Court Opinion

ID: 3162388
Source: CourtListenerOpinion
Date Created: 2015-12-14 23:03:44.12196+00
Date Added: 2024-06-11T11:59:24.400501
License: Public Domain

Filed 12/14/15 Wodka v. Causeway Capital Management CA32/7
                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     SECOND APPELLATE DISTRICT

                                                DIVISION SEVEN

STEVEN H. WODKA,                                                    B255454

         Plaintiff and Appellant,                                    (Los Angeles County
                                                                     Super. Ct. BC463623)
         v.

CAUSEWAY CAPITAL
MANAGEMENT LLC et al.,

           Defendants and Respondents.

            APPEAL from a judgment of the Superior Court of Los Angeles County,
Lee Smalley Edmon, Judge. Affirmed.

              Nicomedes S. Herrera; Simmons Hanly Conroy and Crystal G. Foley for
Plaintiff and Appellant.

             Munger Tolles & Olson, John W. Spiegel and Ronald K. Meyer for
Defendants and Respondents John Gavin and Eric Sussman.

             K&L Gates (Washington D.C.) and Nicholas G. Terris (pro hac vice);
K&L Gates (Los Angeles), Michael J. Quinn, Kevin S. Asfour and Christina N. Goodrich
for Defendants and Respondents Causeway Capital Management LLC, Sarah H. Ketterer,
Harry W. Hartford, James A. Doyle, Jonathan P. Eng, Kevin Durkin, Turner Swan,
Gracie V. Fermelia and Mark Cone.

            Paul Hastings, Thomas A. Zaccaro, Eleanor K. Mercado for Defendant and
Respondent Causeway Capital Management Trust.

                                  ________________________________
                                    INTRODUCTION

       Steven Wodka filed this shareholder derivative action on behalf of Causeway
Capital Management Trust, a Delaware trust in which Wodka invested part of his IRA
portfolio. The trust, through one of its five mutual funds, had purchased shares of two
internet gambling businesses, PartyGaming and NETeller, both of which were listed only
on foreign stock exchanges. After the United States government prosecuted the
principals of PartyGaming and NETeller for violating federal gambling laws, the stock
prices of PartyGaming and NETeller fell, and the fund lost money on its investments in
those companies. Wodka alleged that, by investing in the internet gambling businesses,
the trust’s investment management company, and certain officers and directors of the
investment management company and of the trust, breached their fiduciary duties, were
negligent and committed waste, and that the investment management company breached
its contract with the trust.
       Under Delaware law, which the parties agree applies, a shareholder may not bring
a derivative action unless the board of directors has wrongfully refused a pre-suit demand
that the directors pursue the claim, or the shareholder alleges that he or she is excused
from making such a demand because the directors are incapable of making an impartial
decision about whether to pursue the claim. Wodka did not make a pre-suit demand, and
the trial court concluded that Wodka’s amended complaint did not sufficiently allege an
excuse for his failure to do so. Therefore, the court sustained the defendants’ demurrer
without leave to amend, and dismissed the action. We conclude that Wodka’s
allegations, regarding events both before and after he filed this derivative action, did not
excuse him from making a pre-suit demand, and that the trial court properly sustained the
demurrers without leave to amend.

                                              2
                   FACTUAL AND PROCEDURAL BACKGROUND

       A.     The Allegations

              1.      The Parties
       Causeway Capital Management Trust is a statutory trust organized under
Delaware law and based in California.1 The trust is a “series” mutual fund, which means
that it offers investors different mutual-fund options, each with a portfolio of securities.
       Steven Wodka became a shareholder in the trust in 2004 through his investment in
one of these funds, the “Causeway International Value Fund.” He still owns the shares
he bought in 2004.
       Causeway Capital Management LLC (CCM) is an investment management
company that serves as the investment advisor to all five of the trust’s funds. According
to the complaint, CCM “controls the Trust” and “selects and appoints the Trust’s
executives and its entire board of trustees.” The individual named defendants are all
either trustees or officers of the trust, or officers or directors of CCM.2
       When Wodka filed this action, the trust had five trustees, three of whom,

1
        Causeway Capital Management Trust is a nominal defendant in this action.
“When a derivative suit is brought to litigate the rights of the corporation, the corporation
is an indispensable party and must be joined as a nominal defendant.” (Grosset v.
Wenaas (2008) 42 Cal. 4th 1100, 1108; accord, Sternberg v. O’Neil (Del. 1988) 550 A.2d
1105, 1124.) “Although named a defendant, [the corporation in a derivative suit] is the
real party in interest . . . . The proceeds of the action belong to the corporation and it is
bound by the result of the suit.” (Ross v. Bernhard (1970) 396 U.S. 531, 538.)
2
      Sarah Ketterer is the chief executive officer, co-founder, and a member of CCM.
Harry Hartford is the president, co-founder, and a member of CCM. James Doyle,
Jonathan Eng, and Kevin Durkin are directors of CCM. Hartford, Doyle, Eng, and
Durkin are portfolio managers of the fund, but they are not trustees of the trust.
Turner Swan is the president and secretary of the trust, and a member of CCM. Gracie
Fermelia is the chief compliance officer of the trust, and the chief operating officer and a
member of CCM. Mark Cone is a trustee of the trust, and chief marketing officer and a
managing partner of CCM. John Gavin and Eric Sussman are trustees of the trust.
                                               3
Mark Cone, John Gavin, and Eric Sussman, are defendants in this action. Gavin and
Sussman became trustees in 2001 (before Wodka invested in the fund), and Wodka did
not allege they were employed by or otherwise affiliated with CCM. Wodka alleged that
Cone, the only trustee with a dual role at CCM because he also served as the chief
marketing officer and managing partner of CCM, was one of the individuals responsible
for “the day-to-day management of the Trust and for implementing the strategy
complained of herein with respect to the Fund.” The other two trustees were John
Graham and Lawry Meister, who became trustees in 2008 (after the fund had invested in
PartyGaming and NETeller), and they are not defendants.

              2.      The Gambling Investments
       Between April and December 2006 the fund bought shares of two offshore internet
gambling businesses that were publicly traded in overseas capital markets: PartyGaming
and NETeller. The federal government eventually prosecuted both companies.
       PartyGaming, a Gibraltar company, offered on-line gamers real-money and free-
play games, including poker and casino gambling. Shares publicly traded on the London
Stock Exchange. In its prospectus, PartyGaming disclosed that approximately 87 percent
of its revenue came from customers in the United States, and that the Department of
Justice “consider[ed] that companies offering online gaming to US residents are in
violation of existing US federal laws . . . .”
       By June 30, 2006 the fund had bought almost 16 million shares of PartyGaming
stock at a cost of approximately $34 million. As the United States government cracked
down on internet gambling websites that had taken bets from gamblers in the United
States, the share prices of PartyGaming fell. According to Wodka, “Once federal and
state law enforcement commenced the crackdown on illegal Internet gambling businesses
in 2006, the market re-priced the value of the shares of the illegal gambling businesses to
exclude in whole or in part revenues derived from the US.” Nevertheless, the fund
bought more PartyGaming stock during this time, so that by December 2006 the fund
owned more than 35 million shares of PartyGaming stock.

                                                 4
      The fund sold its shares of PartyGaming only after PartyGaming had stopped
taking bets from gamblers in the US. By that time, the value of PartyGaming’s stock had
plummeted over 80 percent. In December 2008 one of the co-founders of PartyGaming,
Anarug Dikshit, pleaded guilty in the United States District Court for the Southern
District of New York to engaging, through PartyGaming, in illegal internet gambling and
agreed to forfeit $300 million to the government.
      In its Annual Report for the fiscal year ending September 30, 2007 the trust
disclosed that its investments in PartyGaming had been a “significant detractor” to the
fund’s overall performance. Nevertheless, in 2006 the fund had an overall positive return
of approximately 26 percent, which was well above the performances of the Dow Jones
Industrial Average and S&P 500 index, which increased 16 percent and 14 percent,
respectively, over the same time period.
      NETeller, an Isle of Man company, traded on the London Stock Exchange’s
Alternative Investment Market beginning in April 2004. By April 31, 2006 the fund
owned 46,312 shares of NETeller, and the fund increased its investment in NETeller at
the same time the fund was increasing its investment in PartyGaming. By September 30,
2006 the fund owned 1,203,112 shares of NETeller stock.
      In early 2007, the government began prosecuting NETeller and its co-founders,
Stephen Lawrence and John Lefebvre. NETeller admitted criminal wrongdoing and
forfeited $136 million in criminal proceeds as part of a Deferred Prosecution Agreement.
Lawrence and Lefebvre admitted criminal wrongdoing, agreed to forfeit $100 million in
criminal proceeds, paid additional fines of $1.75 million, and were each sentenced to
45 days’ imprisonment plus one year of supervised release.

             3.     The Trustees’ Alleged Role in the Gambling Investments
      Wodka alleged in his operative first amended complaint that the trustees caused or
allowed “the Fund to invest or to continue its investments” in PartyGaming and
NETeller. Wodka alleged that the defendants were “responsible for causing the Fund to
make the illegal investments,” and that “each of the Defendants knowingly developed

                                            5
and implemented an investment strategy pursuant to which the Trust, though the Fund,
was to participate in the illegal profits from Internet gambling companies” and “therefore
caused the Fund repeatedly and over a significant period of time to purchase shares in
‘illegal gambling businesses.’” Wodka further alleged that each of the defendants
“knowingly developed and implemented an investment strategy pursuant to which the
Trust [was caused] repeatedly and over a significant period of time to purchase shares in
‘illegal gambling businesses’ . . . .”
       According to the first amended complaint, the defendants “conducted or caused to
be conducted, or were reckless in failing to conduct or to cause to be conducted, due
diligence before the Fund purchased stock in illegal gambling businesses. Before making
any investment, CCM conducts thorough company-specific fundamental analysis,
including extensive external and internal research, company visits and proprietary
quantitative valuations. Accordingly, [each defendant] knew, or is deemed to have
known, that they were causing the Fund to purchase stock of companies that were taking
bets from gamblers in the US.” Wodka also alleged that the trustees “had a duty to
ensure that each of the funds that compose the Trust had proper control mechanisms to
ensure that it did not make any investments in any illegal gambling businesses.” Wodka
alleged that “[t]he defendant Trustees, who compose a majority of the board of trustees,
also have disabling interests and lack independence because they face a substantial
likelihood of criminal and civil liability for wrongs that constitute, among other things,
crimes, bad faith, gross negligence, willful misfeasance, reckless disregard of duty, and
violation of Defendants’ duty of loyalty.”

       B.     Procedural History

              1.      The Prior Federal Action
       Wodka initially filed an action in federal court against the same defendants,
alleging that they had violated the Racketeer Influenced and Corrupt Organizations Act
(RICO), 18 United States Code section 1961 et seq., and asserting state-law claims for
breach of fiduciary duty, negligence, and waste. The alleged predicate crime under RICO

                                             6
was violating 18 United States Code section 1955, which makes it a crime to “own[ ] all
or part of an illegal gambling business.” On October 8, 2009 the district court dismissed
the RICO claim for failure to plead proximate cause, and the court declined to exercise
supplemental jurisdiction over the state law claims.
       The Ninth Circuit affirmed on May 16, 2011, holding that “the district court
correctly dismissed Wodka’s claims for lack of proximate causation under RICO.”
(Wodka v. Causeway Capital Management LLC (9th Cir. 2011) 433 Fed. Appx. 563,
564.) “Wodka’s losses,” the Ninth Circuit explained, “were directly caused by a series of
intervening actions undertaken by independent, third party actors during the summer and
fall of 2006, including the passage of the Unlawful Internet Gambling Enforcement Act
of 2006, 31 U.S.C. § 5361 et seq., several law enforcement actions taken against two
other Internet-based gambling companies, PartyGaming’s withdrawal from the U.S.
market, and various decisions made by investors to sell off their shares of PartyGaming
and NETeller stock.” (Ibid.)

              2.     This Action
       Wodka filed this action on June 15, 2011, the day before the statute of limitations
would have expired. He alleged the same state-law claims he had alleged in the federal
action—breach of fiduciary duty, negligence, and waste—and that the district court had
dismissed without prejudice. Wodka brought the breach of fiduciary duty and negligence
claims derivatively on behalf of the corporation, as well as individually and on behalf of a
class of investors. He brought the waste claim only derivatively. Wodka did not make a
demand on the board before filing his derivative claims.
       In early 2012 Wodka “suggested to Defendants . . . that [he] would consider
making a demand” if the trustees agreed to stay the case or toll the applicable statutes of
limitations while they considered the demand. The trustees rejected this proposal and
refused to enter into a tolling agreement that would have allowed Wodka to dismiss the
case without prejudice and refile it later if the trustees ultimately decided not to bring the
claims on behalf of the trust.

                                              7
       The defendants demurred to Wodka’s original complaint and to the amended
complaint. In response to the first demurrer, Wodka conceded that the trial court should
sustain without leave to amend the demurrer to his individual and class claims, which the
court did. The court sustained the demurrer to the derivative claims with leave to amend,
and Wodka filed an amended complaint that added an additional derivative claim for
breach of contract against CCM only.
       The defendants again demurred, and the trial court sustained the defendants’
demurrers without leave to amend and dismissed the amended complaint. The court
noted that the defendants’ “primary argument” was that Wodka had “failed to make a
pre-suit demand on the Board of Trustees before pursuing his derivative claims.” On that
issue, the court ruled that Wodka’s “new allegations that ‘all defendants actually knew or
should have known that it was illegal to invest’ in PartyGaming and NETeller [citation]
are premised upon the erroneous legal conclusion that Defendants’ conduct was actually
illegal. [Wodka’s] additional allegations grounded in that incorrect conclusion do not
excuse the pre-suit demand requirement.” The court held that, “even if one could
conceivably read [United States Code] section 1955 to include passive investment in a
publicly traded company, [Wodka] does not allege a substantial likelihood that the
trustees would be found liable for tortious conduct committed in bad faith,” because
Wodka did not “specifically allege facts to suggest that the decision to invest in
PartyGaming and NETeller was so obviously illegal that the trustees consciously decided
to engage in criminal activity” by passively investing in publicly traded stock listed on an
international exchange.”
       The court concluded that because a majority of the trustees did not face a
substantial likelihood of liability, Wodka’s failure to make a demand was not excused on
those grounds. The court ruled that the requirement of a pre-suit demand was not
excused by allegations that a majority of the board was inherently conflicted or
“interested” because the allegations of the trustees’ involvement with CCM concerned
conduct that was “routine practice,” and did not “‘negate independence for demand
excusal purposes.’” Finally, the court ruled that the trustees’ refusal to stay the litigation

                                              8
or toll the statute of limitations did not render a pre-suit demand futile. The court ruled,
“Were a board’s resistance to litigation itself evidence of demand futility, there would be
no jurisprudence on the matter at all because the question of demand futility only arises
when [the] board expresses opposition to litigation. This is not the law, however, and
Plaintiff’s additional allegations on this score demonstrate nothing more than his own
delay in considering a demand and in bringing the action.”

                                       DISCUSSION

          A.    Standard of Review
          We review de novo the trial court’s ruling dismissing Wodka’s shareholder
derivative action for failure to allege demand futility. (See Villari v. Mozilo (2012) 208
Cal. App. 4th 1470, 1477.) “Like the trial court, we assume the truth of all properly
pleaded factual allegations” (Leyte-Vidal v. Semel (2013) 220 Cal. App. 4th 1001, 1007),
but, also like the trial court, we do not assume the truth of “contentions, deductions or
conclusions of law.” (Charter Township of Clinton Police and Fire Retirement System v.
Martin (2013) 219 Cal. App. 4th 924, 933 (Charter Township).) “When a demurrer ‘is
sustained without leave to amend, we decide whether there is a reasonable possibility that
the defect can be cured by amendment: if it can be, the trial court has abused its
discretion and we reverse; if not, there has been no abuse of discretion and we affirm.’”
(Eckler v. Neutrogena Corp. (2015) 238 Cal. App. 4th 433, 438). The plaintiff has the
burden of proving that the trial court abused its discretion in denying leave to amend.
(Ibid.)

          B.    The Pre-Suit Demand Requirement

                1.     Choice of Law
          The parties agree that Delaware substantive law determines the requirements of a
pre-suit demand Wodka must satisfy in order to sue derivatively on behalf of the trust.
(See Kamen v. Kemper Fin. Servs., Inc. (1991) 500 U.S. 90, 92 (Kamen) [“the scope of
                                              9
the demand requirement embodies the incorporating State’s allocation of governing
powers within the corporation”]; Bezirdjian v. O’Reilly (2010) 183 Cal. App. 4th 316, 322
[parties agreed that Delaware law applied to Delaware corporation].) The parties
disagree, however, whether Delaware law (Delaware Chancery Court Rules, rule 23.1(a))
or California law (Corp. Code, § 800, subd. (b)(2)) determines whether the allegations in
a complaint are sufficient to state a derivative claim. (Compare, e.g., Jones v. Martinez
(2014) 230 Cal. App. 4th 1248, 1253-1254 [applying Delaware Chancery Court Rules, rule
23.1, but also citing Corp. Code, § 800, subd. (b)(2)] with Charter Township, supra, 219
Cal.App.4th at p. 934 [applying Corp. Code, § 800, subd. (b)(2), but also citing Delaware
cases] and Shields v. Singleton (1993) 15 Cal. App. 4th 1611, 1621 (Shields) [applying
Corp. Code § 800 after noting that California and Delaware law do not conflict on this
point].) Because both California and Delaware require a plaintiff to plead demand futility
“with particularity,” and because Wodka has not pleaded demand futility with the
requisite particularity under either California or Delaware law, we need not decide which
state’s pleading standard governs. Under either state’s pleading rules, the trial court
properly dismissed Wodka’s amended complaint.3

3
         Corporations Code section 800, subdivision (b)(2), has an additional pleading
requirement not found in Delaware law: the plaintiff must allege that he or she “has either
informed the corporation or the board in writing of the ultimate facts of each cause of
action against each defendant or delivered to the corporation or the board a true copy of
the complaint which plaintiff proposes to file.” In a footnote, Wodka asserts that “[t]his
requirement is substantive and therefore inapplicable,” but he provides no authority for or
argument in support of this assertion. In any event, Wodka argues that he has satisfied
this requirement because the complaint alleged that the board “kn[ew] [about] the claims
. . . since April 23, 2009.” Wodka appears to argue that he complied with Corporations
Code section 800, subdivision (b)(2), because his prior federal complaint included the
same state-law claims he alleged in this action and therefore he gave the defendants
actual notice of his claims. Because we conclude that Wodka did not allege demand
futility with the requisite particularity, we need not decide whether the trial court also
should have dismissed Wodka’s complaint for failure to comply with Corporations Code
section 800, subdivision (b)(2).
                                             10
              2.     The Demand Requirement and the Futility Exception
       In general, a company’s board of directors rather than any single shareholder
determines whether and when to file a lawsuit on behalf of the corporation. (See, e.g.,
Kamen, supra, 500 U.S. at pp. 101-102; 8 Del.C. § 141(a).) “[T]he right of a stockholder
to prosecute a derivative suit is limited to situations where the stockholder has demanded
that the directors pursue the corporate claim and they have wrongfully refused to do so or
where demand is excused because the directors are incapable of making an impartial
decision regarding such litigation.” (Rales v. Blasband (Del. 1993) 634 A.2d 927, 932;
see Del. Code Ann., tit. 12, § 3816, subd. (a) [“[a] beneficial owner may bring an action
in the Court of Chancery in the right of a statutory trust to recover a judgment in its favor
if persons with authority to do so have refused to bring the action or if an effort to cause
those persons to bring the action is not likely to succeed”].) “[C]onsistent with the long-
standing principle that directors and not shareholders manage a corporation, the Delaware
precedents on demand futility make clear that the bar is high, the standards are stringent,
and the situations where demand will be excused are rare.” (Pirelli Armstrong Tire Corp.
Retiree Medical Benefits Trust v. Raines (D.C. Cir. 2008) 534 F.3d 779, 782-783
[applying Delaware law].)
       There are two tests for analyzing demand futility under Delaware law: the Aronson
test and the Rales test. The Aronson test applies when a derivative plaintiff challenges an
affirmative decision by the board to act or refrain from acting. (Aronson v. Lewis (Del.
1984) 473 A.2d 805, 814 overruled on another ground by Brehm v. Eisner (Del. 2000)
746 A.2d 244, 253-254.) The Rales test applies where the subject of a derivative suit is
not a board decision but rather a board’s inaction leading to an alleged violation of the
board’s oversight duties. (Rales, supra, 634 A.2d at p. 934.) “The spirit that clearly
animates each test is a Court’s unwillingness to set aside the prerogatives of a board of
directors unless the derivative plaintiff has shown some reason to doubt that the board

                                             11
will exercise its discretion impartially and in good faith.”4 (In re INFOUSA, Inc.
Shareholders Litigation, supra, 953 A.2d at p. 986.)
       To allege futility under the Aronson test, a plaintiff must satisfy either of two
prongs: “The first prong of the futility rubric is ‘whether, under the particularized facts
alleged, a reasonable doubt is created that . . . the directors are disinterested and
independent.’ The second prong is whether the pleading creates a reasonable doubt that
‘the challenged transaction was otherwise the product of a valid exercise of business
judgment.’” (Brehm v. Eisner, supra, 746 A.2d at p. 256.) Under the first prong of
Aronson, “the mere threat of personal liability for approving a questioned transaction,
standing alone, is insufficient to challenge either the independence or disinterestedness of
directors, although in rare cases a transaction may be so egregious on its face that board
approval cannot meet the test of business judgment, and a substantial likelihood of
director liability therefore exists.” (Aronson, supra, 473 A.2d at p. 815.) “In order for
demand to be excused under the second prong of Aronson,” a plaintiff “must plead
particularized facts sufficient to raise (1) a reason to doubt that the action was taken
honestly and in good faith or (2) a reason to doubt that the board was adequately
informed in making the decision.” (In re Walt Disney Co. Derivative Litigation (Del. Ch.
2003) 825 A.2d 275, 286.) “These rare cases include those in which a board decides to
undertake illegal activity.” (Rosenbloom v. Pyott (9th Cir. 2014) 765 F.3d 1137, 1149.)
       “The Rales test requires that the plaintiff allege particularized facts establishing a
reason to doubt that ‘the board of directors could have properly exercised its independent
and disinterested business judgment in responding to a demand.’” (Wood v. Baum (Del.
4
       Even where the underlying conduct alleged in the complaint constitutes corporate
wrongdoing, the Board retains the power to refuse to sue “if it deem[s] the litigation
would be contrary to the corporation’s best interests.” (Bezirdjian, supra, 183
Cal.App.4th at p. 325 [applying Delaware law].) In other words, the business judgment
rule applies not just to the underlying conduct, but also to the decision to sue or not to
sue. (See Aronson, supra, 473 A.2d at p. 813.) “It is within the bounds of business
judgment to conclude that a lawsuit, even if legitimate, would be excessively costly to the
corporation or harm its long-term strategic interests.” (In re INFOUSA, Inc.
Shareholders Litigation (Del. Ch. 2007) 953 A.2d 963, 986.)

                                              12
2008) 953 A.2d 136, 140 (Wood).) “Under Rales, directors who face a ‘substantial
likelihood of personal liability are deemed to be interested and, thus, cannot make an
impartial decision regarding demand.’” (Hartsel v. Vanguard Group, Inc. (Del. Ch. June
15, 2011) 2011 WL 2421003, at p. 25, aff’d, 38 A.3d 1254 (Del. 2012) (Hartsel).) “But,
demand will be excused on this basis ‘only in the rare case’ where a plaintiff can
demonstrate director conduct that is ‘so egregious on its face that board approval cannot
meet the test of business judgment, and a substantial likelihood of director liability
therefore exists.’” (Ibid.) Thus, “[u]nder either approach [Aronson or Rales], demand is
excused if Plaintiffs’ particularized allegations create a reasonable doubt as to whether a
majority of the board of directors faces a substantial likelihood of personal liability for
breaching the duty of loyalty.” (Rosenbloom v. Pyott, supra, 765 F.3d at p. 1150.) In
attempting to allege demand futility under Aronson or Rales, the derivative plaintiff is
“entitled to all reasonable factual inferences that logically flow from the particularized
facts alleged, but conclusory allegations are not considered as expressly pleaded facts or
factual inferences.” (Brehm v. Eisner, supra, 746 A.2d at p. 255; see Charter Township,
supra, 219 Cal.App.4th at p. 935 [“‘general, conclusory facts are insufficient,’” and
“‘facts relating to the structural bias common to corporate boards throughout America
are . . . insufficient’”]; Oakland Raiders v. National Football League (2001) 93
Cal. App. 4th 572, 587 [conclusory facts are not sufficient to allege demand futility].)
       Wodka does not distinguish between Aronson or Rales or argue which of the two
tests applies to his claims. Instead, he cites both cases and argues implicitly that he
satisfied both tests because his allegations create a reasonable doubt regarding whether a
majority of the board of directors faces a substantial likelihood of liability. Under this
theory, Wodka satisfied the demand futility test under either Aronson or Rales if he
alleged, for a majority of the board, “facts specific to each [trustee] from which [the
court] can conclude that that particular [trustee] could or could not be expected to fairly
evaluate” his claims. (See Shields, supra, 15 Cal.App.4th at p. 1622 [evaluating demand
futility in a derivative action on behalf of a Delaware company without explicitly
applying Aronson or Rales]; Seminaris v. Landa (Del. Ch. 1995) 662 A.2d 1350, 1354

                                              13
[“substantial likelihood of director liability” would satisfy Aronson]; In re Dow Chemical
Co. Derivative Litigation (Del. Ch., Jan. 11, 2010) 2010 WL 66769 at p. 12 [“‘substantial
likelihood of personal liability’” would satisfy Rales].) Wodka, however, did not do so.

       C.     The First Amended Complaint Does Not Allege Demand Futility with the
              Requisite Particularity

       Although Wodka did not allege how many trustees were on the board, the parties
do not dispute that there were five trustees when Wodka filed this action. Two of the
trustees (Graham and Meister) were not trustees when the trust invested in PartyGaming
and NETeller; Wodka did not allege that they were unable to consider a shareholder
demand fairly and properly. One of the trustees, Mark Cone, is an officer of CCM, and
the defendants do not argue that he was independent or in a position to properly consider
a demand from Wodka. (See Del. Code Ann., tit. 12, § 3801, subd. (d)); Hartsel, supra,
2011 WL 2421003, at p. 21; see also Jones v. Harris Associates L.P. (2010) 559 U.S.
335, 338 [describing the typical role of an investment advisor to a mutual fund].) The
remaining two trustees, Gavin and Sussman, did not have positions at CCM. Thus,
whether Wodka satisfied the Aronson or Rales test for demand futility turns on whether
he alleged with particularity that Gavin and Sussman could not properly evaluate a
demand.
       Wodka did not allege with particularity any involvement by Gavin and Sussman in
the investments in PartyGaming and NETeller.5 The first amended complaint did not
allege with particularity that Gavin or Sussman retained control over the trust’s
investment decisions, or whether or how they approved the decision to invest in

5
       The trust’s Declaration of Trust provides that trustees may “delegate such
authority as they consider desirable to any . . . investment adviser . . . or other agent or
independent contractor.” (See Stone ex rel. AmSouth Bancorporation v. Ritter (Del.
2006) 911 A.2d 362, 372 [most corporate decisions “‘are, of course, not the subject of
director attention’”].)

