United States District Court, D. Nevada
W. A. SOKOLOWSKI, on behalf of LAS VEGAS SANDS CORP., Plaintiff(s),
SHELDON G. ADELSON, et al. Defendant(s)
JAMES C. MAHAN, District Judge.
Presently before the court are motions to dismiss plaintiff's derivative complaint. (Docs. # 1, 14, 21, 83). Plaintiff filed responses to the motions to dismiss. (Docs. # 39, 54, 99). Defendants filed corresponding replies. (Docs. # 52, 75, 109).
Plaintiff W.A. Sokolowski alleges the following claims: (1) violations of Section 14(a) of the Securities Exchange Act of 1934; (2) breach of fiduciary duty and waste of corporate assets; (3) unjust enrichment; (4) breach of the duty of candor; (5) breach of the duty of loyalty; (6) negligence; and (7) unjust enrichment against defendants Jason Ader, Irwin Chafetz, Victor Chaltiel, Charles Forman, Charles Koppelman, and Michael Leven - current or past members of the Sands' board of directors. (Doc. # 1 at 49-54). Plaintiff also alleges breach of contract against defendant PricewaterhouseCoopers, LLP ("PWC") partner Frederick Hipwell. Id. at 53-54. Las Vegas Sands Corp. is a nominal defendant. Id. at 1.
These claims arise out of allegations that defendants: (1) permitted "overseas bribery, kickbacks, money laundering and other wrongful behavior..."; (2) initiated a pretextual investigation; (3) deluded investors; (4) violated the Bank Secrecy Act and the Foreign Corrupt Practices Act; (5) "[c]onceale[d] material facts with respect to purported audits..."; (6) misused assets; (7) released a "false and misleading" proxy statement; (8) allowed the utilization of "Sands' corporate assets to further the political interests of the [c]ompany's largest shareholders..."; (9) abandoned an investment in a Spanish gaming interest; (10) violated internal codes of conduct; and (11) "[e]nhanced the [i]ndividual [d]efendants' positions as directors and/or officers of Sands while providing each of them with substantial compensation, power, and prestige." Id. at 3-4.
As relief, plaintiff requests the following: (1) the appointment of a conservator; (2) the appointment of a chief compliance officer to oversee regulatory compliance; (3) a finding that the 2013 proxy statement "is false and misleading" and thus violates the board of directors' duty of candor; (4) a declaration that defendant board members "have breached their fiduciary duties and wasted Sands' assets..."; (5) an order for defendant board members to pay damages to Sands; (6) a declaration "that PWC has breached the terms of its engagements by Sands..."; (7) a declaration "that PWC has negligently performed its audits of the Company's year-end financial statements..."; (8) an order for defendants to disgorge unjust earnings; (9) an order for Sands "to take all necessary actions to reform and improve its corporate governance, compliance and internal control procedures..."; (10) an award for restitution from defendants; (11) "reasonable attorneys' fees, expert fees and other reasonable costs and expenses..."; and (11) any additional warranted relief. Id. at 54-55.
II. Legal Standard
Derivative litigation is born of equitable principles. Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983). This breed of litigation's purpose is to protect the value of a stockholder's shares through "obtaining a recovery for [a] corporation...." See id.
Federal Rule of Civil Procedure 23.1 governs derivative litigation and states "[t]he complaint must... allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law."
Rule 23.1 has been interpreted to "require that a derivative plaintiff be a shareholder at the time of the alleged wrongful acts and that the plaintiff retain ownership of the stock for the duration of the lawsuit." Lewis, 719 F.2d at 1047; see Quinn v. Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010). "Rule 23.1's continuous share ownership requirement is procedural in nature and thus applicable in diversity actions." Kona Enter., Inc. v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999).
If a plaintiff does not possess company shares at the time of suit, that plaintiff cannot benefit for suing on that company's behalf. Lewis, 719 F.2d at 1047. Thus, to satisfy principles of equity, a plaintiff must fulfill the continuous ownership requirement of Rule 23.1. See id.
"Strict compliance with Rule 23.1" is required "before a derivative suit can wrest control of an issue from a board of directors." See Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir. 2008). Otherwise, the primacy of a board of directors' authority is "the general rule of American law...." See id.
Derivative shareholder actions are exceptional because "derivative actions brought by minority stockholders could, if unconstrained, undermine the basic principle of corporate governance that the decisions of a corporation... should be made by the board of directors or the majority of ...