Court Opinion

ID: 2776673
Source: CourtListenerOpinion
Date Created: 2015-02-04 22:00:50.914968+00
Date Added: 2024-06-11T11:14:14.341537
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 14-1414

                         AARON SARNACKI,
  derivatively on behalf of Smith & Wesson Holding Corporation,

                      Plaintiff, Appellant,

                                v.

 MICHAEL F. GOLDEN; JOHN A. KELLY; BARRY M. MONHEIT; KENNETH W.
CHANDLER; JOHN B. FURMAN; I. MARIE WADECKI; JEFFREY D. BUCHANAN;
   ROBERT L. SCOTT; MITCHELL A. SALTZ; COLTON R. MELBY; ANN B.
  MAKKIYA; LELAND A. NICHOLS; THOMAS L. TAYLOR; SMITH & WESSON
                       HOLDING CORPORATION,

                      Defendants, Appellees.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                FOR THE DISTRICT OF MASSACHUSETTS

          [Hon. Michael A. Ponsor, U.S. District Judge]

                              Before

                       Lynch, Chief Judge,
               Stahl and Kayatta, Circuit Judges.

     Julia M. Williams, with whom Craig W. Smith, Robbins Arroyo
LLP, Terence K. Ankner, and Partridge, Ankner & Horstmann, LLP were
on brief, for appellant.
     John A. Sten, with whom Jason C. Moreau, Victoria E.
Thavaseelan, and McDermott Will & Emery LLP were on brief, for
appellees.

                         February 4, 2015
           LYNCH, Chief Judge.   This is a shareholder derivative

suit under state law which, after investigation by a Special

Litigation Committee, the corporation rejected.     It is one of

several suits alleging that Smith & Wesson Holding Corporation

("Smith & Wesson") made misleading public statements in 2007 about

demand for its products. We previously affirmed a grant of summary

judgment for the corporation in a class action alleging that these

statements constituted violations of federal securities laws.   In

re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir.

2012).

           In this case, Aaron Sarnacki asserts Nevada state-law

claims against Smith & Wesson's officers and directors, including

breach of fiduciary duties, waste of corporate assets, and unjust

enrichment.   In reaction to earlier and parallel cases, in June

2009, Smith & Wesson's Board formed a Special Litigation Committee

(SLC) to investigate and determine the viability of any of these

claims and to make a recommendation to the Board whether to pursue

any of these claims.     The SLC recommended against filing any

claims.   On the basis of that decision, the defendants here moved

for summary dismissal under Delaware law, as adopted by Nevada.

After limited discovery, the district court granted the motion. We

affirm.

                                 -2-
                                        I.

                Smith & Wesson is a major gun manufacturer incorporated

in Nevada with its principal place of business in Springfield,

Massachusetts. The defendants are or were officers or directors of

Smith & Wesson, including both its CEO and former CFO. Sarnacki is

a shareholder of Smith & Wesson who is a citizen of Maine.

                Sarnacki's suit alleged that, starting in the second

quarter of 2007, the defendants made or caused the company to make

a series of public statements, including press releases, touting

high sales projections due to the company's new rifle and shotgun

business.        For example, on September 6, 2007, the company issued a

press release raising sales projections for fiscal year 20081 based

on "growth in [their] core handgun business as well as [their]

newly established long gun business."2 Through September 10, 2007,

the company continued to predict strong sales growth and raised

earnings guidance in press releases, on conferences calls, and in

federal filings.

                Sarnacki alleged that all this time, Smith & Wesson and

the defendants had evidence that these projections were false.

Smith       &   Wesson   had   overinvested   in   production   while   demand

        1
       Smith & Wesson's fiscal year begins on May 1, so FY 2008
began May 1, 2007. See In re Smith & Wesson Holding Corp. Sec.
Litig., 669 F.3d at 70 n.2.
        2
       The higher earnings projections were based in part on Smith
& Wesson's entrance into the market for long guns, complementing
their core business selling handguns.

