United States District Court, M.D. North Carolina
MEMORANDUM OPINION AND ORDER
WILLIAM L. OSTEEN, Jr., District Judge.
Presently, this court is asked to review the Recommendation (Doc. 35) filed by the Magistrate Judge in accordance with 28 U.S.C. § 636(b), in which the Magistrate Judge recommends that the Motion to Dismiss (Doc. 24) filed by Nominal Defendant BB&T Corporation ("BB&T") be granted. Plaintiff Curtis Borchardt ("Plaintiff") filed timely objections to the Recommendation (Doc. 38), and BB&T has responded to those objections (Doc. 40).
This court, upon review of the Recommendation, granted discovery on the limited issues specified by N.C. Gen. Stat. § 55-7-44(a). (See Order (Doc. 46) at 4.) At the close of discovery, all parties filed supplemental briefs reaffirming their support of or opposition to the Magistrate Judge's Recommendation. (Docs. 73, 76, 77.) On October 10, 2014, this court held a hearing on the pending motions and took the matter under advisement.
BB&T's Motion to Dismiss (Doc. 24) is now ripe for adjudication, and after conducting a de novo review, this court will adopt the Magistrate Judge's Recommendation with the following additional analysis.
Also pending before this court is a Motion to Dismiss filed by Kelly S. King and the other individual defendants, all of whom were officers and directors of BB&T (the "Individual Defendants"). (Doc. 5.) North Carolina law requires courts to dismiss derivative actions when the corporation follows the statutory requirements laid out in section 55-7-44 of the North Carolina General Statutes. See N.C. Gen. Stat. § 55-7-44(a). Because this court finds that BB&T has complied with these statutory requirements, this court must dismiss the case. Accordingly, this court need not address the merits of Plaintiff's claims against the Individual Defendants, and the Individual Defendants' Motion to Dismiss is now moot.
This action's origin can be traced to another lawsuit filed in the United States District Court for the District of New Jersey, referred to herein as the "Dow Corning litigation." See Dow Corning Corp. v. BB&T Corp., Civil Case No. 09-5637 (FSH)(PS), 2010 WL 4860354 (D.N.J. Nov. 23, 2010). In the Dow Corning litigation, plaintiffs Dow Corning Corporation and Hemlock Semiconductor Corporation filed suit alleging that BB&T and its subsidiary, Scott & Stringfellow, LLC, induced plaintiffs to invest in auction rate securities ("ARS") based on material misrepresentations and omissions concerning the liquidity of the ARS. Id. at *1-2.
ARS are debt instruments with long-term maturities whose interest rates reset at short-term, definite intervals (varying from approximately a week to a month depending on the issuance) through a process known as a Dutch auction. See id. at *1. Dutch auctions take successively higher bids from buyers until all securities in the auction can be sold. Id . The price at which all securities can be sold is called the "clearing rate." Id . If there are not enough buy bids to match the sell orders, the auction "fails, " and the ARS holder must wait until the next auction to attempt to sell. Id . Because there is no established secondary market for ARS, Dutch auctions are the primary source of liquidity for the securities.
In the Dow Corning litigation, the plaintiffs alleged that the defendants marketed the ARS to the plaintiffs as highly liquid securities that could be held as cash equivalents. Id. at *2. The plaintiffs further alleged that during the run-up to the 2008 financial crisis, the defendants had knowledge that the ARS market was deteriorating. Id. at *3. The defendants allegedly knew the liquidity of the ARS was in jeopardy; however, they continued marketing the securities to the plaintiffs. Id . Then, during the 2008 financial crisis, the market for ARS ultimately collapsed. Id . As a result, the plaintiffs were left holding over $640 million of illiquid ARS. Id . The defendants in the Dow Corning litigation filed a motion to dismiss, and the district court granted the motion as to the claims against BB&T without prejudice. Id. at *17. The court found that the plaintiffs had stated a claim under federal and state law with respect to the conduct of Scott & Stringfellow, and as such, the suit against Scott & Stringfellow was allowed to continue. Id.
In the present case, Plaintiff sues derivatively on behalf of BB&T. Plaintiff was a shareholder of BB&T during the events alleged in the Dow Corning litigation. He filed his complaint with this court on April 1, 2010, accusing the Individual Defendants, who are current and former officers and board members of BB&T, of breaching their fiduciary duties to the corporation. (Complaint ("Compl.") (Doc. 1) ¶¶ 1-2.) The complaint filed by Plaintiff parallels the claims made in the Dow Corning litigation, specifically alleging a breach of fiduciary duties by the Individual Defendants in connection with the marketing and sale of ARS. (Id. ¶ 2.) Plaintiff contends that these breaches by the Individual Defendants subjected BB&T to "costs and expenses incurred in connection with the [Dow Corning litigation], as well as further investigation of the unethical and illicit activities." (Id. ¶ 7.)
On December 11, 2009, prior to the filing of a complaint in this court and as required by North Carolina law, Plaintiff sent a demand letter to BB&T's board of directors ("the Board"). (Compl. ¶ 71, Ex. A, Demand Letter (Doc. 1-2).) In his letter, Plaintiff demanded the Board "take action to remedy breaches of fiduciary duties by the directors and certain executive officers of [BB&T]." (Id. at 1.)
