GCA Reply to derivative action

1 2 3 4 5 6 7 8 9 10 11 12 DARRYL P. RAINS (Pro Hac Vice) DRains@mofo.com ERIK J. OLSON (Pro Hac Vice) OLGA A. TKACHENKO (Pro Hac Vice) MORRISON & FOERSTER LLP 755 Page Mill Road Palo Alto, California 94304-1018 Telephone: 650.813.5600 Facsimile: 650.494.0792 JAMES J. PISANELLI (SBN 4027) jpisanelli@bhfs.com BROWNSTEIN HYATT FARBER SCHRECK LLP 100 City Parkway, Suite 1600 Las Vegas, Nevada 89106 Telephone: 702.382.2101 Facsimile: 702.382.8135 Attorneys for Individual Defendants Scott H. Betts, Robert Cucinotta, Fred C. Enlow, Charles J. Fitzgerald, Harry C. Hagerty III, William H. Harris, Geoff Judge, E. Miles Kilburn, Walter G. Kortschak, Karim Maskatiya, and Kirk Sanford UNITED STATES DISTRICT COURT 13 FOR THE DISTRICT OF NEVADA 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IN RE GLOBAL CASH ACCESS HOLDINGS, INC. DERIVATIVE LITIGATION This Document Relates to: ALL ACTIONS. Lead Case No. 2:07-cv-01659-JCM-PAL INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CONSOLIDATED COMPLAINT FOR FAILURE TO STATE A CLAIM ORAL ARGUMENT REQUESTED pa-1262301 1 2 3 4 5 6 7 8 9 10 11 A. 12 B. 13 III. 14 15 16 17 IV. V. II. TABLE OF CONTENTS Page INTRODUCTION .......................................................................................................................... 1 FACTUAL AND PROCEDURAL BACKGROUND.................................................................... 2 ARGUMENT .................................................................................................................................. 4 I. THE BUSINESS JUDGMENT RULE AND RULE 9(b) OBLIGATE PLAINTIFFS TO PLEAD SPECIFIC FACTS AGAINST EACH INDIVIDUAL DEFENDANT..................................................................................................................... 4 A. B. Specific Pleading Is Required To Overcome The Business Judgment Rule .......... 4 Rule 9(b) Also Applies And Requires Specific Pleading ....................................... 5 PLAINTIFFS DO NOT PLEAD A MISREPRESENTATION BY DEFENDANTS SUFFICIENT TO SUPPORT COUNTS I OR II OF THEIR COMPLAINT .................... 7 Plaintiffs Do Not Specifically Plead Any False Statements ................................... 7 Plaintiffs Do Not Detail The Role of Each Individual Defendant .......................... 8 COUNT III DOES NOT ADEQUATELY ALLEGE GROSS MISMANAGEMENT......................................................................................................... 9 COUNT IV DOES NOT STATE A CLAIM FOR CORPORATE WASTE ................... 11 PLAINTIFFS’ COMPLAINT DOES NOT PROPERLY PLEAD AN UNJUST ENRICHMENT CLAIM................................................................................................... 12 CONCLUSION ............................................................................................................................. 15 18 19 20 21 22 23 24 25 26 27 28 i pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES Page CASES Aronson v. Lewis, 473 A.2d 805 (Del. 1984) ..................................................................................................... 4, 11 Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150 (Del. Ch. 2005)..................................................................................................... 8 Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ....................................................................................................... 4, 5 Brehm v. Eisner, 906 A.2d 27 (Del. 2006) ........................................................................................................... 11 Burks v. Lasker, 441 U.S. 471 (1979).................................................................................................................... 4 Cede & Co. v. Technicolor Inc., 634 A.2d 345 (Del. 1993) ........................................................................................................... 4 Continuing Creditors' Comm. of Star Telecomm. v. Edgecomb, 385 F. Supp. 2d 449 (D. Del. 2004)............................................................................................ 9 Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963 (Del. Ch. 2000)..................................................................................................... 8 Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060 (Del. 1988) ....................................................................................................... 12 Glazer v. Zapata Corp., 658 A.2d 176 (Del. Ch. 1993)................................................................................................... 11 Grassmueck v. Barnett, No. C03-122P, 2003 U.S. Dist. LEXIS 14767 (W.D. Wash. July 7, 2003) ............................... 4 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ..................................................................................................... 14 Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003)............................................................................................... 9, 13 Highland Legacy Ltd. v. Singer, No. Civ. A. 1566-N, 2006 WL 741939 (Del. Ch. Mar. 17, 2006).............................................................................. 