Court Opinion

ID: 9840563
Source: CourtListenerOpinion
Date Created: 2023-09-19 14:00:36.798032+00
Date Added: 2024-06-11T10:35:44.376641
License: Public Domain

22-2794
Rubenstein v. Adamany

                        UNITED STATES COURT OF APPEALS
                            FOR THE SECOND CIRCUIT

                                  SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary
order filed on or after January 1, 2007, is permitted and is governed by federal rule of
appellate procedure 32.1 and this court’s local rule 32.1.1. When citing a summary
order in a document filed with this court, a party must cite either the federal appendix
or an electronic database (with the notation “summary order”). A party citing a
summary order must serve a copy of it on any party not represented by counsel.

       At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 19th day of September, two thousand twenty-three.

PRESENT:
            JON O. NEWMAN,
            JOSÉ A. CABRANES,
            MARIA ARAÚJO KAHN,
                  Circuit Judges.
__________________________________________

STANLEY RUBENSTEIN, Derivatively on
Behalf of Nominal Defendant JEFFERIES
FINANCIAL GROUP INC.,

                         Plaintiff-Appellant,

                 v.                                                  22-2794

LINDA L. ADAMANY, BARRY J. ALPERIN,
ROBERT D. BEYER, FRANCISCO L. BORGES,
W. PATRICK CAMPBELL, PAUL M.
DOUGAN,     BRIAN     P.   FRIEDMAN,
MARYANNE GILMARTIN, RICHARD B.
HANDLER, ALAN J. HIRSCHFIELD, JAMES E.
JORDAN, ROBERT E. JOYAL, JACOB M.
KATZ, JEFFREY C. KEIL, MICHAEL T.
O’KANE, JESSE CLYDE NICHOLS, III,
STUART H. REESE, MICHAEL SORKIN, and
JOSEPH S. STEINBERG,

                        Defendants-Appellees,

JEFFERIES FINANCIAL GROUP INC.,

                  Nominal Defendant-Appellee. *
___________________________________________

FOR PLAINTIFF-APPELLANT:                                   HUNG G. TA (JooYun Kim, on the
                                                           brief), HGT Law, New York, NY;
                                                           Peter Saﬁrstein, Saﬁrstein Law LLC,
                                                           Ridgewood, NJ, on the brief.

FOR DEFENDANTS-APPELLEES:                                  GEORGE S. WANG, Simpson Thacher
                                                           & Bartlett LLP, New York, NY.

       Appeal from the September 29, 2022, judgment of the United States District Court

for the Southern District of New York (Paul A. Crotty, Judge).

       UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,

AND DECREED that the judgment of the district court is AFFIRMED.

       Plaintiff-Appellant Stanley Rubenstein (“Rubenstein”) appeals from a judgment

of the district court (Crotty, J.) dismissing his shareholder derivative action, brought on

behalf of nominal defendant Jefferies Financial Group Inc. (“Jefferies”), against officers

and directors (collectively, “Defendants”) of Jefferies. Rubenstein alleges that Defendants

       *   The Clerk of Court is directed to amend the oﬃcial caption as sets forth above.
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violated Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by

issuing false and misleading proxy statements in connection with shareholder votes on

the re-election of certain directors and the approval of executive compensation between

2017 and 2020.         Specifically, Rubenstein contends that the proxy statements

misrepresented the cost of executive and director compensation by underreporting the

extent to which Defendants used Jefferies’ corporate jets 1 for their own personal travel.

Rubenstein’s original complaint, which also included state law claims for breach of

fiduciary duty, corporate waste, and unjust enrichment, was dismissed by the district

court under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. See

Rubenstein ex rel. Jefferies Fin. Grp. Inc. v. Adamany, 532 F. Supp. 3d 154, 169 (S.D.N.Y. 2021).

On appeal, we affirmed the district court’s dismissal of the state law claims but vacated

its dismissal of the Section 14(a) claim and remanded the case to the district court with

instructions to reconsider “whether Rubenstein ha[d] adequately alleged loss causation.”

Rubenstein ex rel. Jefferies Fin. Grp. Inc. v. Adamany, No. 21-905-CV, 2021 WL 5782359, at *4

(2d Cir. Dec. 7, 2021) (summary order). In explaining our decision, we noted that “[w]e

vacate the decision of the District Court not because we have determined that it is

wrong—we express no view on that question—but because it was reached without

consideration of controlling precedent.” Id.