                                       -3-
collapsed at the start of the economic downturn, leading to

excessive inventory.         Although aware of this, the defendants

continued to tout high projected sales, and some of the defendants

sold millions of their shares.

             The    defendants     finally        corrected    their    alleged

misrepresentations. On October 29, 2007, the company reduced its

net income guidance by ten cents per diluted share, causing a 40%

drop in share price.      In that new guidance, the defendants pointed

in part to soft demand for long guns and excessive inventory.                 On

December 6, 2007, the company again reduced guidance by thirteen

cents per diluted share, and on January 22, 2008, the company

withdrew their earnings guidance completely. In total, the company

lost $726 million in market capitalization.

             As is often the case in these situations, a number of

securities fraud cases were brought against the company.                       In

December 2007 and January 2008, three putative class actions were

filed in federal district court in Springfield against the company

and three individuals, alleging violations of federal securities

laws.   See In re Smith & Wesson Holding Corp. Sec. Litig., 604 F.

Supp.   2d   332,   334-35   (D.   Mass.       2009).   Those    actions     were

consolidated into one case, the "Securities Class Action."               Id. at

334 n.1. The district court eventually granted summary judgment to

the   defendants     on   March    25,    2011,    finding    that   there    was

insufficient evidence of scienter and that the company's statements

                                         -4-
were neither false nor misleading.          In re Smith & Wesson Holding

Corp. Sec. Litig., 836 F. Supp. 2d 1, 3 (D. Mass. 2011).                 This

court affirmed.     In re Smith & Wesson Holding Corp. Sec. Litig.,

669 F.3d at 77.

           On   February   1,    2008,    Sarnacki   filed    a   shareholder

derivative suit in Massachusetts state court.                 That case was

consolidated with other similar cases and dismissed in January 2009

because the plaintiffs failed to make a proper pre-suit demand on

the Board of Directors.          See Sarnacki ex rel. Smith & Wesson

Holding Corp. v. Golden, 4 F. Supp. 3d 317, 320-21 (D. Mass. 2014)

(explaining procedural history and previous litigation).

           Having received two other demand letters, Smith & Wesson

formed a Special Litigation Committee on June 22, 2009, to evaluate

the viability of claims in the demand letters.             See In re Smith &

Wesson Holding Corp. Derivative Litig., 743 F. Supp. 2d. 14, 17 (D.

Mass. 2010).    The SLC consisted of three directors: John Furman,

Robert Scott, and I. Marie Wadecki. Two of those directors, Furman

and Wadecki, were also outside directors and members of the Audit

Committee during the relevant times.        The SLC hired an independent

law firm, then known as Fierst, Pucci & Kane LLP of Northampton,

Massachusetts, and conducted the investigation at issue in this

case.

           On September 4, 2009, Sarnacki sent a demand to Smith &

Wesson's   Board,    insisting    that     it   commence     an   independent

                                    -5-
investigation and recover damages caused by the officers' and

directors' breaches of fiduciary duties. Corporate counsel for the

Board responded to Sarnacki, notifying him of the SLC and demanding

information proving Sarnacki's ownership of shares during the

relevant   times.      The   SLC's   counsel     also   contacted   Sarnacki,

requesting similar information.

           On October 28, 2010, Sarnacki filed this diversity action

in federal district court in Arizona.3             The claims arise under

Nevada state law for breach of fiduciary duty, waste of corporate

assets, unjust enrichment, and entitlement to contribution or

indemnification.    Sarnacki, 4 F. Supp. 3d at 321.