13 In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989)................................................................................................... 13 In re Baxter Int'l S'holders Litig., 654 A.2d 1268 (Del. Ch. 1995)................................................................................................. 10 ii pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES (continued) Page In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996)............................................................................................... 9, 10 In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114 (W.D. Wash. 2006).......................................................................... 11, 14 In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995)......................................................................................................... 6 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) ...................................................................................... 4 In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997) ............................................................................................. 6 In re Sonus Networks, Inc., 499 F.3d 47 (1st Cir. 2007) ....................................................................................................... 10 Jackson Nat'l Life Ins. Co. v. Kennedy, 741 A.2d 377 (Del. Ch. 1999)................................................................................................... 12 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991)...................................................................................................................... 4 Kenney v. Koenig, 426 F. Supp. 2d 1175 (D. Colo. 2006)...................................................................................... 10 Landy v. D'Alessandro, 316 F. Supp. 2d 49 (D. Mass. 2004) ......................................................................................... 11 Levine v. Smith, 591 A.2d 194 (Del. 1991) ........................................................................................................... 5 Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363 (5th Cir. 2001)....................................................................................................... 5 McKesson HBOC, Inc. v. N.Y. State Common Ret. Fund, 339 F.3d 1087 (9th Cir. 2003)................................................................................................... 12 Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001)..................................................................................................... 13 Parnes v. Bally Entm't Corp., 722 A.2d 1243 (Del. 1999) ..................................................................................................... 5, 8 Perkins v. Daniel, No. 06 cv 01518, 2007 U.S. Dist. LEXIS 90104 (D.N.J. Dec. 6, 2007) .................................. 10 Salsitz v. Nasser, 208 F.R.D. 589 (E.D. Mich. 2002) ........................................................................................... 10 iii pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 TABLE OF AUTHORITIES (continued) Page Schock v. Nash, 732 A.2d 217 (Del. 1999) ......................................................................................................... 14 Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) ........................................................................................................... 4 State Teachers Ret. Bd. v. Fluor Corp., 566 F. Supp. 945 (S.D.N.Y. 1983)............................................................................................ 14 Stone v. Ritter, 911 A.2d 362 (Del. 2006) ........................................................................................................... 9 Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007)....................................................................................................... 8 Valn v. United States, 548 F. Supp. 921 (D. Del. 1982)................................................................................................. 7 Vess v. Ciba-Geigy Corp., 317 F.3d 1097 (9th Cir. 2003)............................................................................................. 5, 6, 8 RULES 14 Delaware Corporations Code section 102(b)(7) ........................................................................... 11 15 Fed. R. Civ. Proc. 8(a) .................................................................................................................... 5 16 Fed. R. Civ. Proc. 9(b) ........................................................................................................... passim 17 MISCELLANEOUS 18 3A William Fletcher, Fletcher Encyclopedia of the Law of Corporations, § 1174 (2006)........... 