [FAC ¶ 9 (alleging Booz Allen

changed its legal structure from a partnership to a corporation in 1964).] As Defendants

correctly point out, Booz Allen is not a closely-held corporation. The FAC itself sets forth

that Booz Allen had “approximately 300 stockholders.” Delaware law defines a close

corporation as one with less than thirty shareholders. Del. Code Ann. tit. 8, § 342(a)(1)

(2010); Nixon v. Blackwell, 626 A.2d 1366, 1380-81 (Del. 1993) (statutes govern corporate

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 29 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 30 - 09CV0652

entities). Thus, those unique principles of law do not apply to Booz Allen. See Sprewell,

266 F.3d at 988-89 (court does not accept factual allegation that is contradicted by own

pleading or based on a legal conclusion). 

2. Materiality of Carlyle Transaction

Even if Plaintiff can establish that Booz Allen had a duty to disclose material

information to Plaintiff, he faces the additional hurdle of showing that Booz Allen had

material information at the relevant time. Undisclosed information concerning future

events must be reasonably certain to occur before the company must disclose it. Hanon v.

Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992) (citing Basic, 485 U.S. at 232

(where an “event is contingent or speculative in nature, it is difficult to ascertain whether

the ‘reasonable investor’ would have considered the omitted information significant at the

time”); Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980) (disclosure not

required when there is no evidence that estimates were made with such reasonable certainty

even to allow them to be disclosed to the public)). Whether preliminary merger discussions

or plans to restructure the corporation are material depends upon the balance of the

probability that the event will occur and the anticipated magnitude of the event in light of

the totality of the circumstances. Basic, 485 U.S. at 238. 

 Plaintiff’s complaint contains vague hints that Defendant Shrader first conceived

his deceptive scheme years before Plaintiff was urged to retire. [E.g., FAC ¶¶ 2 (“At the

time of the redeemption, BAH was in the process of selling its government business to

private-equity firms”), 63 (alleging September 11, 2001 terrorist attack prompted Shrader

to seize control of the government sector), 116, 146, 150, 164 (alleging “by 2003, Shrader

concluded” he could eliminate commercial partners and changed assessment method

accordingly), & 281 (alleging in 2004 that Shrader decided to extend his term as CEO to

execute his secret plan).] There is a conclusory assertion that the potential “[s]plit-up of the

firm was under active consideration” in 2004. [Id. ¶¶ 341, 421, 429.] These allegations

about an overall scheme to force out partners and seize control of the company, however,

do nothing to show that Booz Allen was considering selling the government division to

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 30 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

13For the purpose of deciding this motion, the Court assumes that April 1, 2007 is the

relevant date, as that is when Booz Allen exercised its contractual right and repurchased its

shares (two years after Plaintiff retired). Defendants argue that Plaintiff made his investment

decision in either September 2003 (when he received the negative review and recommendation

to retire within two years) or April 2004 (when he accelerated his retirement date and rejected

the offer to be reinstated without the retirement recommendation). Clearly, if those earlier

dates control, the Carlyle transaction was wholly speculative and thus immaterial as a matter

of law.

The Court rejects Defendants’ argument concerning fraud “in connection with the

purchase or sale” of a security. Plaintiff argues that his decision to retire was “in connection

with” Booz Allen’s re-purchase of his 30,500 shares. He alleges he had a security interest in

his option to sell the shares back to Booz Allen in the two-year window after his retirement.

See Falkowski v. Imation Corp., 309 F.3d 1123, 1130 (9th Cir.), amended by, 320 F.3d 905

(9th Cir. 2002), abrogated on other grounds as recognized by Proctor v. Vishay

Intertechnology Inc., 584 F.3d 1208 (9th Cir. 2009). The Court is not persuaded by

Defendants’ attempt to distinguish the line of cases holding that retirement that triggers a stock

purchase or sale satisfies that element of a securities claim. E.g., Jordan, 815 F.2d at 436-39

(stock ownership tied to employment contract was “indirectly or bound up with” decision to

remain or depart company).

- 31 - 09CV0652

Carlyle. This is the transaction that Plaintiff must show was under discussion in order to

establish that it was material information because this deal affected the value of the stock. 