       1Jeﬀeries owns and operates three aircraft: two Gulfstream GV-SPs and one Bombardier
Challenger. J. App’x at 92. The Gulfstreams can accommodate twenty passengers, the
Bombardier can accommodate eight. Id.
                                               3
       On remand, Rubenstein filed an amended complaint (“Amended Complaint”)

alleging two new theories of loss causation. First, he argues that “inaccuracies and

omissions” in the proxy materials concerning Defendants’ personal use of the corporate

jets deprived Jefferies shareholders of their right to cast informed advisory votes on

executive compensation (known as a “say-on-pay” vote) pursuant to 15 U.S.C. § 78n-1. 2

J. App’x at 129. Second, he argues that the allegedly misleading proxy statements

rendered Jefferies’ director elections between 2017 and 2020 “tainted and defective.” Id.

at 130. The Amended Complaint seeks both injunctive relief and the disgorgement of

compensation paid to the directors who prevailed in the “tainted” elections. Id. at 140.

       By opinion and order entered September 29, 2022, and amended on October 5,

2022, the district court dismissed the Amended Complaint, concluding that Rubenstein

had failed to plausibly allege loss causation. See Rubenstein ex rel. Jeﬀeries Fin. Grp. Inc. v.

Adamany, No. 20-CV-2775 (PAC), 2022 WL 6592503, at *3 (S.D.N.Y. Oct. 5, 2022)

(“Rubenstein II”). Regarding the “say-on-pay” theory of loss causation, the district court

concluded that it was foreclosed by the Supreme Court’s decision in Virginia Bankshares,

Inc. v. Sandberg, 501 U.S. 1083 (1991), which held that loss causation in Section 14(a) cases

cannot be based on “non-binding, ‘cosmetic’” shareholder votes. Rubenstein II, 2022 WL

       2  15 U.S.C. § 78n-1 provides that “[n]ot less frequently than once every 3 years, a proxy or
consent or authorization for an annual or other meeting of the shareholders for which the proxy
solicitation rules of the Commission require compensation disclosure shall include a separate
resolution subject to shareholder vote to approve the compensation of executives.”
                                                 4
6592503, at *3 (quoting Va. Bankshares, 501 U.S. at 1105–06). As for the “tainted election”

theory of loss causation, the district court concluded that the theory was “moot” because

the terms of the directors elected between 2017 and 2020 had expired. See id. at *4–5. The

district court entered judgment in accordance with its decision on September 29, 2022,

and Rubenstein timely appealed. We assume the parties’ familiarity with the underlying

facts, the procedural history, and the issues on appeal, to which we refer only as necessary

to explain our decision to aﬃrm.

                                         DISCUSSION

       “We review de novo the dismissal of a complaint under Rule 12(b)(6), accepting

all factual allegations as true and drawing all reasonable inferences in favor of the

plaintiff.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715 (2d Cir. 2011). To state a claim

under Section 14(a), and Rule 14a-9 promulgated thereunder, 3 a plaintiff must plausibly

allege that (1) a proxy statement contained a material “misstatement or omission,” which

(2) caused the plaintiff injury, and (3) “the proxy solicitation itself, rather than the

particular defect in the solicitation materials, was an essential link in the accomplishment

of the transaction.” Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 384–85 (1970). The causation

requirement “under federal securities laws is two-pronged: a plaintiff must allege both

       3 Rule 14a-9, promulgated pursuant to Section 14(a) of the Exchange Act, prohibits proxy
statements which are “false or misleading with respect to any material fact, or which omits to
state any material fact necessary in order to make the statements therein not false or misleading.”
7 C.F.R. § 240.14a-9.
                                                5
transaction causation, i.e., that but for the fraudulent statement or omission, the plaintiff

would not have entered into the transaction; and loss causation, i.e., that the subject of

the fraudulent statement or omission was the cause of the actual loss suffered.” Suez

Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001); see also Grace

v. Rosenstock, 228 F.3d 40, 47 (2d Cir. 2000) (“[B]oth loss causation and transaction

causation must be proven in the context of a private action under § 14(a) of the 1934 Act

and SEC Rule 14a-9 promulgated thereunder.”).

       On appeal, Rubenstein argues that the district court erred in concluding that the

Amended Complaint fails to adequately allege loss causation. He contends that his “say-

on-pay” theory is not foreclosed by Virginia Bankshares and that his “tainted election”

theory is not moot because the Amended Complaint seeks prospective injunctive relief

as to Jefferies’ future proxy statements and the disgorgement of the director’s prior

compensation. We address each argument in turn.

