# U ni te d S ta te s Co ur t of A pp ea ls For the Eig hth Circu it

__ __ __ __ __ __ __ __ __ __ __ __ __ _
No. 1 2- 16 39

__ __ __ __ __ __ __ __ __ __ __ __ __ _ Nels on Gom es , in di vi du al ly, de riv at iv el y an d on be ha lf of ot he rs si m il arl y si tu at ed
,

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff - App el la nt ,

v.

Am eri can Cen tu ry

Co m pa ni es , Inc .; Am eri can Cen tu ry Glo ba l In ve st m en t Man ag em en t, In c.; J am es E. Sto wers , Jr.; James E. Sto wers , III; Jo na th an S. Tho m as ; Th om as A. Brown ; An dr ea C. Hal l; Don al d H. Pra tt ; Gal e E. Say ers ; M

. Je an ni ne Str an djo rd ; Ti m ot hy S. W eb st er; W il li am M. Ly on s; Enri qu e Ch an ; M ark Kop in sk i; Am eri can Cen tu ry W or ld Mu tu al Fu nd s, In c., do in g b us in es s as Am eri can Cen tu ry

Int ern at io na l Di sc ov ery Fu nd
,

ll ll ll ll ll ll ll ll ll ll l Defe nd

an ts - App el le es

.

__ __ __ __ __ __ App eal fro m

Uni te d S ta te s Di st ric t Co ur t fo r th e Weste rn Dis tri ct of M is so ur i - Kan sa s C it y

__ __ __ __ __ __
Su bm it te d: Sep te m

be r 19 , 20 12 Fil ed : M arch 28 , 20 13

__ __ __ __ __ __ Befo re RI LEY, Chi ef J ud ge , SMITH an d C OLLOTO N, Circ ui t J ud ge s.

__ __ __ __ __ __
COLLOTON, Ci rcu it Ju dg e.Nels on Gom es , an i nv es to r in th e Am eri can Cen tu ry Int ern at io na l Di sc ov ery Fu nd (“ th e Fu nd ”), br ou gh t Mary la nd co m m on -la w cl ai m s an d fed eral rack et eeri ng cl ai m s fo r vi ol at io ns of 18 U.S.C. §§ 19 62 (c) an d (d ) ag ai ns t th e ap pe ll ees , who are th e Fu nd ’s fid uc ia rie s (“ th e fid uc ia rie s” ). Am on g ot he r cl ai m s, th e co m pl ai nt al le ge d de riv at iv e cl ai m s on be ha lf of th e Fu nd fo r br each of fid uc ia ry du ty, ne gl ig en ce,

was te , an d rack et eeri ng

. The di st ric t co ur t di sm is se d Gom es ’s co m pl ai nt fo r fai lu re 1

to st at e a cl ai m

. Gom es ap pe al s th e di sm is sa l of hi s de riv at iv e cl ai m s, an d we affi rm

.

I.

The co m pl ai nt al le ge s th at th e fid uc ia rie s kn owi ng ly cau se d th e Fu nd to in ve st

m il li on s of do ll ars in two of f-s ho re In te rn et ga m

bl in g web si te s. The web si te s, Bwin
In te ract iv e Ent ert ai nm en t AG an d NETell er Pl c, il le ga ll y to ok wag ers fro m ga m bl ers in th e Uni te d St at es

. W he n th e go ve rn m en t be ga n ag gr es si ve ly pr os ecu ti ng of f-s ho re
ga m bl in g op erat io ns du rin g th e su m m er of 20 06
, bo th web si te s fo rfei te d hu nd red s of

m il li on s of do ll ars an d st op pe d op erat in g in th e Uni te d S t a te s. The ir sh are va lu es dr op pe d pr eci pi to us ly. As th e web si te s’ sh are va lu es pl um m et ed
, so to o di d th e sh are

va lu es of th e Fu nd , b ecau se th e Fu nd ’s v al ue was cal cu la te d on th e ba si s o f th e n et

va lu e o f th e Fu nd ’s po rtf ol io . Th e Fu nd real iz ed m il li on s o f do ll ars in lo ss es when it so ld it s s ha res of B win an d NETel le r.

