Opinion ID: 3039127
Heading Depth: 3
Heading Rank: 1

Heading: Clarifying the claims pleaded

Text: In their briefs and at oral argument, the parties have largely talked past one another. This is somewhat 6 SLUSA reaches “covered class actions” brought in state court by making such claims subject to removal to federal court, 15 U.S.C. § 78bb(f)(2), where they are then subject to dismissal, 15 U.S.C. § 78bb(f)(1). Whether a single offending claim requires dismissal of the entire action is an open question, and one we need not reach here. Another open question is whether any dismissal should be without prejudice to the reassertion of the claims in individual actions. 7 We have jurisdiction under 28 U.S.C. § 1291. SLUSA preemption is jurisdictional, and we review dismissals for lack of subject-matter jurisdiction de novo. Rowinski, 398 F.3d at 298. 8 understandable, as the parties differ in their definition of the nature of the claims at issue. Therefore, we begin by making clear what claims are asserted by the Trust, and how the Trust became the owner of those claims. Much of the confusion stems from the fact that the nature of a pump-and-dump scheme perpetrated by corporate directors and officers is that it typically gives rise to multiple viable causes of action—causes of action that are owned by different parties and are assertable against different defendants. For example, for the offending directors and officers, carrying out a pump-and-dump scheme almost certainly constitutes a breach of their duty of loyalty to the corporation they serve. Thus, the scheme gives the corporation a colorable claim against the directors and officers (and anyone who knowingly aided them) for breach of fiduciary duty (and aiding and abetting a breach of fiduciary duty).8 The remedy for such a breach, under Delaware law, is that the directors and officers and their abettors become jointly and severally liable to make good on any loss to the corporation attributable to the disloyalty. Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 173 (Del. 2002) (affirming Chancellor’s decision to hold abettors of 8 Delaware law has long provided that corporate fiduciaries who engage in insider trading for personal gain breach the duty of loyalty. Brophy v. Cities Serv. Co., 70 A.2d 5, 8 (Del. Ch. 1949) (Harrington, C.). There is some dispute over whether Brophy is still good law to the extent that it imposed the remedy of disgorgement of the trader’s profits, rather than limiting the corporation’s recovery to actual damages, but there is no dispute that insider trading constitutes a breach of duty. See In re Oracle Corp., 867 A.2d 904, 928 n.111 (Del. Ch. 2004) (Strine, V.C.) (“Notably, the abolition of Brophy would not preclude a recovery by the corporation for actual harm to itself caused by illicit insider trading by a fiduciary, but the existence and extent of such damage would have to be proven.” (emphasis in original)), aff’d, 872 A.2d 960 (Del. 2005) (table). As the Vice Chancellor noted, Brophy has not been overruled, and, as the Vice Chancellor also noted, the American Law Institute maintains that Brophy’s provision of the disgorgement remedy is the best approach to corporate-governance law. 867 A.2d at 929 n.112. 9 fiduciary breach jointly and severally liable for the damage caused by the breach). If the corporation wrongfully refuses to pursue these claims, its shareholders may bring them derivatively.9 See In re First Interstate Bancorp Cons. S’holder Litig., 729 A.2d 851, 864 (Del. Ch. 1998) (holding that, where alleged breach of fiduciary duty harmed the corporation, alleged aiding-and-abetting claim is derivative in nature). For another relevant example, a pump-and-dump scheme likely gives rise to a colorable suit by the purchasers of the “pumped” securities against the directors and officers under federal securities laws for rescission of their purchases or damages in the amount of the difference between what they paid for the pumped securities and what those securities were really worth.10 A similar suit could also be maintained under federal securities law against the corporation if the corporation had made any material misrepresentations as to its financial condition,11 which is often a part of these schemes. What tends to make the present case appear somewhat confusing is that both of these types of claims—securities claims owned by the 9 Delaware law generally does not allow shareholders to assert breach-of-fiduciary-duty claims directly, unless the shareholders can show damage distinct from the damage to the corporation. Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031, 1034 (Del. 2004) (Veasey, C.J.). As the Tooley Court noted, for a direct claim to lie, [t]he stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. Id. at 1039 (emphasis added). 10 Section 12 of the Securities Act of 1933, 15 U.S.C. § 77l, and section 29 of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78cc, provide these remedies. 11 This remedy is available under Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated to enforce § 10(b) of the 1934 Act, 15 U.S.C. § 78j. 10 Purchasers and fiduciary-duty claims owned by the corporation—were assigned to the Trust. Counts I and II of the complaint plead claims against the Banks for aiding and abetting the Directors’ breaches of their fiduciary duty (presumably, the duty of loyalty) to AremisSoft and its shareholders. While we are not at this time deciding whether these claims are adequately pleaded, one can only understand the allegations in light of the elements of the pleaded cause of action. Under Delaware law, aiding and abetting a breach of fiduciary duty has three elements: (1) a breach of fiduciary duty, (2) knowing participation in that breach by the defendant, and (3) damages. Here, ¶¶ 109 and 114 of the complaint undertake 12 to allege breaches by the Directors, ¶¶ 110–11 and 115–16 undertake to allege participation by the Banks, and ¶¶ 112 and 117 undertake to allege damages. The substance of the alleged breach is the pump-and-dump scheme, by which the Directors allegedly (1) inflated AremisSoft’s stock price by misrepresenting the company’s finances and then (2) unloaded overpriced shares on the investing