14 19 20 21 22 23 24 25 26 27 28 iv pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendants Scott H. Betts, Robert Cucinotta, Fred C. Enlow, Charles J. Fitzgerald, Harry C. Hagerty III, William H. Harris, Geoff Judge, E. Miles Kilburn, Walter G. Kortschak, Karim Maskatiya, and Kirk Sanford move for dismissal of the consolidated complaint in this action for failure to state a claim. Defendants respectfully request a hearing on this motion. INTRODUCTION This case is about commissions. Plaintiffs allege that eleven individual defendants caused Global Cash Access (or “GCA”) to improperly calculate and report the commissions the company pays to casinos for the right to conduct business on their premises. Because plaintiffs’ claims all arise under Delaware law, and are therefore subject to the business judgment rule, plaintiffs’ complaint must meet the heightened pleading standards imposed by that rule. And because plaintiffs’ complaint alleges fraudulent conduct — including false financial reports, fraudulent public statements, and bad faith disregard of fiduciary duties, among other claims — plaintiffs’ complaint must meet the heightened pleading standards imposed by Rule 9(b). Together, these mean that plaintiffs’ complaint should have stated, for each individual defendant, the specific facts showing his involvement in GCA’s allegedly improper and fraudulent scheme. It doesn’t. Plaintiffs’ complaint does not say how, why, or in what way the individual defendants misrepresented GCA’s commissions expense or the state of its internal controls. In fact, the complaint quotes numerous company statements that frankly disclosed GCA’s internal controls weaknesses regarding commissions. Plaintiffs do not plead any facts showing these company statements were false. Plaintiffs’ complaint also does not adequately plead any breach of fiduciary duty. Plaintiffs never say that these eleven defendants disregarded their duties. To the contrary, the complaint details the steps they took — new employees, new software, new procedures, and, ultimately, an internal investigation — to identify and correct the commissions problem. At bottom, plaintiffs’ complaint says nothing more than GCA had internal controls weaknesses related to commissions. While that may be true, it is not nearly enough to convert a business shortcoming into a viable lawsuit. The complaint should be dismissed. 1 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Id. FACTUAL AND PROCEDURAL BACKGROUND Global Cash Access provides gaming patrons access to cash at casinos through automated cash machines, credit card cash advances, point-of-sale debit card transactions, check verification and warranty services, and money transfers. Compl. ¶ 44.1 GCA pays commissions to the gaming establishments where it does business for the right to operate on their premises. Id. The commissions usually are calculated as a specified percentage of the service fee associated with each customer’s transaction. Id. The contracts which define the commissions to be paid, and the service fees on which they are based, differ based on the type of transaction, and also differ from casino to casino. Tkachenko Decl. Ex. A, at 18.2 On March 30, 2007, GCA announced it had material weaknesses in its internal accounting controls related to commissions. Compl. ¶ 49. GCA wrote: Inadequate controls related to commissions. We did not have appropriate internal control design related to how we calculate the amount of commissions we pay our customers. Specifically, 1) internal controls over commission set-up did not include a comparison of commission rates to contractual terms and 2) there was an ineffective process to determine the appropriate commission type and amount. In addition, some of the databases and applications used to maintain transaction records and perform certain commission computations were maintained by a third party and appropriate controls to monitor and approve changes and to limit access were not in place. At the same time, GCA said that it had begun to implement measures to improve its internal controls. Tkachenko Decl. Ex. A, at 102. GCA’s stock price did not move significantly, and there is no indication that investors considered the March 30, 2007 announcement to be important. Id. Ex. N, at 3. “Compl. ¶” refers to paragraphs of the Verified Consolidated Shareholder Derivative Complaint for Breach of Fiduciary Duties, Waste of Corporate Assets and Unjust Enrichment, filed with this Court on May 5, 2008. GCA requests that the Court take judicial notice of certain documents attached to the Declaration of Olga A. Tkachenko in Support of Motions to Dismiss (“Tkachenko Decl.”). See Request for Judicial Notice In Support Of Motions To Dismiss. 2 1 2 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 When GCA filed its next two quarterly financial statements, GCA again identified the material weaknesses that it had disclosed in March and updated investors on its progress in improving its internal controls over commissions. Compl. ¶¶ 59, 61; Tkachenko Decl. Ex. B, at 36-37; Ex. C at 42-43. For example, in August 2007, GCA told investors it had hired a commission analyst with auditing experience to oversee the commissions audit process. Compl. ¶ 61. GCA also announced its intention to develop automated commission calculations and review tools. Id. GCA’s stock price remained steady throughout this period. Tkachenko Decl. Ex. N, at 3-4. Then, in November 2007, GCA announced that it would delay its next quarterly filing while investigating unspecified allegations recently made by an anonymous erstwhile whistleblower. Id. Ex. E. The company’s stock dropped significantly (from $9.20 per share to $3.71 per share) based on the uncertainty created by this announcement. Id. Ex. N at 7; Compl. ