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August 2011

Southern California Directors and Officer and Securities Litigation Team Prevails in Complicated Shareholder Derivative Action

Los Angeles and Orange County D&O and Securities Litigation attorneys Craig Mariam, James Grady, William Pedranti, Eric Caligiuri, and Hazel Mae Pangan, with the support of Ashley Montgomery, Robin Collette, and Katheryn Shinn, obtained a complete dismissal in a highly contested multi-party shareholder derivative and direct action involving two business entities that were eventually merged into a single corporation.  The lawsuit alleged breach of fiduciary duty, civil conspiracy, misappropriation of corporate assets, and fraud against a Pasadena, California based research and development company and its past and present directors and officers.  Plaintiffs alleged damages over $20,000,000 on behalf of all shareholders.  

Plaintiffs were minority shareholders who invested in the predecessor entity to the named corporate defendant.  They claimed that over a twenty year period, the company's founding directors misappropriated corporate assets, fraudulently issued securities, and breached their fiduciary duties through various acts of corporate mismanagement.  Plaintiffs also claimed that the subsequent directors conspired to commit and ratified the misconduct by failing to investigate even though several of these directors did not concurrently serve on the corporation's board with the founding directors.  Plaintiffs alleged that as a result of the misconduct, the corporation could not bring its technology for the interdiction of toxins and impurities in perishable products to the commercial market and shareholders were deprived of returns on their investments. 

As the opening to several rounds of complicated pleading and law and motion practice, the Gordon & Rees defense team, led by Craig Mariam, filed a demurrer to the plaintiffs' complaint, which was sustained in its entirety, in part without leave to amend.  In the demurrer, the defense pointed out that:  (1) plaintiffs failed to meet the pre-suit demand requirements of the California Corporations Code; (2) plaintiffs failed to allege the requisite sale or attempted sale of their securities as required for claims under California's security statutes; and (3) plaintiffs' securities claims were barred by the applicable statutes of limitations. 

Various subsequent rounds of motions ensued, including discovery motions related to a protective order and production of documents, interrogatories, and more.  All were decided in client's favor.

The defense team then filed and prevailed on a motion to require plaintiffs to furnish security for the corporation's defense against the action.  The security motion was based on a novel application of the special litigation committee and business judgment rule defenses in a non-dispositive motion context.  The defense also pointed out that the plaintiffs incorrectly conflated the newer directors' knowledge of the plaintiffs' allegations of misconduct with knowledge of actual misconduct, with the former being an insufficient basis for liability for failure to investigate.  The Court agreed with the defense, and ordered plaintiffs to post the statutory maximum of $50,000 security.  

Rather than to "keep digging," with the order to furnish $50,000 in security looming, plaintiffs chose to abandon their lawsuit and failed to oppose the second demurrer as to the remaining claims.  The case is expected to conclude, with prejudice against re-filing, in short order.