The Ill eg al Gam

bl in g Bu si ne ss Act of 19 70 m ak es it a fel on y to “ own [] al l or
pa rt of an il le ga l ga m

bl in g bu si ne ss .” 18 U.S.C. § 19 55 (a). A vi ol at io n of § 19 55 is

a pr ed ic at e cri m e un de r th e Rac ke te er In flu en ced an d Co rru pt Or g a n i zat io ns Act (“ RICO” ), 18 U.S.C. § 19 61 (1 ). Gom es c l a i ms t h a t th e fid uc ia rie s kn ew th at
pu rch as in g th e sh ares was il le ga l, be c a u s e be fo re th e pu rch as es , th e Ju st ic e Dep art m en t ha d is su ed pu bl ic w ar nin gs st at in g th at In te rn et ga m bl in g web si te s whi ch

The Hon or ab le Sco tt O. W rig ht
, Uni te d St at es Dis tri ct Ju dg e fo r th e W es te rn 1 Dis tri ct of M is so ur i.

-2

-to ok be ts fro m Uni te d St at es res id en ts were cr i mi na l or ga ni zat io ns

. NETell er’s

pr os pe ct us fro m Apr il 20 04 al so can di dl y ack no wled ge d th at it m ig ht be pr os ecu te d,

an d t he pri nc ip al s o f si m il ar o ff-s ho re web si te s al read y ha d b een pro se cu te d.

The fid uc ia rie s m ov ed to di sm is s Gom es ’s co m pl ai nt fo r fai lu re to m ak e a pr esu it de m an d on th e bo ard of di rec t or s of th e Fu nd

. The di st ric t co ur t gr an te d th e

m ot io n, an d Go m es ap pe al s.

II.

W e rev ie w de no vo a d i s t r i c t co ur t’s de ci si on to gr an t a m ot io n to di sm is s,

acce pt in g th e co m

pl ai nt ’s al le ga ti on s as tru e. L.L. Nel so n Ent er s., In c. v. Cn ty

. of St

. Lo ui s, Mo.
, 67 3 F.3 d 79 9, 80 4 (8 th Ci r. 2 0 1 2 ). To su rv iv e a m ot io n to di sm is s, a

co m pl ai n t mu s t pl ead “ en ou gh fact s to st at e a cl ai m to rel ie f th at is pl au si bl e on it s face .” Bell Atl

. Co rp

. v. Two mbl y , 55 0 U.S. 54 4, 57 0 (2 00 7)

. Fed eral Ru le of Ci vi l
Pro ced ur e 23 .1 im

po se s a he ig ht en ed pl ead in g st an da rd on co m pl ai nt s in de riv at iv e
act io ns

. It req ui res th at th e pl ai nt iff “ st at e wit h pa rti cu la rit y

. . . an y effo rt by th e pl ai nt iff to ob ta in th e de si red act io n fro m th e di rect or s or co m pa rab le au th or it y ” an d

“ th e reas on s fo r no t ob ta in in g th e act io n or no t m ak in g th e effo rt.” Fed

. R. Ci v. P. 23 .1(b )(3 ).

Alt ho u g h Ru le 23 .1 “ co nt em pl at es bo th th e de m an d req ui rem en t an d th e
po ss ib il it y th at de m an d m ay be ex cu se d, it do es no t crea te a de m an d req ui rem en t of

an y pa rti cu la r di men s i on .” Ka men v. Kemp er Fin

. Se rv s., In c. , 50 0 U.S. 90
, 96 ( 1 9 9 1 ) (em

ph as is om it te d)

. Rat he r, it is “ a ru le of pl ead in g” th at “ req ui res th at t h e

co m pl ai nt in su ch a cas e al le ge th e fact s t h a t w i l l en ab le a fed eral co ur t to de ci de whe th er su ch a de m an d req ui rem en t ha s be en sa ti sf ie d.” Hal eb ia n v. Berv
, 59 0 F.3 d
19 5, 2 11 (2d Cir . 20 09 ) (i nt ern al qu ot at io ns om it te d)

.