On February 18, 2010, the Board directed BB&T's general counsel to advise Plaintiff that the Board had determined that undergoing the requested action would not be in the best interest of BB&T or its shareholders. (Compl. ¶ 72, Ex. B (Doc. 1-3).) Plaintiff specifically alleged in his Complaint that the Board, in reaching its decision to reject his demand letter, "did not conduct any investigation of the Demand, did not appoint a committee of independent directors to investigate or consider the Demand, did not retain any independent counsel or other advisors to assist in investigating or considering the Demand, nor do anything other than refuse the Demand out of hand." (Compl. (Doc. 1) ¶ 73.)
Portions of depositions taken by Plaintiff suggest, at a minimum, that there is some dispute of fact as to how much discussion occurred prior to rejecting Plaintiff's original demand. Some of the deposition excerpts have partially substantiated this claim that the Board's initial rejection of the Shareholder Demand was little more than a perfunctory "no" vote.
Nonetheless, evidence exists in the record to the contrary. According to the deposition of Mr. Thomas E. Skains, the Board (including those directors who would later form the Special Committee) had a "board package in advance of the meeting, " "had a lengthy discussion about the [demand] letter, " had "general counsel of [BB&T] [do] investigations on the nature of the letter, " and had "independent knowledge and experience as to whether [the Board member] performed any of these alleged acts." (Pl.'s Mem. of Law in Further Opp'n to Nominal Def. BB&T's and the Individual Defs.' Mots. to Dismiss & Supplemental Objections to Mag. Sharp's Report & Recommendation ("Pl.'s Resp. & Supplemental Objections"), Ex. C, Deposition of Thomas E. Skains ("Skains Dep.") (Doc. 76-4) at 3-4.) Mr. Skains, however, noted that the Board conducted no independent investigation or inquiry of its own, did not perform a "separate investigation by the board or some board members of the actions of others, " and did not conduct any investigation with respect to the allegations raised towards the officers. (See id.)
After receiving the rejection letter, Plaintiff filed suit with this court on April 4, 2010. (Compl. (Doc. 1).) On April 27, 2010, the Board formed a special investigative committee ("Special Committee") to investigate and evaluate Plaintiff's derivative claim. (Second Decl. of Thomas E. Skains ("Skains Decl.") (Doc. 26) ¶ 3.) The Special Committee consisted of three of the then-current BB&T directors - Thomas E. Skains; J. Littleton Glover, Jr.; and K. David Boyer, Jr. (Id.) These three directors who comprised the Special Committee were among the directors who had previously voted to dismiss Plaintiff's demand letter. (Skains Dep. (Doc. 76-4) at 3.) The resolutions of the Board of Directors establishing the Special Committee authorized the Special Committee to employ independent counsel to participate in and assist in the investigation, and also authorized the Special Committee to have full access to any and all of the books and records of BB&T and its subsidiaries, including Scott & Stringfellow, LLC. (Skains Decl., Ex. 1, Apr. 27, 2010 Resolutions of the Board of Directors of BB&T Corp. (Doc. 26-1) at 2-3.)
On May 11, 2010, the Special Committee retained the law firm of Brooks, Pierce, McLendon, Humphrey & Leonard ("Brooks Pierce") to serve as special counsel during the course of the investigation. (Skains Decl. (Doc. 26) ¶ 6.) After conducting an extensive review, Brooks Pierce recommended that the Board not pursue any action against the Individual Defendants. (Skains Decl., Ex. 2, Brooks Pierce Report of Investigation (Doc. 26-2) at 22-23.) Specifically, Brooks Pierce, as Special Counsel,
[I]nterviewed thirteen officers and employees of BB&T and Scott & Stringfellow, as well as all twenty-five Individual Defendants. The actions complained of in the [Dow Corning] complaint were those of Jeff Boyd, the sales person who sold ARS to [Dow Corning], and of John Elster, the BB&T Capital Markets trader who participated in ARS auctions where BB&T was a primary dealer or primary co-dealer. Special Counsel interviewed both Mr. Elster and Mr. Boyd.
Special Counsel interviewed individuals charged with regulatory compliance within Scott & Stringfellow, and individuals charged with compliance for BB&T. Special Counsel also interviewed individuals with responsibility for risk management within Scott & Stringfellow. During the relevant period, the Chief Operating Officer of BB&T attended Scott & Stringfellow board meetings. Special Counsel interviewed Kelly King and Chris Henson, respectively the prior and current COO, who are also two of the Individual Defendants.
Special Counsel reviewed thousands of pages of documents, including board minutes for BB&T, board minutes for Scott & Stringfellow, audit committee minutes for BB&T, compliance materials, and ARS information provided to Scott & Stringfellow customers. In addition, Special Counsel had a database of more than 87, 000 e-mails, which included correspondence between clients and Scott & Stringfellow. This database was searched for relevant e-mails which were reviewed by Special Counsel.
(Id. at 7-8.)
Brook Pierce's report to the Special Committee concluded as follows:
Special Counsel has not found any evidence of any breach of fiduciary duties within the areas that are the focus of [Plaintiff's] claims by any of the Individual Defendants. More than that, Special Counsel did not find any evidence that either BB&T or Scott & Stringfellow made misrepresentations to its clients regarding ARS, that either of them caused the failure of the ARS market, or that either of them failed ...