           The   SLC   issued    its    report    on    December    23,   2010,

concluding that "there is insufficient evidence of any breach of

fiduciary duty by the named officers and directors" and that it is

"not . . . in the best interests of the Company" to pursue a

derivative suit. On January 13, 2011, this case was transferred to

the District of Massachusetts with the consent of both parties. On

July 1, 2011, the defendants filed a motion to dismiss, based on

the SLC's final report.         The district court denied the motion

without prejudice on March 29, 2012, and ordered limited discovery

on the adequacy of the SLC's investigation.             Sarnacki v. Golden,

     3
       Sarnacki insists that he filed on this date to ensure a
shareholder suit satisfied the pertinent statute of limitations,
though the SLC (allegedly unbeknownst to Sarnacki) obtained tolling
agreements.

                                       -6-
No. 11-cv-30009-MAP, 2012 WL 1085539, at *2 (D. Mass. Mar. 29,

2012).

            After    discovery,   the    defendants    moved     for   summary

dismissal on June 28, 2013, again on the basis of the SLC's

conclusions.        Under   Delaware    law,   a   motion   to   terminate   a

derivative suit because an SLC has recommended against filing any

claims is handled by summary dismissal, a "hybrid summary judgment

motion for dismissal."       Zapata Corp. v. Maldonado, 430 A.2d 779,

787 (Del. 1981).      The district court granted that motion on March

12, 2014.   Sarnacki, 4 F. Supp. 3d at 327.           This appeal followed.

                                       II.

            The parties agree that Delaware law, by operation of

Nevada law, applies to this case.        Sarnacki, 4 F. Supp. 3d at       322;

Sarnacki, 2012 WL 1085539, at *2; see Moradi v. Adelson, No. 2:11-

cv-00490-MMD-RJJ, 2012 WL 3687576, at *2 n.1 (D. Nev. Aug. 27,

2012); In re Amerco Derivative Litig., 252 P.3d 681, 697 (Nev.

2011).   Under Delaware law, if the corporation moves for summary

dismissal of a shareholder suit on the basis of the SLC's judgment,

a court conducts a two-step inquiry.           First, the corporation must

prove the SLC's (1) independence, and (2) good faith and reasonable

bases for its conclusions.4       Zapata, 430 A.2d at 788-89.          On these

     4
      We analyze the SLC's good faith and reasonableness together,
though Delaware's courts sometimes analyze them separately.
Compare Kahn v. Kolberg Kravis Roberts & Co., 23 A.3d 831, 841-42

                                       -7-
questions, the burden is on the corporation to show "that there is

no genuine issue as to any material fact and that the moving party

is entitled to dismiss as a matter of law."     Id. at 788.   Second,

in the court's discretion, the court may apply "its own independent

business judgment" to "thwart instances where corporate actions

meet the criteria of step one, but the result does not appear to

satisfy its spirit."   Id. at 789.    The district court here decided

the case at the first step, and Sarnacki does not argue that it

should have conducted the step-two inquiry.

          This court has never addressed the standard of review for

a summary dismissal at Zapata step one.        We now hold that the

applicable standard of review is de novo, because a summary

dismissal under Delaware law is a hybrid of a motion to dismiss and

a motion for summary judgment, both of which we review de novo.

See Booth Family Trust v. Jeffries, 640 F.3d 134, 139-41 (6th Cir.

2011). Although the standard of review is a matter of federal law,

see Booth, 640 F.3d at 140 ("[C]onsistent with the Erie doctrine,

federal law governs the standard of review of a summary judgment

motion in a diversity case."), our holding is consistent with

Delaware state law, see Kahn v. Kolberg Kravis Roberts & Co., 23

A.3d 831, 840-41 (Del. 2011) ("Zapata's first prong is subject to

a summary judgment standard, our review of which is de novo.").

(Del. 2011) (together), with Kindt v. Lund, No. Civ. A. 17751-NC,
2003 WL 21453879, at *3-4 (Del. Ch. May 30, 2003) (separately).

                                -8-
             Accordingly, we consider de novo whether the district

court erred in finding as a matter of law that (a) the SLC was

independent, and (b) the SLC's investigation was reasonable and

conducted in good faith.