                                              14
PartyGaming or NETeller. Instead, Wodka alleged only that the trustees as a group
“allowed” the fund to invest or to continue to invest in PartyGaming and NETeller, that
the defendants are “responsible” for the investments, and that they “knowingly developed
and implemented” the investment strategy. The only non-conclusory allegation that
Gavin and Sussman even knew of the investments was that the trust disclosed the
investments in public filings.6 The only allegation of any specificity was that, “[b]efore
making any investment, CCM conducts thorough company-specific fundamental
analysis, including extensive external and internal research, company visits and
proprietary quantitative valuations.” Wodka, however, did not plead with particularity
why Gavin and Sussman could not evaluate his claims against CCM impartially and in
good faith. The general allegations that CCM “controls the Trust” and “selects and
appoints” the board are insufficient. (See Aronson, supra, 473 A.2d at p. 816 [“it is not
enough to charge that a director was nominated by or elected at the behest of those
controlling the outcome of a corporate election” because “[t]hat is the usual way a person
becomes a corporate director”]; see also Jones, supra, 559 U.S. at p. 338 [the “typical”
arrangement is that “[t]he adviser selects the fund’s directors, manages the fund’s
investments, and provides other services”].)
       Wodka argues that the trustees violated several federal and state laws, including
18 United States Code section 1955 (which makes it a crime to “own” part of an illegal
gambling business), Penal Code section 337j, subdivision (a)(2) (which makes it
unlawful for any person as owner to receive revenue for keeping, running, or carrying on
any controlled game), and the California common law (which Wodka asserts makes
wrongful the seeking of “profit from the wrongdoing of another”). Wodka, however, did
not allege with particularity that Gavin or Sussman decided to invest in PartyGaming or
NETeller, or ratified those investments, or that they did so knowing that their conduct
was illegal. Thus, Wodka did not sufficiently allege under Delaware law that Gavin or
Sussman faced a substantial likelihood of liability for the allegedly criminal conduct.

6
      Wodka also alleged that those public filings disclosed that the trust voted its
minority shares in NETeller.
                                            15
(See Wood, supra, 953 A.2d at pp. 141-142 [a “serious threat of liability” for allegedly
criminal conduct may only be found where the plaintiff pleads a non-exculpated claim,
alleging with particularity that the defendants knowingly engaged in particular conduct
and that they knew that the conduct was illegal].)
       Moreover, the trust’s Declaration of Trust exculpates trustees from civil liability
unless they acted with “willful misfeasance, bad faith, gross negligence, or reckless
disregard.” Where, as here, the “directors are exculpated from liability except for claims
based on ‘fraudulent,’ ‘illegal’ or ‘bad faith’ conduct, a plaintiff must also plead
particularized facts that demonstrate that the directors acted with scienter, i.e., that they
had ‘actual or constructive knowledge’ that their conduct was legally improper.”7 (Wood,
supra, 953 A.2d at p. 141.) Wodka did not allege that Gavin or Sussman knew or should
have known that the trust’s passive investment in offshore internet gambling businesses
through foreign stock purchases was illegal. Indeed, the trust publicly disclosed the
trusts’ investments in its SEC filings, and the parties agree nobody has ever been
prosecuted for similar investments.8
       Wodka’s allegation that demand is excused because the board committed waste
fails for the same reasons. Wodka argues that the trust “should not have paid anything
for shares in illegal gambling businesses, because such investments could only be
profitable if U.S. laws were successfully violated.” Even assuming this allegation states a

7
        We reject Wodka’s argument that “[t]he common law presumption that everyone
is deemed to know the criminal laws is sufficient to establish constructive knowledge.”
Were that the law, the “actual or constructive knowledge” requirement would be
meaningless when applied to illegal activity. (See Wood, supra, 953 A.2d at p. 142 [“the
Complaint alleges many violations of federal securities and tax laws but does not plead
with particularity the specific conduct in which each defendant ‘knowingly’ engaged, or
that the defendants knew that such conduct was illegal”].)
8
        Wodka argues that “[e]xculpation based on exculpatory clauses . . . is an
affirmative defense that . . . . cannot be resolved in the context of a demurrer.” The
Delaware Supreme Court has explained, however, that when evaluating the claim that a
plaintiff has not complied with the stringent futility pleading requirements, “it must be
kept in mind” if an “exculpation provision . . . exempts . . . directors from all liability
except in case of ‘fraudulent or illegal conduct.’” (Wood, supra, 953 A.2d at p. 141.)
                                              16
claim for waste, Wodka did not allege with particularity, against Gavin, Sussman, or the
two non-defendant trustees, claims that are not exculpated by the Declaration of Trust’s
provisions.
       Wodka’s conclusory allegation that “[t]he Trustees also had a duty to ensure that
each of the funds that compose the Trust had proper control mechanisms to ensure that it
did not make any investments in any illegal gambling businesses” does not excuse
demand because the only factual allegation that the trust did not have proper control
mechanisms in place was that the trust made the investments. (See Stone ex rel. AmSouth
Bancorporation v. Ritter, supra, 911 A.2d at p. 373 [a “bad outcome” does not imply
“bad faith”].) Wodka did not allege any specifics about what kind of control mechanisms
would have been “proper,” or what each trustee did or failed to do to institute or remove
such controls. Moreover, “imposition of liability [on a lack of oversight theory] requires
a showing that the directors knew that they were not discharging their fiduciary
obligations,” (id. at p. 370) and Wodka did not allege that Gavin or Sussman (or the two
non-defendant trustees) had that knowledge.
       Wodka’s reliance on Rosenbloom v. Pyott, supra, 765 F.3d 1137 is misplaced. In
Rosenbloom, the derivative plaintiffs alleged that demand on the corporation’s board was
futile because the board knew or should have known about the company’s illegal, off-
label marketing of Botox. (Id. at pp. 1150-1151.) The plaintiffs in that case, however,
alleged far more particularity than Wodka alleged. The plaintiffs in Rosenbloom
“allege[d] with particularity that the Board continued to closely and regularly monitor
off-label Botox sales.” (Id. at p. 1152.) The plaintiffs alleged that the board “discussed
and decided to continue funding” to promote the off-label use of Botox, watched a slide
show about the prevalence of disorders for which Botox was an off-label treatment,
reviewed promotional documents for a program to support physicians seeking
reimbursement for off-label uses, and approved agreements designed to facilitate off-
label promotion. (Ibid.) Unlike the defendants in this case, the defendants in
Rosenbloom never argued that they did not know that off-label advertising was illegal,
nor could they have done so because the Allergen board had “received repeated FDA

                                            17
warnings about illegal promotion of Botox.” (Id. at p. 1153.) Wodka did not allege that
an enforcement agency ever warned the trust that its investments were illegal.
       Thus, the first amended complaint did not allege any facts that Gavin or Sussman
could not have fairly evaluated a pre-suit demand. (See Shields, supra, 15 Cal.App.4th at
p. 1622.) The first amended complaint did not contain any allegations about the two
other, non-defendant trustees. Therefore, the first amended complaint did not allege that
a majority of the five-person board would not have been able to properly consider a pre-
suit demand. (See Blaustein v. Lord Baltimore Capital Corp. (Del. 2014) 84 A.3d 954,
958 [“a plaintiff must allege with particularity that a majority of the board lacks
independence or is otherwise incapable of validly exercising its business judgment”].)
Wodka did not meet his burden of alleging with particularity the futility of making a
demand on the trust before he filed his derivative action on behalf of the trust.

       D.      The Allegations Regarding the Board’s Post-Filing Conduct Do Not Excuse
               Demand
       Wodka argues that the board abdicated its responsibility for determining whether
to proceed with this litigation because the board refused, after Wodka filed this action, to
agree to stay the proceedings or toll the statutes of limitations so that Wodka could make
a post-filing demand. Wodka argues that the trustees “were presented with an easy
opportunity to consider a demand while preserving investors’ claims from forfeiture, and
they rejected it.”
       As Gavin and Sussman explain, this argument is flawed: “If [Wodka’s] position
were upheld, pre-suit demand would never be required because every derivative plaintiff
could file suit and then ask the board to agree to stay proceedings and/or toll limitations
so that the plaintiff could make a post-filing demand. If the board refused, the plaintiff
could argue, as [Wodka] does here, that pre-suit demand is therefore excused. If the
board agreed, the plaintiff would be allowed to make a demand after filing the complaint,
notwithstanding the plaintiff’s violation of the specific statutory requirement of a demand

                                             18
(or excuse) before filing.” Essentially, Wodka’s approach would eliminate the statutory
pre-suit demand requirement, so that a shareholder could make a demand prior to filing a
derivative action, after filing a derivative action, or anytime the shareholder deemed it
appropriate. Delaware law is to the contrary. (See Del. Code Ann., tit. 12, § 3816(a);
Wood, supra, 953 A.2d at p. 140; Ryan v. Gursahaney (Del. Ch. 2015) 2015 WL
1915911, at p. 5; Canty v. Day (S.D.N.Y. 2014) 13 F. Supp. 3d 333, 342 [applying
Delaware law].)
       Citing Rich ex rel. Fuqi Intern., Inc. v. Yu Kwai Chong (Del. Ch. 2013) 66 A.3d
963 (Fuqi), Wodka argues that the defendants’ post-filing actions rendered a meaningful
response to a litigation demand unlikely or impossible. Fuqi, however, involved very
different circumstances. The plaintiff in Fuqi made a pre-suit demand, and the
corporation did not respond for two years. (Id. at p. 965.) The court held that “[t]he
Plaintiff [had] pled with particularity facts that create a reasonable doubt that the Fuqi
board [had] acted in good faith in investigating the Plaintiff’s demand.” (Id. at p. 979.)
Wodka never made a pre-suit demand.
       Wodka argues that, “even under a ‘demand futility’ analysis, modern cases permit
courts to consider post-filing conduct in appropriate cases,” and that in this case the board
“abjured and repudiated any effective authority to make . . . a decision” about whether to
prosecute Wodka’s claims. According to Wodka, “the Board in this case attempted to
make a meaningful decision impossible by actively seeking to cause the forfeiture of
[Wodka’s] claims before the Board could even investigate a litigation demand or
impartially consider it.” Wodka’s logic is backwards. It was Wodka’s delay in waiting
until the eve of the expiration of the statute of limitations to pursue this derivative action,
without having made a demand, that left the board with little or no time to consider his
demand. Indeed, under Wodka’s theory, the fact that the defendants demurred to
Wodka’s complaint based on the statute of limitations would also evidence an
unwillingness to proceed with the litigation, and therefore would support demand futility.
Again, Delaware law is to the contrary. (See Aronson, supra, 473 A.2d at pp. 809-810
[“futility is gauged by the circumstances existing at the commencement of a derivative

