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In re Wynn Resorts, Limited Derivative Litigation

United States District Court, D. Nevada

March 29, 2019



          Kent J. Dawson United States District Judge.

         Presently before the Court is Defendants' Motion to Stay Shareholder Derivative Action (#51). Plaintiffs filed a response in opposition (#62) to which Defendants replied (#71). Also before the Court is Plaintiffs' Motion to Enter Order Denying Defendants' Motion to Dismiss (#72).[1]

         I. BACKGROUND

         Shortly after publication of an article in the Wall Street Journal on January 26, 2018, discussing the alleged misconduct by officers and directors of Wynn Resorts, Plaintiffs Rickey A. Broussard (No. 2:18-CV-00293) and the City of Dearborn Heights Act 345 Police & Fire Retirement System (No. 2:18-CV-00439) filed derivative complaints on behalf of Wynn Resorts. On March 29, 2018, this Court ordered consolidation of the Broussard and Dearborn actions under the caption In re Wynn Resorts, Limited Derivative Litigation, No. 2:18-CV-00293, and appointed the City of Dearborn Heights as Lead Plaintiff in the consolidated action. ECF No. 33 (Mar. 29, 2018 Consolidation Order). On April 27, 2018, Plaintiffs filed a consolidated amended complaint (#38) (“Consolidated Complaint”).

         The Consolidated Complaint alleges that the directors of Wynn Resorts knew about and did not disclose an alleged pattern of sexual misconduct. See generally ECF No. 38 ¶¶ 1-14. Particularly, Plaintiffs contend that the directors of Wynn Resorts breached their fiduciary duties by causing Wynn Resorts “to issue public reports to shareholders and gaming regulators alike that concealed adverse material information about the Company's namesake, Steve Wynn. Defendants' false and misleading statements and material omissions breached their fiduciary duties and related legal obligations.” Id. ¶ 11. According to Plaintiffs, the directors “exposed Wynn [Resorts] to billions of dollars of losses and risks of loss” associated with the federal securities class action and an application for a gaming license. See id. In addition to alleging purported breaches of fiduciary duties, Plaintiffs also allege that the directors of Wynn Resorts violated Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 by making false or misleading statements in proxy statements that failed to disclose a supposed pattern of sexual harassment and failing to disclose that information to gaming regulators. Id. ¶¶ 151-154.

         This action names as defendants the former Chief Executive Officer (“CEO”) and Chairman of Wynn Resorts, Stephen A. Wynn (“Wynn”), former Chief Financial Officer (“CFO”) and current CEO Matthew Maddox (“Maddox”), General Counsel and Senior Vice President Kimmarie Sinatra, and current or former directors John J. Hagenbuch, Jay L. Johnson, Robert J. Miller, Patricia Mulroy, Clark T. Randt, Jr., Alvin V. Shoemaker, J. Edward Virtue, D. Boone Wayson, and Ray Irani. Id. ¶¶ 25-36. The complaint also names Wynn Resorts as a nominal defendant. Id. ¶¶ 22-24.

         On February 20, 2018, five days after the present derivative action was filed, Plaintiffs John V. Ferris and Joann M. Ferris filed a federal securities class action, Ferris v. Wynn Resorts, No. 2:18-CV-00479-GMN-CWH, against Wynn Resorts and individual defendants Steve Wynn, Matthew Maddox, current CFO Craig Billings, and former CFO Stephen Cootey. Similar to this derivative action, the complaint in the securities class action alleges these defendants violated certain federal securities laws-Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5- by allegedly failing to disclose a “pattern of sexual misconduct.” Id. ¶ 4. The securities complaint alleges that in numerous public filings, the defendants “had a duty” to disclose details about ongoing alleged sexual misconduct, and that their failure to do so resulted in artificially inflated prices for Wynn Resorts stock. Id. ¶¶ 4, 73. The plaintiff claims that when “the truth” was supposedly revealed in the Wall Street Journal article, Wynn Resorts stock price dropped, causing investors to suffer losses. Id. ¶¶ 5, 6, 11, 50-52. Just as in this derivative case, the issues raised by the securities class action concern what information the individual defendants had and when, and whether they had any duty to disclose it. See, e.g., id. ¶¶ 4, 23, 71; see also id. ¶ 62 (identifying among the issues to be resolved in the securities case whether the individual defendants caused the company to issue false and misleading statements).