A.   Independence

             The independence inquiry is highly fact specific and

centers on whether any member of the SLC, "for any substantial

reason, [is] incapable of making a decision with only the best

interests    of   the    corporation       in    mind."      In    re    Oracle    Corp.

Derivative Litig., 824 A.2d 917, 938 (Del. Ch. 2003) (citation and

quotation marks omitted).

             Sarnacki's main challenge to the SLC's independence is

that two of the three SLC members, Wadecki and Furman, could not be

independent for two reasons. The first is that they are defendants

in this case.     The second reason is that, as members of the Audit

Committee,    they      reviewed    and    approved       many    of    the   allegedly

misleading statements. In particular, Sarnacki's complaint alleged

that the Audit Committtee approved financial statements, press

releases, and "financial information and earnings guidance provided

to analysts and rating agencies," though the record does not show

that they approved scripts for earnings conference calls.

             There   are    no     per    se    rules   holding        that   an   SLC's

independence is destroyed by either naming a member as a defendant

or a members' past approval of a disputed statement. See Kaplan v.

                                          -9-
Wyatt, 499 A.2d 1184, 1189 (Del. 1985) ("Even a director's approval

of the transaction in question does not establish a lack of

independence."); Kindt v. Lund, No. Civ. A. 17751-NC, 2003 WL

21453879, at *3 (Del. Ch. May 30, 2003) ("The fact that Senator

Garn was on the board and approved the transactions does not negate

his independence.          Nor does his being named as a defendant cause

Senator Garn to lack independence." (footnotes omitted)).                      Rather,

the inquiry is more closely based on the facts.                          Sarnacki must

"show more" to suggest that an SLC member's "position as a member

of the Board of Directors influenced his decisions as a member of

the [SLC]."     Kaplan, 499 A.2d at 1189.

             There are good reasons to reject such per se rules.                      If

an   SLC     member's      status     as    a     defendant    in    the    litigation

categorically        subverted      the    independence       of   the   committee,    a

shareholder would be able to manipulate the process: he or she

would   be    able    to   name     SLC    members    as   defendants       after   the

committee's formation, thereby undercutting the legitimacy of its

conclusions. See Lewis v. Graves, 701 F.2d 245, 249 (2d Cir. 1983)

(calling, in the context of the demand requirement, such a move a

"transparent litigation tactic").                   The realities of corporate

governance, in which some corporations have small boards, suggest

that an SLC will frequently include at least one director who also

approved the relevant transaction.                 Cf. id. at 248 ("By virtue of

                                           -10-
their offices, directors ordinarily participate in the decision

making involved in such transactions.").

             These realities of corporate governance play a role here.

The SLC was formed on June 22, 2009.     At that time, Smith & Wesson

had an eight-person Board including a three-person Audit Committee.

Though the three SLC members were named as alleged wrongdoers along

with the rest of the Board, neither the Securities Class Action nor

the other demand letters specified any wrongdoing by the Audit

Committee.     In creating a three-person SLC, then, the Board could

reasonably have selected members of the Audit Committee without any

attempt to undermine the SLC's independence, screening only for

expertise and ensuring that the SLC had at least two outside

directors.     It was only months after the SLC's formation that

Sarnacki sent his demand, on September 4, 2009, to the Board

specifying misconduct by the Audit Committee.      By that point, the

SLC had met, hired counsel, and begun communicating with plaintiffs

in other derivative actions. It was not unreasonable for the Board

to decline to abandon the SLC, which had already started its work,

and to reconstitute a new one.

             To say there is no per se rule does not mean that there

is no cause for concern.     Those who are asked to evaluate conduct

which they have approved may have a tendency not to find fault.