  I.   The “Say-on-Pay” Theory

       We ﬁrst conclude that the district court properly held that Rubenstein’s “say-on-

pay” theory is foreclosed by Virginia Bankshares. There, the Supreme Court held that

materially misleading proxy statements issued to minority shareholders in connection

with a non-binding vote failed to satisfy Section 14(a)’s causation requirement because

the solicited votes were not necessary to approve the challenged corporate action. See Va.

Bankshares, 501 U.S. at 1105–06. In arriving at this conclusion, the Supreme Court

                                              6
expressly rejected the shareholders’ argument that the misstatements were causally

connected to their loss because the defendants “would have been unwilling to proceed

with the merger without the approval manifested by the minority shareholders’ proxies,

which would not have been obtained without the solicitation’s express misstatements

and misleading omissions.” Id. at 1100–01.

       Rubenstein argues that Virginia Bankshares is inapposite because his “say-on-pay”

theory challenges the loss of a statutory right to cast a particular vote, not the corporate

action that the vote is intended to inﬂuence. In support of this claim, Rubenstein relies

on our prior decision in Wilson v. Great Am. Indus., Inc., 979 F.2d 924 (2d Cir. 1992). In

Wilson, minority shareholders alleged that materially misleading proxy statements issued

in connection with a proposed merger “deceptively procured [their] vote in favor of the

merger,” which, in turn, “deprived them of their state appraisal rights.” Id. at 930. On

appeal, we concluded that the minority shareholders adequately alleged loss causation

because the state appraisal rights, if exercised, could have allowed the minority

shareholders to “recoup a greater value” for their shares. See id. at 931 (“[L]oss causation

may be established when a proxy statement prompts a shareholder to accept an unfair

exchange ratio for his shares rather than recoup a greater value through a state

appraisal.”).

       Here, the parties do not dispute that the “say-on-pay” votes were merely advisory

and had no impact on the value or structure of the executive compensation packages.

                                             7
Rubenstein does not argue that the allegedly misleading proxy statements deprived him

of an economic beneﬁt or prevented him from exercising a substantive state right similar

to the appraisal rights at issue in Wilson. Instead, he simply argues that loss causation is

satisﬁed because the non-binding “say-on-pay” vote is an important right in and of itself.

This argument is insuﬃcient to establish loss causation based on a non-binding,

“cosmetic” shareholder vote that confers no substantive rights upon shareholders. Va.

Bankshares, 501 U.S. at 1105; see also Grace, 228 F.3d at 48 (noting “that the principle

announced in Virginia Bankshares” requires “a plaintiﬀ [to] present nonspeculative

evidence of loss causation and transaction causation” (citing Wilson, 979 F.2d at 931));

Gray v. Wesco Aircraft Holdings, Inc., 847 F. App’x 35, 37 (2d Cir. 2021) (summary order)

(holding Section 14(a) requires a showing that plaintiﬀ “suﬀered a non-speculative

economic loss”). Accordingly, we conclude that the district court correctly held that

Rubenstein’s “say-on-pay” theory fails to allege loss causation. 4

 II.    The “Tainted Elections” Theory

       Turning to the “tainted elections” theory, we begin by noting that the district court

       4 We note that every federal court to address this issue has similarly concluded that Section
14(a) claims based on “say-on-pay” proxy materials fail to adequately allege causation. See e.g.,
McDowell v. Bracken, 794 F. App’x 910, 917 (11th Cir. 2019) (summary order) (“[T]he [district] court
did not err when it correctly concluded that proxies related to the election of directors and a non-
binding ‘say-on-pay’ vote were too indirectly connected to any alleged losses to ﬁnd loss
causation . . . .”); Yu Liang v. Berger, No. 13-CV-12816-IT, 2015 WL 1014525, at *10 (D. Mass. Mar.
9, 2015) (holding that shareholder approval of executive compensation “on an advisory basis”
failed to allege causation); In re Marriott Int’l, Inc., Customer Data Sec. Breach Litig., No. 19-MD-
2879, 2021 WL 2401641, at *17 (D. Md. June 11, 2021) (same).
                                                 8
erred in concluding that the theory is moot because the terms of the directors approved

by the relevant proxy statements had expired.           Subsection (g) of the Amended