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-W he n a pl ai nt iff pu rs ue s de riv at iv e cl ai m s ari si ng u n d e r s t a te la w wit ho ut

m ak in g a pr e-s ui t de m an d, a fed eral co ur t m us t ap pl y st at e la w to de te rm in e whe th er de m an d is ex cu se d. Id

. at 20 4. Wh e n t he de riv at iv e cau se of act io n ari se s un de r fed eral la w, fed eral co ur ts sh ou ld “ in co rp or at e st at e la w as th e fed eral ru le of de ci si on , un le ss ap pl ic at io n of th e pa rti cu la r st at e la w in qu e s t i o n wou ld fru st rat e
sp eci fic ob

jecti ve s of th e fed eral pr og ram s.” Ka men , 50 0 U

. S

. a t 98 (in te rn al

qu ot at io ns an d a lt erat io ns om it te d)

.

Gom es arg ue s th at ap pl y in g Mar y l a n d ’s de m an d req ui rem en t to hi s rack et eeri ng cl ai m wou ld be in co ns is t e n t w i t h RICO’s br oa d rem ed ia l pu rp os e. Gom es al so co nt en d s t h a t e v e n if hi s RICO cl ai m is su bjec t to Mar y la nd ’s d em an d

req ui rem en t, d em an d was ex cu se d a s t o a ll of h is cla im s u nd er Ma ry la nd law.

A.

W e fir st co ns id er whe th er ap pl y in g Mar y la nd ’s de m an d req ui rem en t to a de riv at iv e cl ai m ari si ng un de r 18 U.S.C. § 1 9 6 4 ( c) wou ld be in co ns is te nt wit h
RICO’s ob

jecti ve s. W he th er de m an d is req ui red be fo re th e f i l i n g o f a de riv at iv e RICO cl ai m is a q u e s t i o n o f fed eral la w. Se e Ka men , 50 0 U.S. at 97

. Bu t ga ps in fed eral st at ut es be ari ng on th e al lo cat io n of go v ern in g po wer wit hi n a co rp or at io n sh ou ld be f

il le d wit h st at e la w, un le ss do in g so wou ld be “ in co ns is te nt wit h th e
po li ci es un de rlyin g th e fed er a l s t a t ut e.” Id

. at 99
, 10 8. “ The sc op e of th e de m an d

req ui rem e n t u n d e r st at e la w c le arl y reg ul at es th e al lo cat io n of co rp or at e go ve rn in g
po wers be twee n th e di rect or s an d in di vi du al sh areh ol de rs .” Id

. at 10 8. The refo re, we

m us t de te rm in e whe th er Mar y la nd ’s de m an d req ui rem en t is in co ns is te nt wit h “ th e
po li ci es un de rlyin g” RICO. Id

.

Gom es arg ue s th at it wo ul d fru st rat e RICO’s br oa d “ rem ed ia l pu rp os es ” to
ap pl y Mar y la nd ’s d em an d req ui rem en t to hi s rack et eeri ng cl ai m

. Se e Org an iz ed Cri m e Co nt ro l Act of 19 70
, Pu b. L. No. 91 -4 52
, § 90 4( a), 84 St at

. 92 2, 94 7. A br oa d

-4

-rem ed ia l pu rp os e, ho wev er, is no t in co ns is te nt wit h a de m an d r e q ui rem en t. The