McCormick, 26 F.3d at 876-77. 

The complaint plainly states that the Carlyle transaction was publicly announced on

May 22, 2008 and that Carlyle had developed its bid “in the months leading up to

November, 2007.” [FAC ¶ 389-90.] Nothing suggests the Carlyle transaction was

probable in April 2007, when Booz Allen exercised its right to re-purchase Plaintiff’s

shares.13 Defendants cite many cases in which the potential transaction was under tentative

discussion, yet, the courts held the negotiations had not advanced to the point of being

material. E.g., Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 979 (9th Cir. 1999);

Hartford Fire Ins. Co. v. Federated Dep’t Stores, Inc., 723 F. Supp. 976, 982-85 (S.D.N.Y.

1989). Plaintiff’s allegations do not even approach the stage of negotiations involved in the

published cases. He merely states that in mid-2006, the Board of Directors “tasked”

Shrader “to explore strategic options to maximize the business prospects of all part of BAH

while enhancing shareholder value.” [FAC ¶ 321.] A generic assignment to make more

money is vastly separated from concrete negotiations to sell part of Booz Allen. As

Defendants note, Plaintiff is essentially arguing that Shrader’s thoughts were material

information. [Defs.’ Mot. at 26.] The “mere intention” to “pursue” or an “unrequited

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 31 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 32 - 09CV0652

desire” to “explore” selling the company at some time in the future is not material

irrespective of the importance of the restructuring. L.L. Capital Partners, L.P. v.

Rockefeller Ctr. Props., Inc., 921 F. Supp. 1174, 1180-81 (S.D.N.Y. 1996); Panfil v. ACC

Corp., 768 F. Supp. 54, 58 (W.D.N.Y. 1991).

3. Strong Inference of Scienter

The Court agrees with Defendants that the complaint does not contain sufficient

facts to create an inference of securities fraud, let alone the strong inference required to

survive a motion to dismiss. The Defendants aptly observe that Plaintiff “asks this Court to

infer that the Individual Defendants engaged in a comprehensive, multi-year racketeering

scheme apparently starting in 1999 to defraud his fellow senior officers and him by forcing

their retirements and not disclosing the existence of a secret plan in the hopes of entering

into a then-unknown transaction with a then-unknown partner in order to make money

years in the future.” [Defs.’ Mot. at 29.] 

The pleading does not contain any facts directly substantiating Plaintiff’s theory. 

[Id.] The most glaring example is the allegation that the purchase of a home in Florida

shows an intent to defraud. [FAC ¶¶ 315-18.] The FAC contains numerous assumptions,

speculations, and conclusions about Defendant Shrader, but is silent about other

Defendants. The allegations against Shrader fail to create a cogent or compelling inference

that he acted with the required state of mind. The complaint lists Shrader’s ordinary

business decisions to increase profit and lower costs, and then Plaintiff second-guesses the

wisdom of those routine decisions and labels them as fraud. Lipton v. PathoGenesis Corp.,

284 F.3d 1027, 1038 (9th Cir. 2002) (generalized assertions that “directors possess motive

and opportunity to enhance a company’s business prospects” are inadequate to plead

scienter). One example is Plaintiff’s criticism that Booz Allen selected Credit Suisse as the

investment bank for the leveraged buyout. Plaintiff does not allege that Credit Suisse was

incompetent or had a conflict of interest; rather, he acknowledges that Booz Allen had an

existing relationship with the bank. [FAC ¶ 331.] The FAC repeatedly and consistently

labels Plaintiff’s subjective opinions as evidence of an overall scheme to deceive. [Id. ¶¶

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 32 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 33 - 09CV0652

322-23.] He attacks every business decision Shrader made and measures it by his own

standard. [E.g., id. ¶¶ 119-120 (in 2003, company reduced by one-third the amount of

stock distributed annually “to prevent the firm from being over capitalized which would

lead to negative tax consequences and reduce our financial flexibility”).] This includes

action beyond Shrader’s control. For example, Plaintiff contends that SAIC, an “industry

gem,” was an “ideal” company to buy Booz Allen’s government sector. [Id. ¶ 360-73; Pl.’s

Opp. Br. at 48.] Plaintiff argues this shows the scheme to undervalue Booz Allen, but the

complaint acknowledges SAIC never made an offer. [FAC ¶ 366.] Plaintiff’s ipse dixit

that SAIC’s valuation method shows Booz Allen was undervalued is not supported with

fact. [Id. ¶ 401-04.]

