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Lieblein v. Ersek

United States District Court, D. Colorado

March 31, 2016



Marcia S. Krieger, Chief Judge

THIS MATTER comes before the Court pursuant to Defendant Scott Scheirman’s Motion to Dismiss (# 56), the Plaintiffs’ response (# 69), and Mr. Schierman’s reply (# 80) Defendants’collective Motion to Dismiss (# 57, 58), the Plaintiffs’ response (# 70), and the Defendants’collective reply (# 79).[1] The Magistrate Judge[2] heard oral argument on these motions on February 24, 2016 (# 95), and the Court has considered the transcript (# 96) from that hearing as well.


This is a shareholder derivative suit, brought by shareholders of Nominal Defendant Western Union Company (“WU”), against certain WU directors and officers. The Consolidated Shareholder Derivative Complaint (“Complaint”) (# 38) is lengthy and complex, so the Court offers only a greatly summarized version here and elaborates in more detail in its analysis.

WU’s primary business operations involve facilitating domestic and international money transfers, by which a customer may send money to a recipient nearly anywhere in the world, usually within a matter of minutes. WU provides this service through a broad network of domestic and international “agents, ” individuals and entities such as banks, grocery stores, pharmacies, and so on, that serve as WU’s storefronts where customers can send or receive funds. WU charges fees to the senders of money transfers, which accounted for more than 80% of WU’s revenue during the time period at issue here. Transfers from senders in the United States amounted to approximately 20% of WU’s revenues.

The money transfer industry is a common means by which persons engaged in serious criminal activity attempt to launder money. As a consequence, the money transfer industry is heavily-regulated, both domestically and internationally. Among other things, transactions above a certain dollar threshold trigger requirements that WU obtain and retain identification information for senders and recipients and require WU to disclose high-value transactions to regulatory authorities. Customers (both licit and illicit) sometimes attempt to avoid triggering these regulatory requirements by “structuring” a large transaction as several smaller transactions, each falling below the necessary dollar threshold. WU allegedly has a reputation for lax compliance with anti-money laundering regulations. Customers were aware of this fact, and those seeking to avoid or evade scrutiny of their transfers were more likely to use WU than its competitors. That allowed WU to charge premium rates to such customers. As a result, WU has enjoyed an unusually large profit margin relative to its competitors and its market share.

After 2002, WU was the subject of frequent investigations and regulatory actions by state and federal authorities who sought to enforce WU’s compliance with anti-money laundering rules and policies. The Complaint goes into considerable detail about several of these investigations, but it is not necessary here to recite the particulars. It is sufficient to note that WU resolved many of the investigations by paying many millions of dollars in settlement and adopting more stringent anti-money laundering policies. As pertinent here, such policies often required WU to appoint an officer to oversee WU’s compliance with money laundering regulations and that such officer report to the Board of Directors about compliance issues as well as threatened or actual regulatory actions investigations.

For purposes of this action, the most prominent of the regulatory actions was brought by the State of Arizona in 2005. The investigation revealed that WU and its agents were not maintaining proper records and indeed, that some of WU’s agents in the Southwest border region of the United States – an area accounting for 25% of WU’s domestic revenues – knowingly facilitating money laundering of funds paid over to human smugglers. In 2010, WU and the State of Arizona entered into a settlement agreement – the “Southwest Border Agreement” or “SBA” – intended to resolve the matter. Among its provisions, the Southwest Border Agreement required WU to allow a court-appointed Monitor to evaluate and recommend improvements to the company’s anti-money laundering procedures. The crux of the Plaintiffs’ contentions in this action seems to be that, notwithstanding the SBA, WU has resisted adoption of the anti-money laundering policies recommended by the Monitor, has attempted to narrow the scope of the Monitor’s authority, and has generally resisted demands that it improve its (and its agents’) compliance with regulatory requirements.

Most recently, the State of Arizona asserted that WU was in material breach of the SBA in various respects. The parties resolved that dispute by WU’s agreement to extend the Monitor’s oversight for several more years and to engage in even more aggressive recordkeeping and reporting on transactions over $500 in the Southwest U.S. The Plaintiffs contend that the additional expenses and reporting requirements resulting from this controversy “could have been avoided if Defendants had ensured good faith compliance” with governmental entities dating back as early as 2003.

The Plaintiffs allege, generally, that each named director and officer ached his/her fiduciary duties to WU by: (i) willfully failing to address issues of WU’s lax anti-money laundering compliance at an earlier date; (ii) allowing misleading proxy statements to be sent to shareholders (in that the proxy statements failed to reveal various facts about the regulatory enforcement actions and investigations that were occurring), (iii) misrepresenting the progress and costs of the SBA in WU’s 2010-2012 public securities filings, and (iv) authorizing a stock buy-back program during 2010-2012, when WU stock was trading at an inflated value due to the non-disclosures discussed above. In addition, the Plaintiffs allege that Mr. Scheirman engaged in insider trading by disposing of large numbers of WU shares in 2011 and 2012, mindful of these same facts.