But the Delaware Supreme Court has held that "a director is

independent when he is in a position to base his decision on the

                                  -11-
merits of the issue rather than being governed by extraneous

considerations or influences." Kaplan, 499 A.2d at 1189; see also,

e.g., Sutherland v. Sutherland, No. C.A. 2399-VCL, 2008 WL 1932374,

at *3 (Del. Ch. May 5, 2008).               Sarnacki offers no evidence of

actual    bias      affecting     any    decisionmaker        or    of     extraneous

considerations having motivated either the process or the ultimate

recommendation.          Moreover, the Committee did not use in-house

counsel, a disapproved practice, but chose independent counsel.

              Sarnacki overstates the record when he argues there were

admissions of non-independence.             He argues that the SLC members

admitted prejudging the merits of the claims they were charged with

investigating.       But in the statements at issue, the SLC members

testified merely that they were doubtful of Sarnacki's derivative

claims   based      on   their   background       knowledge    and       the   Board's

preliminary investigations before the SLC was formed. They did not

draw any formal conclusions, and that they had some preliminary

views    is   not    surprising    and     does   not   by    itself       constitute

prejudgment of the issue.               In the case cited by Sarnacki, in

contrast to the record here, the SLC members "conducted the

investigation with the object of putting together a report that

demonstrates the suit has no merit." London v. Tyrrell, No. 3321-

CC, 2010 WL 877528, at *15 (Del. Ch. Mar. 11, 2010).

              Sarnacki    also    argues    the    district        court    erred   by

considering each of his bias arguments separately, rather than as

                                         -12-
a totality.    Sarnacki complains that had the district court viewed

the structural bias, the evidence of prejudgment, and arguments on

the good faith and reasonableness prong together, it would have

seen a lack of independence by the SLC.            We do not read the

decision that way and on de novo review, considering these all

together, conclude there is no merit.

           Sarnacki   finally   argues   that,   even   if   he   has    not

plausibly challenged the SLC's independence, that is not his

burden.   Rather, the defendants must prove the SLC's independence.

Sarnacki is right on the law.     See Zapata, 430 A.2d at 788.           But

the defendants have carried their burden.        Smith & Wesson's Board

appointed three experienced directors, two of whom were outside

directors on the independent Audit Committee, to the SLC.               They

were "in a position to base [their] decision on the merits of the

issue rather than being governed by extraneous considerations or

influences."    Kaplan 499 A. 2d at 1189.    And Sarnacki has offered

no plausible argument to the contrary.

           We do not rely, as did the district court, on a theory

that Sarnacki "tacitly conceded the independence of the SLC by

making a demand on the board."    Sarnacki, 4 F. Supp. 3d at 325.         As

Sarnacki correctly observes, the court's analysis is incorrect.

The cases discussing this tacit concession focus on the effect of

the concession implicit in a demand on a plaintiff's later attempt

to argue that making a demand was excused.       See, e.g., Spiegel v.

                                 -13-
Buntrock, 571 A.2d 767, 775-77 (Del. 1990).      Delaware's cases do

not say that such a concession limits later arguments about an

SLC's independence. To the contrary, they say that a plaintiff can

make a demand and subsequently argue that the Board improperly

refused   the     demand,   including   by   challenging   the   SLC's

independence.    See, e.g., Grimes v. Donald, 673 A.2d 1207, 1219-20

(Del. 1996), overruled on other grounds by Brehm v. Eisner, 746

A.2d 244, 253 & n.13 (Del. 2000).

             On the undisputed facts, the Board has met its burden as

to the independence of the SLC.

B.   Good Faith and Reasonableness

             The good faith and reasonableness inquiry focuses on the

process used by the SLC, rather than the substantive outcome of the

process. See Spiegel, 571 A.2d at 778 ("The ultimate conclusion of

the [special litigation] committee . . . is not subject to judicial

review." (alterations in original)(quoting Zapata, 430 A.2d at 787)

(internal quotation marks omitted)). Courts look to indicia of the

SLC's investigatory thoroughness, such as what documents were

reviewed and which witnesses interviewed. See Sarnacki, 4 F. Supp.

3d at 325.

             There is no question that the SLC relied on experienced

independent counsel, reviewed relevant discovery materials, and

released a lengthy final report, all indicia of a reasonable

process and good faith.

                                 -14-
             Sarnacki   first    argues      that    the    SLC    abdicated      its

responsibilities, placing the entire investigation in its counsel's

hands.     This is in some tension with his suggestion that the SLC

members could have been out to protect themselves.                       Second, he

argues that the SLC's work was tainted, because SLC independent

counsel    collaborated     closely    with     counsel       representing        the

defendants in the Securities Class Action.

             Sarnacki   again    overstates         the    record.        He    takes

statements    from   the   SLC   members'     depositions         that   they    were

generally unaware of the scope of discovery to show that they were

so uninvolved as to abdicate their roles to independent counsel.

For example, SLC counsel obtained an extensive document production

from the Securities Class Action defendants' counsel, but SLC

members could not testify as to the details of how that production

was generated or how documents from that production were selected

for their personal review.

             Reliance on experienced outside counsel for the SLC is

often taken as evidence that the SLC conducted its investigation

reasonably and in good faith, not the opposite. See, e.g., Grafman

v. Century Broad. Corp., 762 F. Supp. 215, 220 (N.D. Ill. 1991).

There is no adverse inference to be drawn about the members

delegating the discovery methodology or filtering decisions to

counsel.      The SLC members did personally review the relevant

documents and make the final decisions about the contents of the

                                      -15-
SLC report.5   The plaintiffs cite no case for the proposition that

relying on counsel for discovery decisions, without more, is

unreasonable or a sign of bad faith.         Cf. Peller v. The Southern

Co., 707 F. Supp. 525, 529 (N.D. Ga. 1988) (explaining that while

an SLC's "reliance on counsel is an accepted practice," insulating

the investigation from scrutiny by privileging the SLC's documents

is "not good faith"); Davidowitz v. Edelman, 583 N.Y.S.2d 340, 344

(N.Y. Sup. Ct. 1992) (finding an SLC's investigation unreasonable

because    "[t]he   committee   did    not   join   in   their   counsel's

investigation or review, save in the most perfunctory manner").

The errors in those cases did not happen here.

           Sarnacki   argues    that   SLC   counsel   engaged   in   "heavy

reliance" on discovery by the defendants' counsel in the federal

Securities Class Action, and this should have been a "red-flag

warning" to the SLC that they needed to supervise SLC counsel more

closely.    Since they failed to do so, the argument goes, the SLC

effectively relied on conflicted counsel.

           This argument contains a fatal flaw: there is no evidence

that SLC counsel was biased or conflicted, and the SLC's choice to

     5
       The defendants rely heavily on the SLC's final report to
rebut Sarnacki's claims. Sarnacki rejects this by observing that
the report was authored by SLC counsel, and so cannot show that the
SLC members themselves were adequately involved in the process. We
are doubtful that the claimed inconsistencies between the final SLC
report and the SLC members' deposition testimony undermine the
report in any serious way.     Nonetheless, we do not place heavy
emphasis on that report in reaching our conclusion.

                                   -16-
save costs and avoid duplication in discovery by using what had

already been produced in the securities action was eminently

sensible.    Cf. Kindt, 2003 WL 21453879, at *4 (finding an SLC's

conclusion reasonably supported even as the SLC saved costs by

foregoing a formal fairness opinion of a merger).      The discovery

from the class action case was plainly relevant to the SLC's

decision.    The cases Sarnacki cites, which involved a conflict by

the SLC's own counsel, have no bearing here.        E.g., Stepak v.

Addison, 20 F.3d 398, 406-08 (11th Cir. 1994).6

            Having dealt with Sarnacki's second argument, we point

out that the differences between Sarnacki's claims and those of the

class action did not render use of that discovery unreasonable or

in bad faith.