Su pr em e Co ur t lo ng ha s he ld th at se cu rit ie s la ws co m ba ti ng f r a u d
, in cl ud in g th e In ve st m en t Co m

pa ny Act of 19 40 (“ ICA”)
, 15 U.S.C. § 80 a- 1 e t s e q. , sh ou ld be

co ns tru ed fle xi bl y to effe ct ua te th ei r rem ed ia l pu rp os es

. Se e Her man & Mac Lea n v. Hud dl es to n , 45 9 U.S. 37 5, 38 6- 87 (1 98 3) ; Aff il ia te d Ute Citi

ze ns of Uta h v . Uni te d
St at es , 40 6 U.S. 12 8, 15 1 & n.1 5 (1 97 2)

. Non et he le ss , in Bur ks v. La sk er , 44 1 U.S.
47 1 (1 97 9)
, th e Co ur t he ld th at th e ICA di d no t pr ev en t th e di rect or s of a New Yor k

co rp or at io n fro m te rm in at in g a de riv at iv e cl ai m br ou gh t wit ho ut a pr e-s ui t de m an d. Id

. at 48 4- 85

. Des pi te th e ICA’s rem ed ia l pu rp os es , t h e C o u r t e xp la in ed
, “ [t]he re

m ay well be si tu at io ns in whi ch th e in de pe nd en t d ire ct or s co ul d re as on ab ly be li ev e th at th e be st in te res ts of th e sh areh ol de rs cal l fo r a d eci si on no t to su e.” Id

. at 48 5. The Co ur t he ld th at “ Co ng res s di d no t req ui re th at St at es , or fed eral co ur ts , ab so lu te ly fo rb id di rect or ter m in at io n o f al l n on fri vo lo us act io ns .” Id

. at 4 86

.

Gom es rel ie s on Dai ly In co me Fun d, In c. v. Fox
, 46 4 U.S. 52 3 (1 98 4)
, whe re th e Su pr em e Co ur t al lo wed de riv at iv e cl ai m s un de r th e I C A to pr oc eed wit ho ut a de m an d, bu t Fox he ld th at de m an d was no t req ui red fo r a di ffer en t reas on : m ut ua l fu nd s were no t au th or iz ed to pu rs ue cl ai m s un de r § 36 (b ), so th e req ui rem en ts of Ru le
23 .1 si m pl y di d n ot ap pl y

. Id

. at 54 2. It is un di sp ut ed th at Gom es ’s cl ai m s are

su bjec t to Ru le 23 .1 an d th at th e fid uc ia rie s co ul d le ga ll y ch oo se to ad op t hi s cl ai m s.

Und er Ka men , th e qu es ti on is whe th er ap pl ic at io n of Mar y la nd ’s de m an d

req ui rem en t wou ld fru st rat e th e po li ci es of RICO, an d we th in k it wou l d n o t

. Tha t

a f ed eral st at ut e ha s a rem ed ia l pu rp os e do es no t m ak e al l cl ai m s ari si ng un d e r i t im m un e fro m s t a t e l a w de m an d req ui rem en ts

. Se e Bur ks

, 44 1 U.S. at 48 5- 86

. Req ui rin g an in ve st or to of fer th e co rp or at io n an op po rtu ni ty to pu rs ue it s own cl ai m do es no t pr ecl ud e t h e i n v e st or fro m su in g if th e di rect or s refu se th e de m an d. Se e W er bo ws ky v. Co ll omb
, 76 6 A.2d 12 3, 14 4 (Md

. 20 01 ). Bec au se Mar y la nd ’s de m an d

req ui rem en t do e s n o t fru st rat e th e fed eral po li ci es un de rlyin g RICO, we ap pl y Mar y la nd law t o a ll of Go m es ’s cla im s t o d et erm in e whe th er d em an d was ex cu se d.

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-B.