                                              19
suit,” which “disposed of plaintiff’s argument that defendants’ motion to dismiss
established board hostility and the futility of demand”].)
       The cases cited by Wodka involving post-filing conduct and demand futility
involved factual scenarios not present here. For example, In re American Intern. Group,
Inc. (Del. Ch. 2009) 965 A.2d 763 (AIG) involved a “unique circumstance” in which the
board, post filing, appointed a special litigation committee to investigate the claims.
(Id. at pp. 775, 807.) The special litigation committee “chose to take no position[,] . . .
and thus demand was futile.” (Id. at p. 807.) The court in AIG recognized that it was not
dealing with “the typical situation where a corporation is objecting to litigation brought in
its name.” (Id. at p. 808.) To the contrary, by “tak[ing] no position and permit[ting] the
Stockholder Plaintiffs to proceed,” the special litigation committee “recognized that the
Stockholder Plaintiffs would go forward without the demand requirement being a barrier
to their claims.” (Id. at p. 809.) As Gavin and Sussman correctly explain, “Unlike AIG,
this lawsuit is the ‘typical situation’ addressed ‘in Aronson and its progeny’ where ‘a
corporation is objecting to litigation brought in its name’ and filed a ‘motion[] to dismiss
for failure to make demand.’ [Citation.] Unlike AIG, [the defendants] have not
‘permit[ted] the Stockholder Plaintiff[ ] to proceed.’”
       Wodka cites Spiegel v. Buntrock (Del. 1990) 571 A.2d 767 as an example of how
“Delaware courts routinely consider post-filing events in determining demand futility.”
The court in Spiegel, however, determined that the plaintiff’s post-filing demand mooted
the plaintiff’s demand-futility argument. (Id. at p. 775; see Kamen, supra, 500 U.S. at
p. 105 [“Delaware law does not permit a shareholder to make a demand and later to assert
its futility”].) Contrary to Wodka’s argument, the Delaware Supreme Court explained
that “‘[w]hen deciding a motion to dismiss for failure to make a demand under Chancery
Rule 23.1 the record before the court must be restricted to the allegations of the
complaint.’” (Spiegel, at p. 774, emphasis added.) The effect of making a post-filing
demand is to “make[ ] his original contention, that demand was excused, moot,” because
“[b]y making a demand, a stockholder tacitly acknowledges the absence of facts to
support a finding of futility.” (Id. at p. 775.) Here, Wodka never made a demand on the

                                             20
board. In fact, under Spiegel the only inference from Wodka’s post-filing conduct of
offering to make an untimely demand is that he “tacitly acknowledges the absence of
facts to support a finding of futility.” (Ibid.)
       Finally, Wodka argues that “there is nothing blameworthy” in having waited to
file this lawsuit until the expiration of the statute of limitations because he had been
“zealously pursu[ing] civil RICO claims in federal court” in an attempt “to maximize
recovery for injured investors.” Wodka asserts that he was “forced to file this action on
the last day before the expiration of the statutes of limitations.” Wodka, however, could
have made a pre-suit demand before he filed his federal court action, or after the federal
district court dismissed the action (more than one year before the Ninth Circuit affirmed
the dismissal). Wodka did not allege that the trust is responsible for his failure to file a
pre-suit demand. That was Wodka’s strategic decision; if demand were truly futile then it
would not matter how soon before the expiration of the statute of limitations he filed his
complaint. Under Delaware law Wodka had to choose between making a pre-suit
demand or alleging demand futility (see Spiegel, supra, 571 A.2d at p. 775), and he chose
to attempt the latter.

       E.      The Trial Court Did Not Abuse Its Discretion in Denying Leave to Amend
       The burden of proving that there is a reasonable possibility that a pleading defect
can be cured by amendment “is squarely on the plaintiff.” (Blank v. Kirwan (1985) 39
Cal. 3d 311, 318; accord, Arce v. County of Los Angeles (2012) 211 Cal. App. 4th 1455,
1471; Long v. Century Indem. Co. (2008) 163 Cal. App. 4th 1460, 1468.) The trial court
sustained the demurrer to the first amended complaint without leave to amend,
determining that “[t]he scarcity of new allegations [in the first amended complaint] and
their legal insignificance only highlights the fact that the true deficiencies in Plaintiff’s
complaint are of law, not of insufficient pleading.” Wodka has not met his burden to
prove that there is a reasonable possibility of curing the defect in his complaint. He did
not request leave to amend his first amended complaint in the trial court, and on appeal
he does not argue that the trial court should have given him a second opportunity to

                                               21
amend his complaint. Nor does Wodka suggest how he would amend the first amended
complaint to correct the insufficiencies of his demand futility allegations. The trial court
did not abuse its discretion in denying leave to amend.

                                      DISPOSITION

       The judgment is affirmed. The request for judicial notice filed by Gavin and
Sussman on November 25, 2015 is denied. Respondents are to recover their costs on
appeal.

              SEGAL, J.

We concur:

              ZELON, Acting P. J.

              BECKLOFF, J.*

*
 Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.

                                             22