Plaintiff’s theory also depends on an allegation that Shrader forced senior

executives, who by nature of their lengthy employment owned thousands of shares of

company stock, to retire as part of his securities scheme. The equally plausible inference is

that the company concluded that these executives’ performance had declined, and while the

executives disagreed with that opinion, Booz Allen allowed them to continue working until

they voluntarily and gracefully retired with full benefits. [Id. ¶¶ 192, 195 (after 28 years

service, Pasternack retired six months after negative assessment that “had a negative impact

on BAH” ).] Plaintiff acknowledges that at the time the employment decisions were made,

they were grounded in sound business judgment. [Id. ¶ 198 (“Pasternack had no grounds

for suspecting that the decision was made in bad faith.”).] There is nothing inherently

fraudulent in the situations Plaintiff describes, which at best, might prompt an executive to

claim wrongful termination. Moreover, the forced retirements of sixteen executives over a

four year period bear a remote and tenuous connection to the securities fraud claim,

because the sale to Carlyle in 2008 benefitted all similarly-situated shareholders equally. 

No matter how strong the collegial bond between partners at Booz Allen, the working

executives could not show favoritism to the retired executives and they followed the plain

language of the Stock Rights Plan to repurchase shares. 

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 33 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 34 - 09CV0652

Plaintiff asserts he discovered the fraud when he learned, in July 2008, about the

leveraged buyout and he was disappointed that he had retired three years before the Carlyle

Group bought the government division. Plaintiff’s personal disappointment, in hindsight,

does not create an inference that the conduct was undertaken with an intent to commit

securities fraud. Taking into consideration the entirety of the complaint and the inferences

both favorable and unfavorable to Plaintiff, the Court finds no plausible inference that the

Defendants acted with the required scienter. Tellabs, 551 U.S. at 314; Metzler Inv. GMBH

v. Corintian Colleges, Inc., 540 F.3d 1049, 1065-69 (9th Cir. 2008).

For all of the above reasons, the Court GRANTS Defendants’ motion to dismiss the

federal securities claim.

B. State Securities Fraud Claim

California law prohibits a seller or buyer of a security from making untrue

statements and misleading omissions. Cal. Corp. Code § 25401. The required level of

culpability is recklessness, which “exists when the danger of misleading buyers or seller is

so obvious that the defendant must have been aware of it.” Cal. Amplifier, Inc. v. RLI Ins.

Co., 94 Cal. App. 4th 102, 109-10 (2001). The statement “must be made ‘for the purpose

of inducing the purchase or sale’ of a security by another person.” Id. at 110-12

(interpreting both administrative and private right of actions). “A person must have a

specific intent to affect the price of a security in order to induce its purchase or sale.” Id.

California’s securities law “does not apply to simple nondisclosure.” Lynch v. Cook, 148

Cal. App. 3d 1072, 1088 (1983). Privity is required, thus, liability is limited to the actual or

literal seller or purchaser. SEC v. Seaboard Corp., 677 F.2d 1289, 1296 (citing Cal. Corp.

Code §§ 25401, 25501); In re Diasonics Sec. Litig., 599 F. Supp. 447, 548-49 (C.D. Cal.

1984) (blanket allegation does not satisfy strict privity requirement to each defendant).

Plaintiff’s state securities claim fails for substantially the same reasons discussed

above in relation to the federal claim. First, Plaintiff incorrectly named the five core

directors as defendants—the company, not the individuals, re-purchased Plaintiff’s shares

after he retired. Seaboard, 677 F.2d at 1296 (dismissing state securities claim because

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 34 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 35 - 09CV0652

liability is limited to the “actual sellers”). Second, California’s securities law does not

cover cases of simple non-disclosure. Plaintiff’s complaint is based upon the failure to

disclose the Carlyle transaction. [FAC ¶¶ 530-31.] 