         Defendants have now moved to stay this action asserting that proceeding when the related securities class action is pending is not in Wynn Resorts' best interest or its shareholders' interest. Defendants argue that proceeding would divert resources from the securities class action. Moreover, Defendants argue that Plaintiffs in this action, nominally Wynn Resorts, will be seeking to prove the very allegations that it is defending against in the securities class action. This will require Plaintiffs to discredit key witnesses in the securities class action who are needed for Wynn Resorts' defense in this action.


         A district court has the inherent power to stay cases to control its docket and promote the efficient use of judicial resources. Landis v. North Am. Co., 299 U.S. 248, 254-55 (1936); Dependable Highway Exp., Inc., v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007). When determining whether a stay is appropriate pending the resolution of another case - often called a “Landis stay” - the district court must weigh: (1) the possible damage that may result from a stay, (2) any “hardship or inequity” that a party may suffer if required to go forward, and (3) “and the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law” that a stay will engender. Lockyer v. Mirant Corp., 398 F.3d 1098, 1110 (9th Cir. 2005). However, contrary to Plaintiff's argument, the Court need not find “exceptional circumstances[.]” Intel Corp. v. Advanced Micro Devices, 12 F.3d 908, 912 (9th Cir. 1993) (analyzing a stay under the Colorado River doctrine which only applies when staying a federal action in favor of an ongoing state court proceeding.) In this action, a stay would be issued in favor of the ongoing, federal securities class action, not the concurrently proceeding state court derivative actions.

         III. ANALYSIS

         In this action, the factors weigh in favor of a Landis stay. The hardship and inequity Wynn Resorts would suffer should this case be permitted to proceed now weigh strongly in favor of a stay. A derivative suit allows shareholders to bring claims to enforce a company's rights against its directors. Fed.R.Civ.P. 23.1. In bringing such claims, the derivative plaintiffs are seeking to act as the company's fiduciaries and have a duty to act in the company's best interest. See In re Ormat Techs., Inc. Deriv. Litig., 2011 WL 3841089, at *5 (D. Nev. Aug. 29, 2011) (staying derivative case in favor of pending securities class action); see also In re STEC, Inc. Deriv. Litig., 2012 WL 8978155, at *4 (C.D. Cal. Jan. 11, 2012) (same, noting that a plaintiff bringing a derivative action is a “fiduciary and has a duty to act in the company's best interest”).

         Litigating the derivative action would divert the company's financial and management resources from the pending securities class action. Moreover, proceeding with this action now would require Plaintiffs to prove the very same alleged misconduct that is the basis of the securities class action, and to attack the credibility of witnesses also named as defendants in that action. These efforts-whether or not meritorious or successful-could undermine Wynn Resorts' defense of the securities class action, and courts have stayed derivative actions in favor of securities class actions for this reason. See, e.g., In re Ormat, 2011 WL 3841089, at *4 (staying federal derivative action in part because “Defendants are witnesses that [the company] will rely upon in the Securities Class Action”); see also Rosenblum v. Sharer, 2008 WL 9396534, at *23-24 (C.D. Cal. Jul. 28, 2008) (staying derivative action because “it seems likely that the officers and director Defendants in the derivative action would be important witnesses in the securities class action, [which] could potentially result in the liability of the officers being imputed to the corporation”; and “denying a stay will potentially cause substantial harm to [the company], the party on whose behalf this derivative action has been brought”); Cucci v. Edwards, 2007 WL 3396234, at *2 (C.D. Cal. Oct. 31, 2007) (staying derivative action because it “would likely conflict with [the company's] defense” of a securities class action, because plaintiffs “would need to prove allegations that would seriously undermine [the company's] defense of the class action”); Breault v. Folino, 2002 WL 31974381, at *2 (C.D. Cal. Mar. 15, 2002) (holding that the company “would be harmed by Plaintiffs' pursuit of this derivative action now” because “Defendants are likely witnesses who [the company] will rely upon in the pending cases” and “Plaintiffs will need to undermine Defendants' credibility to pursue this action”); In re STEC, 2012 WL 8978155, at *4 (“Courts generally stay a shareholder derivative suit until the culmination of a securities class action when the cases arise from the same factual allegations and the evidence in the former could jeopardize the company's defense in the latter.”).

         These same considerations apply in the present actions. There is no doubt that the federal securities claims are almost identical and will require nearly identical evidence to prove their claims. This puts the nominal Plaintiff, Wynn Resorts, in the position of attempting to prove the claims it is defending in the securities class action. To “avoid ...

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