Based on these allegations, the Plaintiffs assert six causes of action: (i) breach of fiduciary duty, under an unspecified jurisdiction’s common law, against the “Director Defendants” (Defendants Devitre, Ersek, Goodman, Greenberg, Holden, Levinson, Mendoza, Townsend, and Trujillo), based on allegations that, among other things, these Defendants refused to implement an effective anti-money laundering program over many years, reappointed the same Directors to various committees over various years, caused WU to breach the SBA and repurchase artificially-inflated stock, and awarded themselves excessive compensation; (ii) breach of fiduciary duty, under an unspecified jurisdiction’s common law, against the “Officer Defendants” (Defendants Ersek, Scheirman, and Stockdale), in that these Defendants caused WU to ignore its anti-money laundering compliance obligations and breach the SBA; (iii) violation of 15 U.S.C. § 78n(a) against all Defendants, in that the Defendants caused WU to issue misleading proxy statements in 2012, 2013, and 2014; (iv) a claim for “corporate waste, ” under an unspecified jurisdiction’s common law, against all Defendants, based on allegations that the Defendants caused WU to pay undeserved compensation to themselves, exposed WU to the expenses of defending against a securities fraud class action, and authorized a stock buy-back program at inflated prices, among other things; (v) unjust enrichment, under an unspecified jurisdiction’s common law, against all Defendants; and (vi) breach of fiduciary duty, premised upon insider trading, against Mr. Schierman.

The Defendants filed a joint Motion to Dismiss (# 57, 58), arguing that the Plaintiffs failed to allege sufficient facts to warrant excusing them from having to make a demand on the Board of Directors with regard to any of their claims. Separately, Mr. Schierman filed a Motion to Dismiss (# 56), arguing that: (i) the Plaintiffs do not allege facts showing Mr. Schierman’s culpable participation in the events underlying the breach of fiduciary duty claim (Claim 2); (ii) as to Claim 3, the Plaintiffs do not allege facts showing that Mr. Schierman issued or approved the allegedly defective proxy statements; (iii) as to Claim 4, corporate waste, to the extent it is predicated on the stock repurchase, the Plaintiffs have not pled facts showing that Mr. Schierman was responsible for any false statements that allegedly artificially inflated the stock’s price; (iv) as to Claim 4 to the extent it is predicated on excessive compensation, there is no allegation that Mr. Schierman personally participated in setting the compensation of the Directors or Officers; (v) as to Claim 4 to the extent it is predicated on Mr. Schierman allegedly exposing WU to a securities fraud lawsuit, the Plaintiffs have not alleged facts sufficient to plead corporate waste in these circumstances; (vi) the unjust enrichment claim fails as a matter of law, based on the failure of the other claims against Mr. Schierman and because the only benefit he allegedly received was duly paid salary and benefits; and (vii) as to Claim 6 – insider trading, the Plaintiffs have failed to adequately allege that Mr. Schierman knew of material, nonpublic information and made trades were based upon such knowledge.


A. Standard of review

In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all well-plead allegations in the Complaint as true and view those allegations in the light most favorable to the nonmoving party. Stidham v. Peace Officer Standards and Training, 265 F.3d 1144, 1149 (10th Cir. 2001), quoting Sutton v. Utah State Sch. For the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999). The Court must limit its consideration to the four corners of the Amended Complaint, any documents attached thereto, and any external documents that are referenced in the Amended Complaint and whose accuracy is not in dispute. Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001); Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002); Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001). A claim is subject to dismissal if it fails to state a claim for relief that is “plausible on its face.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). To make such an assessment, the Court first discards those averments in the Complaint that are merely legal conclusions or “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. at 1949-50. The Court takes the remaining, well-pled factual contentions, treats them as true, and ascertains whether those facts (coupled, of course, with the law establishing the requisite elements of the claim) support a claim that is “plausible” or whether the claim being asserted is merely “conceivable” or “possible” under the facts alleged. Id. at 1950-51. What is required to reach the level of “plausibility” varies from context to context, but generally, allegations that are “so general that they encompass a wide swath of conduct, much of it innocent, ” will not be sufficient. Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012).

B. Demand on Board of Directors

This action is a derivative one; that is, the Plaintiffs are attempting to bring causes of action that properly belong to WU itself, as the entity ostensibly injured by wrongdoing by its directors and officers. The decision to commence litigation and assert causes of action belongs in the first instance to the corporation itself. As a result, most jurisdictions, including Delaware, [3]require that putative shareholder plaintiffs make a pre-suit demand upon the corporation’s board that the corporation pursue the litigation. See Kamen v. Kemper Financial Servs., Inc., 500 U.S. 90, 101 (1991); see also Fed. R. Civ. P. 23.1(b)(3) (requiring particularized pleading of pre-suit demand or the reasons why it should not be required). Because such a demand may be futile, as it is often the directors themselves who would be defendants in the putative suit, some jurisdictions excuse the pre-suit demand in appropriate circumstances. Id. at 101-02.

It is undisputed that the Plaintiffs did not make pre-suit demand on WU’s Board of Directors. Thus, the question becomes whether the Complaint alleges sufficient facts to carry the Plaintiffs’ burden of showing that such demand would have been futile. Beam v. Stewart, 845 A.2d 1040, 1048-49 (Del. 2004). The Plaintiffs are required to plead the pertinent facts with particularity. Id.; Fed.R.Civ.P. 23.1(b)(3)(B).

Under Delaware law, two different tests govern the issue of demand futility, depending on the nature of the allegations. If the suit challenges a particular decision made by the board, the Court applies the Aronson test. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The Aronson test requires the plaintiff to plead facts sufficient to demonstrate a reasonable doubt as to whether: (i) the directors were disinterested or independent with regard to the decision in question; or (ii) that the challenged decision was the product of a valid exercise of business judgment. Id. If the suit does not challenge a specific business decision, but rather, challenges the board’s failure to adequately carry out its oversight duties, the Court applies the Rales test. See Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). The Rales test is ...

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