In opposition to the motion to dismiss, Plaintiff appears to argue an affirmative

misrepresentation of fact. He argues that Shrader’s December 12, 2004 email which

“represented that the One Firm Concept and Enduring Value Concept were continuing

policies” of Booz Allen was an affirmative misstatement of fact because Shrader was at

that time contemplating splitting-up the two divisions and was taking steps to seize control

of the company. [FAC ¶¶ 426-29.] The FAC refers to “representations that the policy of

maintaining BAH as one firm was the bedrock principle of BAH’s future strategy.” [Id. ¶

529.] 

This is a tenuous theory given the three-year gap between the email and the time

Carlyle bid on Booz Allen’s government division. The email is not itself an offer to buy

Plaintiff’s shares and would not fall within California’s statute. Cal. Corp. Code § 25401

(“It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a

security in this state by means of any written or oral communication which includes an

untrue statement of material fact or omits to state a material fact necessary in order to make

the statements made, in the light of the circumstances under which they were made, not

misleading”) (emphasis added). The claim also suffers because Plaintiff has not explained

why the statement of a generalized corporate philosophy in 2004 is misleading as to a

material fact about an inchoate transaction. As previously discussed, Plaintiff has not

stated facts to support his conclusory assertions about the timing of the Carlyle transaction. 

[Compare FAC ¶¶ 421, 423 with id. ¶ 440.] 

Accordingly, the Court GRANTS Defendants’ motion to dismiss this state law

claim.

/ / /

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 35 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 36 - 09CV0652

VIII. LEAVE TO AMEND

Plaintiff requests leave to amend. With the exception of the state law theories that

are governed by the holding in the Nemec litigation, the Court will allow Plaintiff one final

opportunity to amend his complaint as to the principal defendants. Schreiber Distrib., 806

F.2d at 1401. Following informal discussions with the Defendants, Plaintiff amended his

original complaint by doubling its length. [Doc. Nos. 1, 13, 14, & 16.] That amended

pleading describes routine business decisions which are embellished with blanket assertions

of sinister motive. The Court has reservations about Plaintiff’s ability to allege, in good

faith, specific facts to support his law suit. Pelletier v. Zweifel, 921 F.2d 1465, 1518-19

(11th Cir. 1991). Nonetheless, the liberal policy of granting leave to amend permits him an

opportunity to cure the deficiencies outlined above as to the key defendants (Shrader,

Appleby, Strickland, Garner, Doughty, and Booz Allen Hamilton, Inc.). 

Absolutely nothing in the FAC indicates a basis on which to hold the other directors

liable on any theory articulated in the complaint. Iqbal, 129 S. Ct. at 1949 (plaintiff must

plead “factual content” because Rule 8 “demands more than an unadorned, the defendantunlawfully-harmed-me accusation”); Twombly, 550 U.S. at 554-5 (stating a claim requires

“enough factual matter” to suggest an action exists against a defendant). With minor

exceptions, the only fact in the complaint is where each director lives. [FAC ¶¶ 14-22.] 

The body of the complaint briefly mentions only three directors – Mark Gerencser,

Horacio Rozanski, and Daniel Lewis – and the opposition brief mentions a fourth – Chief

Financial Officer Douglas Swenson. The passing references concern innocent conduct or

conclusions of misconduct (often unrelated). For example, there is an allegation that Lewis

knew about the leveraged buyout in January 2007 and that he did not have a “strong

managerial personality.” [Id. ¶¶ 255, 276.] As to Gerencser and Rozanski, id. ¶¶ 287, 293,

the allegations do not allege any improper conduct by them; rather, they were on a

committee that made a proposal that Shrader rejected. [Id. ¶¶ 294-95.] Plaintiff also

mentions Rozanski and Lewis in connection with the termination of another executive. [Id.

¶¶ 192, 195, 197.] Again, the surrounding facts relate to alleged misconduct by Shrader. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 36 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14Five Defendants live outside the United States. [FAC ¶¶ 16, 18, & 20.] Because

Defendants filed a motion that thoroughly discusses the defects in the complaint and Plaintiff

had a fair opportunity to defend his claims, the Court extends the dismissal to those defendants

who are similarly situated but did not appear. Abagninin v. AMBAC Chem. Co., 545 F.3d 733,

742-43 (9th Cir. 2008); Ricotta v. State of Calif., 4 F. Supp. 2d 961, 978 (S.D. Cal. 1998).