Complaint’s “Prayer for Relief” requests “[i]njunctive relief requiring Defendants to

disclose the correct ‘aggregate incremental costs’ of personal use of the Aircraft, including

a portion of the ﬁxed costs allocable to personal ﬂights on the Aircraft, and requiring

Defendants to correct all proxy statements for prior ﬁscal years to disclose these same

costs . . . .” J. App’x at 140 (emphasis added). Drawing all reasonable inferences in

Rubenstein’s favor, we read subsection (g) as requesting both retrospective relief as to

Jeﬀeries’ “prior” proxy statements and prospective injunctive relief as to its future proxy

statements. We have previously recognized that a Section 14(a) claim challenging the

election of corporate directors is not mooted by the end of the directors’ terms “where

[the] plaintiﬀ seeks injunctive versus declaratory relief, or, in short, where [the] plaintiﬀ

‘seeks not only to eliminate the eﬀect of past wrongdoing, but also to prevent its

recurrence.’” Sanders v. Thrall Car Mfg. Co., 582 F. Supp. 945, 955 (S.D.N.Y. 1983) (quoting

Seibert v. Sperry Rand Corp., 586 F.2d 949 (2d Cir. 1978)), aﬀ’d per curiam, 730 F.2d 910 (2d

Cir. 1984). Because the Amended Complaint appears to request injunctive relief as to

Jeﬀeries’ future proxy statements, the theory of loss causation is not moot.

       Despite this conclusion, we nevertheless aﬃrm the district court’s dismissal of the

Amended Complaint because the “tainted election” theory fails to adequately allege loss

causation. See Clementine Co., LLC v. Adams, 74 F.4th 77, 83–84 (2d Cir. 2023) (“We may

                                             9
aﬃrm the judgment of the district court on any ground that ﬁnds a basis in the record

and where, as here, the district court dismisses a complaint for lack of standing, this Court

can aﬃrm on the alternative basis of failure to state a claim even if it ﬁnds Article III’s

standing requirements satisﬁed.”). To plead loss causation, a plaintiﬀ must allege “that

the misrepresentations or omissions caused the economic harm” for which the plaintiﬀ

seeks relief. Grace, 228 F.3d at 47–48; see also Wilson, 979 F.2d at 931 (“We recognize that

loss causation or economic harm to plaintiﬀs must be shown, as well as proof that the

misrepresentations induced plaintiﬀs to engage in the subject transaction, that is,

transaction causation.”). Here, the “tainted election” theory fails because Rubenstein

does not plausibly allege that the ﬁnancial harm suﬀered by Jeﬀeries was caused by the

allegedly misleading proxy statements.

       Rubenstein identiﬁes two economic harms in the Amended Complaint: (1) “the

payment of millions of dollars of improper and undisclosed perquisites (personal aircraft

use) to the three [executive] [o]ﬃcer Defendants,” and (2) “the payment of director

compensation to the [d]irector Defendants who were elected on the misleading proxy

statements.” Appellant’s Reply Br. at 3. The Amended Complaint, however, does not

plausibly allege that material misstatements concerning executive compensation

proximately caused either harm.        First, ﬁnal approval of executive compensation,

including the corporate policies governing the executives’ use of the corporate aircraft,

was left to the discretion of the elected directors and Jeﬀeries’ “Compensation

                                             10
Committee.” J. App’x at 47, 458. Because the shareholders did not directly approve of

any aspect of executive compensation, Rubenstein cannot plausibly allege that the

misleading proxy statements caused Jeﬀeries to pay millions of dollars in undisclosed

perquisites to its executives. See Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir.

2005) (“[T]o establish loss causation, a plaintiﬀ must allege . . . that the subject of the

fraudulent statement or omission was the cause of the actual loss suﬀered . . . .” (internal

quotation marks omitted)); see also Edward J. Goodman Life Income Tr. v. Jabil Circuit, Inc.,

594 F.3d 783, 797 (11th Cir. 2010) (explaining that the election of directors only indirectly

caused the shareholders’ loss where the subject matter of the lawsuit concerned the

directors’ actions after election).

       Second, the Amended Complaint does not plausibly allege a causal nexus between

the misleading proxy statements and the compensation received by Jeﬀeries’ directors.

Rubenstein does not allege that the directors would not have been re-elected had the

“aggregate internal costs” associated with private use of the jets been accurately disclosed

prior to the election. 5 Instead, Rubenstein simply argues that the causation requirement

is satisﬁed because the directors were re-elected “based on proxy statements issued in

       5In his original complaint, Rubenstein did allege that “had the proxy statement accurately
portrayed the cost of the abuse of the Flight Program, Jeﬀeries’s board would have lost reelection,
which would have had the result of ending or reducing the practice of excessive personal travel
on company airplanes.” Rubenstein, 2021 WL 5782359, at *3; see also J. App’x at 68–69 (original
complaint). In the Amended Complaint, Rubenstein’s “primary theory [of] causation . . . is that
Defendants’ misleading proxy statements caused injury by leading to the defective elections for
the Director Defendants.” Appellant’s Reply Br. at 2.
                                                11
violation of Section 14(a).” J. App’x at 130. This conclusory allegation, while suﬃcient to

establish transaction causation, 6 does not plausibly allege that material misstatements

concerning the alleged misuse of the corporate jets caused the directors to earn “a lucrative

compensation package comprising an equity grant in the amount of $190,000, retainer of

$115,000 and additional retainers” of tens of thousands of dollars for serving on various

committees. Id. at 130–31. Nor does it plausibly allege that the proxy statements caused

the directors to earn millions of dollars in undisclosed perquisites. Accordingly, the

“tainted election” theory fails to allege suﬃcient facts to plead loss causation. See Lentell,

396 F.3d at 174–75 (aﬃrming dismissal for failure to allege loss causation where

        6  Rubenstein’s “tainted election” theory conﬂates loss causation with transaction
causation, which is not at issue in this case. In his Amended Complaint and principal brief,
Rubenstein cites our prior decision in Galef v. Alexander, 615 F.2d 51, 56 (2d Cir. 1980), in support
of the proposition that “loss causation is established when shareholders elect[] [directors] based
on misleading proxy statements.” Appellant’s Br. at 15 n.5. The Galef decision, however, focuses
exclusively on the issue of transaction causation. See 615 F.2d at 65 (“[T]here appears to be alleged
a suﬃcient causal link between the claimed nondisclosures in the proxy statements and the
elections which the statements sought to inﬂuence.” (emphasis added) (citing Weisberg v. Coastal
States Gas Corp., 609 F.2d 650, 653–54 (2d Cir. 1979) (concluding “transaction causation
requirement” satisﬁed where “the challenged transaction is the election of the directors[] and
[there is] no doubt that the proxy solicitation itself . . . was an essential link in the accomplishment
of that transaction . . . .” (internal quotation marks omitted)))); see also Kuebler v. Vectren Corp., 13
F.4th 631, 645 (7th Cir. 2021) (“Plaintiﬀs argue that loss causation is alleged suﬃciently where a
materially deﬁcient proxy statement was an essential link in the consummation of a transaction
that the plaintiﬀ alleges caused him ﬁnancial harm. But that is the test for transaction
causation.”). Moreover, Galef predates our decision in Grace, which expressly held that a Section
14(a) claim must allege “both loss causation and transaction causation.” 228 F.3d at 47.
Rubenstein’s assertion that “loss causation is suﬃciently pled under Section 14(a) where a
plaintiﬀ alleges that misleading proxy statements were issued in connection with and led to the
election of directors,” Appellant’s Br. at 13, is incorrect as a matter of law. See Grace, 228 F.3d at
47 (stating that under Section 14(a) a plaintiﬀ must demonstrate both transaction causation and
loss causation).
                                                   12
complaint oﬀered no factual allegations supporting inference that subject of false

statements caused decline in stock value); see also Lattanzio v. Deloitte & Touche LLP, 476

F.3d 147, 157–58 (2d Cir. 2007) (concluding plaintiﬀs failed to allege suﬃcient facts to

show that defendant’s misstatements were the proximate cause of plaintiﬀs’ losses where

non-party’s misstatements could also have caused the loss and plaintiﬀs did not “allege[]

facts that would allow a factﬁnder to ascribe some rough proportion of the whole loss to

[defendant’s] misstatements”).

       In sum, although we agree with Rubenstein that the district court erred in

concluding that the “tainted election” theory is moot, we aﬃrm the district court’s

judgment of dismissal because the “tainted election” theory fails to adequately allege loss

causation.

                                      *      *      *

       We have considered Rubenstein’s remaining arguments and consider them to be

without merit. Accordingly, we AFFIRM the judgment of the district court.

                                          FOR THE COURT:
                                          Catherine O’Hagan Wolfe, Clerk of Court

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