Opinion
7064 7065 650100/16
07-05-2018
Stanley H. EPSTEIN, et al., Plaintiffs, SEP IRA A/C Peter Christopher Gardner, Derivatively on Behalf of Nominal Defendant Sequoia Fund, Inc., Plaintiff–Appellant, v. RUANE, CUNNIFF & GOLDFARB INC., et al., Defendants–Respondents, Sequoia Fund, Inc., a Maryland Corporation, Nominal Defendant–Respondent.
Fensterstock, P.C., New York (Evan S. Fensterstock of counsel), and Nelson & Fraenkel, LLP, Los Angeles, CA (Gretchen M. Nelson of the bar of the State of California, admitted pro hac vice, of counsel), for appellant. Willkie Farr & Gallagher LLP, New York (Tariq Mundiya of counsel), for Ruane, Cunniff & Goldfarb Inc., Robert D. Goldfarb and David Poppe, respondents. Ropes & Gray LLP, New York (Robert A. Skinner of the Commonwealth of Massachusetts, admitted pro hac vice, of counsel), for Robert L. Swiggett, Roger Lowenstein, Edward Lazarus and Sequoia Fund, Inc., respondents.
Fensterstock, P.C., New York (Evan S. Fensterstock of counsel), and Nelson & Fraenkel, LLP, Los Angeles, CA (Gretchen M. Nelson of the bar of the State of California, admitted pro hac vice, of counsel), for appellant.
Willkie Farr & Gallagher LLP, New York (Tariq Mundiya of counsel), for Ruane, Cunniff & Goldfarb Inc., Robert D. Goldfarb and David Poppe, respondents.
Ropes & Gray LLP, New York (Robert A. Skinner of the Commonwealth of Massachusetts, admitted pro hac vice, of counsel), for Robert L. Swiggett, Roger Lowenstein, Edward Lazarus and Sequoia Fund, Inc., respondents.
Renwick, J.P., Richter, Manzanet–Daniels, Tom, Gesmer, JJ.
Orders, Supreme Court, New York County (O. Peter Sherwood, J.), entered on or about March 1, 2017 and on or about March 2, 2017, which, insofar as appealed from as limited by the briefs, granted defendants' and nominal defendant's motions to dismiss the complaint as against them, unanimously affirmed, without costs.
Plaintiff failed to allege sufficient facts to establish that a pre-suit demand on the board of the nominal defendant (Sequoia) to prosecute the action would have been futile under applicable Maryland law (see Werbowsky v. Collomb , 362 Md. 581, 600, 620, 766 A.2d 123, 133, 144 [Md. 2001] ; see also Simon v. Becherer , 7 A.D.3d 66, 72, 775 N.Y.S.2d 313 [1st Dept. 2004] ; Hart v. General Motors Corp. , 129 A.D.2d 179, 182–183, 517 N.Y.S.2d 490 [1st Dept. 1987], lv denied 70 N.Y.2d 608, 521 N.Y.S.2d 225, 515 N.E.2d 910 [1987] ). The allegations of the complaint do not "clearly demonstrate, in a very particular manner," that "a majority of the directors are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule" ( Werbowsky, 362 Md. at 620, 766 A.2d at 144 ). When this action was commenced, Sequoia's board had five members. Defendants do not seriously dispute that defendants Robert D. Goldfarb and David Poppe (the Inside Directors) were conflicted. However, plaintiff failed to demonstrate that any of the Outside Directors (defendants Robert L. Swiggett, Roger Lowenstein, and Edward Lazarus), who are "presumed to be disinterested" ( Matter of Franklin Mut. Funds Fee Litig., 388 F.Supp.2d 451, 470 [D.N.J. 2005] ; see Md Code Ann, Corps. & Assns. § 2–405.3 [b]; 15 USC § 80a–2 [a][19][A] ), was also conflicted.
The complaint alleges no specific facts about Lazarus to rebut the presumption. It alleges that Lowenstein and Swiggett were conflicted due to their longstanding history as Sequoia board members and relationships with Goldfarb, Poppe, and defendant Ruane, Cunniff & Goldfarb Inc. (the Adviser). However, "[e]vidence of personal and/or business relationships" is not sufficient to excuse a demand ( Sekuk v. Global Enters. Profit Sharing Plan v. Kevenides , 2004 WL 1982508, *5, 2004 Md. Cir. Ct. LEXIS 20, *13, [Md. Cir. Ct., May 25, 2004] ; accord Oliveira v. Sugarman , 226 Md.App. 524, 544, 130 A.3d 1085, 1097 [Md. Ct. Spec. App. 2016], affd 451 Md. 208, 152 A.3d 728 [Md. 2017] ; Smith v. Stevens , 957 F.Supp.2d 466, 473 [S.D. N.Y.2013] ). Nor is it sufficient that Swiggett and Lowenstein were compensated for their services as board members (see Werbowsky , 362 Md. at 618, 622, 766 A.2d at 143–144, 145–146 ; Scalisi v. Fund Asset Mgt., L.P. , 380 F.3d 133, 140–141 [2d Cir.2004] ; Smith , 957 F.Supp.2d at 472 ; Ryan v. Morgan Asset Mgt., Inc. , 694 F.Supp.2d 879, 887 [W.D. Tenn. 2010] ).
The fact that Lowenstein and Swiggett "approved or participated in some way in the challenged transaction or decision," and thus may be subject to liability therefor, is also insufficient to demonstrate demand futility (see Werbowsky , 362 Md. at 618, 766 A.2d at 143 ; Gomes v. American Century Cos., Inc. , 710 F.3d 811, 817–818 [8th Cir.2013] ; Weinberg v. Gold , 838 F.Supp.2d 355, 360 [D. Md. 2012] ; Seidl v. American Century Cos., Inc. , 713 F.Supp.2d 249, 260–261 [S.D. N.Y.2010], affd 427 Fed. Appx. 35 [2d Cir.2011], cert denied 565 U.S. 1092, 132 S.Ct. 846, 181 L.Ed.2d 549 [2011] ; Franklin Mut. Funds Fee Litig. , 388 F.Supp.2d at 470 ).
Poppe's purported "admission" in a New York Times article that he and Goldfarb made all investment decisions does not prove that the Outside Directors were under their domination or control, since they may have acquiesced in these decisions for legitimate business reasons. Moreover, Poppe also admitted that, although he and Goldfarb made the final decisions, they nonetheless "listened to their [the Outside Directors'] input." This is consistent with Poppe's and Goldfarb's roles as portfolio managers and representatives of the Adviser, and typical of the role of an investment adviser to a mutual fund (see Jones v. Harris Assoc. L.P. , 559 U.S. 335, 338, 130 S.Ct. 1418, 176 L.Ed.2d 265 [2010] ).
It is immaterial to the issue of demand futility that two former directors resigned in connection with the decisions at issue here.
In view of the foregoing, we do not reach the merits of plaintiff's underlying claims.