- 37 - 09CV0652

The allegations do not indicate that Lewis had any reason to doubt Shrader’s instructions. 

[Id. ¶ 192 (“at Shrader’s behest”); id. ¶ 196 (“Shrader knew”); id. ¶ 202.] Plaintiff’s

opposition brief asserts that Swenson owed Plaintiff a fiduciary duty about the stock plan. 

[Pl.’s Opp. Br. at 22.]

The pleading utterly fails to notify these eighteen individuals why they are named in

the lawsuit. Fed. R. Civ. P. 8(a); Fed. R. Civ. P. 9; Semegen, 780 F.2d at 731 (“Rule 9(b)

ensures that allegations of fraud are specific enough to give defendants notice of the

particular misconduct which is alleged to constitute the fraud charged so that they can

defend against the charge and not just deny that they have done anything wrong.”). The

Court dismisses without prejudice the four executives that Plaintiff mentions in passing

(Gerencser, Lewis, Rozanski, and Swenson); but the Court dismisses the other fourteen

individuals with prejudice because the comprehensive amended pleading is devoid of facts

about them (Aguirre, Banerji, Bertone, Berger, Burns, Henry, Kelly, Knott, Mahaffee,

Mayer, Meier, Peck, Saddi, and Wheeler). See Metzler, 540 F.3d at 1072 (denial of leave

to amend when plaintiff previously amended complaint without judicial guidance); Lipton,

284 F.3d at 1038-39 (dismissing with prejudice when basic facts show flaws cannot be

cured by amendment).14

The Court was hampered in its review of the FAC by Plaintiff’s exclusive reliance

on incorporating all 500 paragraphs into every cause of action. Plaintiff’s pleading left the

labor intensive task to the Defendants to search for facts related to the RICO and securities

claims. Pelletier, 921 F.2d at 1518-19. The Second Amended Complaint, if any, should

identify the conduct underlying each claim. In addition, Plaintiff must identify the specific

defendants who are being named in each cause of action. The FAC omitted this

information from some claims, and in other instances, the arguments in the written briefs

did not coincide with the defendants mentioned in the pleading. 

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 37 of 38
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 38 - 09CV0652

Conversely, the FAC overflows with superfluous explanations, such as the treatise

on compensation models and leveraged buyouts. [E.g., FAC ¶¶ 27-57, 108-18 (impact of

9/11).] Plaintiff should exercise professional judgment to ensure that his pleading complies

with Rule 8. Fed. R. Civ. P. 8(a) (“a short and plain statement”). 

CONCLUSION

For the reasons stated herein, the Court GRANTS Defendants’ motion to dismiss

this action. The Court DISMISSES WITH PREJUDICE Plaintiff’s claims for: (1) breach

of the implied covenant of good faith and fair dealing (count 3); (2) breach of fiduciary

duty (count 4); and (3) unjust enrichment (count 5). The Court DISMISSES all other

claims WITHOUT PREJUDICE as to Defendants Ralph Shrader, C.G. Appleby, Samuel

Strickland, Joseph Garner, Dennis Doughty, and Booz Allen Hamilton, Inc. 

The Court DISMISSES Defendants Mark Gerencser, Daniel Lewis, Horacio

Rozanski, and Douglas Swenson WITHOUT PREJUDICE, but DISMISSES Defendants

DeAnne Aguirre, Shumeet Banerji, Peter Bertone, Christian Berger, Heather Burns, Francis

Henry, Christopher Kelly, David Knott, Joseph Mahaffee, John Mayer, Helmut Meier,

Patrick Peck, Joe Saddi, and Steven Wheeler WITH PREJUDICE. The Clerk is

INSTRUCTED to terminate the action against these fourteen individuals. 

Plaintiff may file a Second Amended Complaint on or before October 18, 2010. 

IT IS SO ORDERED.

DATED: September 17, 2010

Hon. Michael M. Anello

United States District Judge

Case 3:09-cv-00652-AJB-BGS Document 36 Filed 09/17/10 Page 38 of 38