Gom es ne xt arg ue s t h a t d e man d was ex cu se d as fu ti le un de r Mar y la nd la w. The fu ti li ty ex cep ti on to Mar y la nd ’s de m an d req u i rem en t is “ ve ry li m it ed .”
We r b o ws ky v. Co ll omb
, 76 6 A.2d 12 3, 14 4 (Md

. 20 01 ). The Mar y la nd Co ur t o f App eal s h as ex pl ai ne d t ha t d em an d i s ex cu se d o nl y when :

th e al le ga ti on s or ev id e nc e cl earl y de m on st rat e, in a ve ry pa rti cu la r

m an ne r, ei th er tha t (1) a de m an d, or a de la y in awai ti ng a res po ns e to a de m an d, wou ld cau se irr ep a r a bl e ha rm to th e co rp or at io n, or (2 ) a maj o r i ty of th e di rect or s are so pe rs on al ly an d di rect ly co nf li ct ed o r
co m m i t t e d t o th e de ci si on in di sp ut e th at th ey can no t reas on ab ly be

ex pe ct ed to res po nd to a de m an d i n g oo d fai th an d wit hi n t he am bi t o f th e b us in es s ju dg m en t ru le

.

Id

.

Gom es fir st co nt e n d s t h a t de m an d wou ld ha ve be en fu ti le
, be cau se aft er hi s

co m pl ai nt was fil ed
, th e fid uc ia rie s reject ed a pr e-s ui t de m an d th at co nt ai ne d ne arl y id en ti cal al le ga ti on s. Bu t whet he r de m an d is fut il e “ m us t b e g au ge d a t t he ti m e th e de riv at iv e act io n is co m

m en ced
, no t aft erwar d wit h th e be ne fit of hi nd si gh t.” Lewi s

v. Gra ves , 70 1 F.2 d 24 5, 25 0 (2 d Ci r. 19 83 ) (in te rn al qu ot at io n om it te d)

. If de m an d

was no t f u t i l e whe n th e co m

pl ai nt was fil ed
, th en th e sh areh ol de r ha d no rig ht to in it ia te th e act io n. “ [I]t is on ly whe n de m an d is ex cu se d th at th e sh areh ol de r en joy s th e rig ht to in it ia te su it on be ha lf of hi s co rp or a t i on in di sr eg ard of th e di rect or s’ wis he s.” W

er bo ws ky
, 76 6 A.2d at 13 4 (em ph as is ad de d) (in te rn al qu ot at io n om it te d)

.

Gom es as se r t s t h at co ur ts reg ul arl y co ns id er po st -fi li ng ev en ts whe n de te rm in in g whe th er de m an d was ex cu se d. Bu t he ci te s on ly on e su ch cas e ho ld in g th at de m an d was ex cu se d, In re Am. In t’l Gro up , In c. , 96 5 A.2d 76 3 (Del

. Ch

. 20 09 ),

an d th e bo ard ’s po si ti on of ne u t r a l i t y in th at cas e m an ife st ed ta ci t ap pr ov al fo r th e

-6

-co nt in ua ti on of li ti ga ti on un de r Dela ware la w. Id

. at 80 9- 10

. In th is cas e, th e Fu nd ’s fid uc ia rie s m ov ed to di sm is s th e cas e an d ne ve r ap pr ov ed th e li ti ga ti on

. Acco rd in gl y , th ere is no re a s o n to lo ok pa st th e da te on whi ch Gom es fil ed hi s co m pl ai nt to de te rm in e whe th er d em an d was ex cu se d.

Gom es ne xt arg ue s th at de m an d was ex cu se d be cau se th e fid uc ia rie s co ul d no t

reas on ab ly ha ve be en ex pe ct ed to res po nd to a de m an d in go od fai th

. Ci ti ng Par is h

v. Mar yl an d & Vir

gi ni a Mil k Pro d u c e r

s As so ci at io n , 24 2 A.2d 51 2 (Md

. 19 68 ),
Gom es c la im s th at th e fid uc ia rie s co ul d no t fai rly co ns id er a de m an d be cau se th ey

were res po ns ib le fo r th e Fu nd ’s il le ga l act io ns an d wil l be li ab le if hi s cl ai m su ccee ds

. In Par is h
, th e Mar y la nd Co ur t of App eal s he ld th at whe re a maj o r i t y o f th e bo ard

pa rti ci pa te d in th e al le ge d wro ng do in g, “ it wou ld be fu ti le fo r th e pl ai nt iff s to m ak e de m an d up on th os e di rect or s to cau se th e Ass oc ia ti on to su e th em to reco ve r fo r th ei r

own wron gf

ul in juri es to th e Ass oc ia ti on .” Id

. at 54 5.