public. This scheme is perceived to have been disloyal, in the sense that the Directors allegedly used their positions of trust to pursue personal gain at the expense of the corporation. The substance of the knowingparticipation contention is that the Banks allegedly knew of the Directors’ large-scale insider trading activities and provided material assistance despite this knowledge. The damages element takes more effort to understand, as the complaint pleads that the scheme damaged “the Plaintiffs,” a term the complaint defines as the Trustees. The Trustees, obviously, are not claiming that they or the Trust were damaged directly; rather, they are claiming damage in their capacity as assignees of the true injured parties. This raises a question: who are the alleged injured parties? The Banks would have us believe that the injured parties are the Purchasers in their individual capacities as purchasers of securities. The Trust, on 12 In using the word “undertake,” we remain agnostic as to whether the pleadings succeed as a matter of law in framing the intended claims, as that is a Rule 12(b)(6) question that is not before us. 11 the other hand, would have us believe that the injured party is, at least in the first instance, AremisSoft. To better understand the question, we turn again to Delaware law,13 the substantive backdrop of these causes of action. As explained in note 9, supra, individual shareholders do not have standing to assert directly state-law claims alleging harm to a corporation. See Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031, 1034 (Del. 2004) (Veasey, C.J.). Instead, those claims must be asserted by the corporation itself or through shareholder derivative litigation. Here, determining whether the Trust complains of harm to the corporation or to the Purchasers individually is not entirely straightforward because a pump-and-dump scheme could be expected to cause two overlapping types of harm that are treated differently by Delaware law. On the one hand, the Purchasers allegedly overpaid for AremisSoft stock, and were thus harmed to the extent of the value discrepancy between what they paid and what they received. Delaware law recognizes this as a direct harm, though the question may be somewhat academic, as Delaware law seems to provide that the harm is irremediable under state law (in deference to the remedies provided by the federal securities laws). See Malone v. Brincat, 722 A.2d 5, 12–13 (Del. 1998) (noting that Delaware does not recognize a state-law cause of action by purchasers against corporate directors for fraud on the market). On the other hand, because of the pump-and-dump scheme, AremisSoft lost its economic viability, as reflected in its declining stock price and eventual bankruptcy. This is, under Delaware law, a purely derivative harm, and one that is remediable if caused by a breach of fiduciary duty. See Metro Commnc’s Corp. BVI v. Adv. Mobilecomm Techs., Inc., 854 A.2d 121, 168 (Del. Ch. 2004) (Strine, V.C.) (explaining that a corporation’s loss in value or economic viability is, in the first instance, a harm to the corporation and, only derivatively, a 13 The parties agree that Delaware law applies to the breachof-fiduciary-duty counts. This is clearly correct, as the claims involve the corporation’s internal affairs, and the state of incorporation is Delaware. See In re Topps Co. S’holders’ Litig., 924 A.2d 951, 959 (Del. Ch. 2007) (Strine, V.C.) (explaining internal affairs doctrine). 12 harm to its shareholders). Because a pump-and-dump scheme causes both harms, both harms appear on the face of the complaint. But only the harm to AremisSoft is relevant to a claim for aiding and abetting a breach of fiduciary duty because such individual-purchaser harms are not cognizable under Delaware law. See Malone, 722 A.2d at 12–13. The Banks, however, argue that the complaint does not allege harm to AremisSoft. They are mistaken. The complaint revolves around corporate directors and officers allegedly breaching their duty of loyalty to the corporation by artificially inflating the stock price and, with the alleged assistance of the Banks, exploiting the increase for their personal benefit. See compl. ¶¶ 20–36 (app. 47–54). Given that the scheme is alleged to have pushed AremisSoft into a liquidating bankruptcy,14 we conclude that the complaint alleges harm to the corporation. Moreover, the Purchasers complain that the declining stock price and subsequent bankruptcy, compl. ¶ 27 (app. 49), ultimately harmed them. By pleading this derivative harm, the Trust necessarily pleaded the initial harm to the corporation. The fact that AremisSoft no longer exists does not convert its corporate claims into direct shareholder claims; rather, the corporate nature of the claims endures, and ownership of the claims passes to AremisSoft’s successor. See Landry v. Fed. Deposit Ins. Corp., 486 F.2d 139, 148 (3d Cir. 1973) (Rosenn, J.) (holding that failure of bank did not alter derivative/direct dichotomy, and that shareholders of bank in FDIC receivership may maintain derivative action after making demand on the FDIC). Reading the complaint against the background of Delaware law, we believe that counts I and II allege aiding-andabetting claims that originally belonged to AremisSoft, not to the purchasers of AremisSoft stock. We also note that, by arguing only corporate aiding-and-abetting claims before us and before 14 The complaint explains that the stock price was artificially inflated for a time, compl. ¶ 26 (app. 49), that it then declined, compl. ¶ 27 (app. 49), that trading was halted in July 2001, id., and that AremisSoft filed for bankruptcy in March 2002, compl. ¶ 14 (app. 46). 13 the District Court,15 the Trust has abandoned any purchaserassigned aiding and abetting claims. To be clear, we have not yet answered the question whether SLUSA preempts counts I and II. That is a different question, and one that arises subsequent to clarifying what claims these counts have alleged. Having determined that the complaint has pleaded aiding-and-abetting claims originally owned by AremisSoft, and assigned to the Trust by the AremisSoft bankruptcy estate, we are ready to turn to what effect, if any, SLUSA has on them.