            Sarnacki next places heavy emphasis on the SLC's reliance

on two experts who were also used by the defendants in the

     6
       Sarnacki also emphasizes that the SLC members, in their
depositions, could not recall basic information about their task.
For example, Sarnacki emphasizes that the SLC members did not
remember the contents of Sarnacki's demand letter. Their lack of
memory, he argues, supports the view that the SLC members were so
uninvolved in the investigation that they abdicated their
responsibilities.
     This argument is unsupported by the record. See Sarnacki, 4
F. Supp. 3d at 326. While the SLC members failed to recall answers
to many questions asked, substantial time passed between their
depositions in this case (in March and April 2013) and the SLC's
final report (in December 2010). Some details unknown to the SLC
members pertained to the discovery process, which the SLC delegated
to counsel. Finally, as Sarnacki explains in other parts of his
brief, the SLC members' answers of "Not that I recall" often meant
"No we did not," rather than "I do not remember."

                                 -17-
Securities Class Action.              The SLC retained Dr. Craig Moore, an

economic expert, to analyze financial data.              The SLC also retained

the DiNatale Detective Agency to investigate allegations made by

unnamed former employees.             As to Dr. Moore, the defendants note

that the SLC was aware of his potential conflict, reviewed the

deposition transcript from the class action in which Dr. Moore was

cross-examined,         and    reviewed    deposition    transcripts         of   the

plaintiffs' experts from the class action.               The SLC was perfectly

capable of evaluating the soundness of Dr. Moore's opinion in light

of his potential conflict.

                 As to DiNatale, the defendants argue that the agency only

provided "written reports of factual interviews," to which Sarnacki

replies that those reports were not passed along to the SLC

members.         If the DiNatale agency did not produce any information

actually used in the SLC's decision, it could not have caused the

SLC members to act in bad faith or unreasonably.               The SLC's use of

the defendants' experts is not always a best practice, but these

facts       do   not   raise   a   plausible     inference    of    bad   faith    or

unreasonableness under these circumstances.

                 Sarnacki's    last   challenge   is   that   the    SLC's    almost

exclusive7 reliance on the Securities Class Action materials was

        7
       The SLC's reliance on the Securities Class Action discovery
was not entirely exclusive. Near the end of the investigation, SLC
counsel interviewed seven defendants in the derivative actions
unnamed in the Securities Class Action. One SLC member described
them as a matter of "wrapping up," but the same member testified

                                          -18-
necessarily incomplete.       His complaint focuses on forward-looking

statements dismissed from the Securities Class Action and names

eleven individual defendants unnamed in the class action.                 These

distinctions, he argues, show that relevant information was omitted

from the discovery the SLC used.

            Insofar as the overlap in materials was extensive, it is

also not indicative of any unreasonableness.                Sarnacki does not

identify a "fact or line of investigation that Defendants missed."

Sarnacki, 4 F. Supp. 3d at 327.              Though      the Securities Class

Action    did   not    include     discovery     about   any    forward-looking

statements, it did include statements of present or historical

fact.    In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d at

72. The discovery for these claims is significantly similar.                   The

forward-looking       statements    at   issue    here    are   alleged   to    be

materially misleading because they projected growth based on high

future demand, while the statements of historical fact at issue in

the class action were alleged to be materially misleading because

they claimed strong existing demand -- both allegedly in conflict

with contemporary internal corporate data. See id. at 74-77.                   The

basic narrative in the two cases is the same: Smith & Wesson and

that the class discovery had shown "nothing . . . to warrant
further going down further paths," especially in light of the
difficulty of proving fraud arising from forward-looking
statements.   Nonetheless, other than the SLC final report, the
record contains no evidence that the SLC members themselves read
transcripts or summaries of the interviews.

                                      -19-
its management inflated expectations about their sales of guns in

2007 and early 2008 based on assertions about high demand that were

false.

           The distinctions Sarnacki emphasizes are ones without a

difference -- or at least, a difference that was not cured by the

SLC's additional interviews.        Sarnacki has not identified any key

factual predicates which might be discoverable but did not fall

within the class action discovery.

           At bottom, there is inadequate evidence to permit a

reasonable    finder   of   fact    to   conclude   that   SLC   counsel   was

conflicted, that the SLC members read too few discovery materials,

or that the SLC's involvement was merely perfunctory.                 On the

undisputed facts, the SLC's investigation was reasonable and in

good faith.

C.   Scope of Discovery Allowed to Sarnacki

           Sarnacki concludes by arguing that, at minimum, the

district   court   should    have    granted    broader    discovery.       In

particular, Sarnacki wants access to the communications among the

SLC, their counsel, the defendants, and the defendants' counsel.

Sarnacki also asks for the minutes of the SLC meetings and the

retention agreements between the SLC and its advisors.             Since the

SLC did not police these relationships, Sarnacki argues, he is

entitled to evidence allowing him to probe them for bias.

                                     -20-
          To succeed, Sarnacki must overcome two hurdles.     First,

we review the district court's decisions about the scope of

discovery for abuse of discretion, reversing only "upon a clear

showing [that] . . . the lower court's discovery order was plainly

wrong and resulted in substantial prejudice to the aggrieved

party."   United States ex rel. Duxbury v. Ortho Biotech Prods.,

L.P., 719 F.3d 31, 37 (1st Cir. 2013) (alterations in original)

(citations and internal quotation marks omitted).     Second, Zapata

itself contemplates only "[l]imited discovery . . . to facilitate"

the inquiry.   430 A.2d at 788.   This discovery is "intended more as

an aid to the Court than it is as a preparation tool for the

parties," and "is not afforded to the plaintiff as a matter of

right but only to such extent as the Court deems necessary."

Kaplan v. Wyatt, 484 A.2d 501, 510 (Del. Ch. 1984), aff'd 499 A.2d

1184 (Del. 1985).

          Sarnacki cites a series of cases in which courts have

granted discovery of the type of documents he seeks.     E.g., Zitin

v. Turley, No. Civ. 89-2061-PHX-CAM, 1991 WL 283814, at *2-4 (D.

Ariz. June 20, 1991) (granting discovery of communications between

an SLC and its counsel).    Only one case suggests that plaintiffs

should receive that discovery as a matter of course. Grimes v. DSC

Commc'ns Corp., 724 A.2d 561, 567 (Del. Ch. 1998).     But even that

case does not suggest that, in the highly fact-intensive context of

a Zapata inquiry, a more limited discovery scope is an abuse of

                                  -21-
discretion.

             In this case, the defendants provided the final SLC

report, all documents relied on by the SLC to produce that report,

Board minutes regarding the formation and appointment of the SLC,

and the SLC members for deposition.              Sarnacki, 4 F. Supp. 3d at

321.   Sarnacki did not file under Fed. R. Civ. P. 56(d) alleging

that it could not present facts in response to the motion for

summary dismissal essential to its opposition.                   See Jones v.

Secord, 684 F.3d 1, 6 (1st Cir. 2012) (describing Rule 56(d) as a

"safety net for parties that need more time to gather facts

essential to resist a motion for summary judgment").              Considering

the specific discovery requests in Sarnacki's motions to compel

further discovery, the district court decided that they were

"overbroad, extending well beyond the intent of the court in

permitting     limited    discovery"       and     that   the     "substantial

disclosures" already provided were "sufficient to permit [Sarnacki]

to build an adequate record."       Sarnacki has also failed to mount a

serious   challenge      to   the   independence,         good    faith,   and

reasonableness of the SLC inquiry. The district court decided that

the discovery was adequate to aid its review, and that decision was

not an abuse of the court's discretion.

                                    -22-
                              III.

          After a careful review of the record, we find that

Smith & Wesson satisfied the Zapata steps.   The judgment of the

district court is affirmed.

          So ordered.

                              -23-