W e m us t co ns id er Par is h in l i g h t o f th e m or e rece nt de ci si on in W er bo ws ky

. W er bo ws ky ob se rv ed th at “ [w]hat ev er m ay ha ve be en th e pe rcei ve d tre n d i n 1 96 8, whe n Par is h was de ci de d, th e tre nd si nc e th en ha s bee n to en fo rce mor e st ri ct ly th e
req ui rem en t of pr e-s ui t de m an d an d at le as t to ci rcu m sc rib e, if no t effe ct iv el y el im in at e, th e fu ti li ty e x c e pt io n.” W er bo ws ky
, 76 6 A.2d at 13 7 (em ph as is ad de d)

. The co ur t th en rep ud ia te d th e pa rt of Par is h ci te d by Gom es , ho ld in g th at it was “ no t wil li ng to ex cu se th e fai lu re to m ak e de m an d si m pl y be cau se a m ajor it y of th e di rect or s ap pr ov e d o r p a rti ci pa te d in so m e way in th e ch al le ng ed tra ns act io n or de ci si o n

. ” I

d

. a t 14 3. On th e co nt rary, th e co ur t ex pl ai ne d th at th e de m an d

req ui rem en t “ gi ve s th e di rect or s

— e v e n in te res te d, no n- in de pe nd en t di rect or s— an
op po rtu ni ty to co ns id er, o r rec on si de r, th e is su e in di sp ut e.” Id

. at 1 44

.

No Mar y la nd co ur t ha s he ld aft er W er bo ws ky th at de m an d w a s ex cu se d be cau se th e di rect or s pa rti ci pa te d in th e tra ns act io n gi vi ng ris e to th e cl ai m an d m ig ht be pe rs on al ly li ab le if th e cl ai m su ccee de d. Gom es ci te s on e un pu bl is he d fed eral

-7

-de ci si on ho ld in g th at de m an d was ex cu se d un de r Mar y la nd la w, in pa rt be cau se th e

di rect or s pa rti ci pa te d in th e de ci si on s th at al le ge dl y ha rm ed th e co rp o r at io n. Se e Felk er v. And er

so n , No . 0 4- 03 72 -CV, 20 05 W L 6 02 97 4, at * 3 ( W. D

. M o

. Feb . 1 1,
20 05 ). Bu t ot he r fed eral co ur ts ap pl y in g Mar y la nd ’s d e man d req ui rem en ts ha ve
qu es ti on ed Felk

er ’s reas on i n g a nd de cl in ed to fo ll ow it

. Se e Se id l v. Am. Cen tu ry Co

. , 71 3 F. Su pp

. 2d 24 9, 25 8 n.1 3 (S.D.N.Y. 20 10 ) (co ll ect in g cas es ). W e co nc lu de th at Se id l
, id . at 2 59 -6 2, s ta te s t he be tt er v ie w of M arylan d l aw on th is po in t.

W e th eref

or e ho ld th at de m an d was req ui red on al l o f Gom es ’s de riv at iv e cl ai m s. Afte r We r b o w s k y , pa rti ci pa ti on by di rect or s in al le ge d wro ng do in g is no t

su ffi ci en t to ex cu se de m an d. The refo re, th e di st ric t co ur t co rrec tl y di sm is se d
Gom es ’s c om

pl ai nt

. Bec au se Gom es f ai le d to m ak e th e req ui red de m an d, we ne ed

no t ad dr es s whe th er he ad eq ua te l y p l e a de d th at th e al le ge d RICO vi ol at io ns
pr ox im at el y

cau se d t he Fu nd ’s lo ss es

.

* * *

The jud gm en t o f th e d is tri ct co ur t i s af fir m ed

.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __

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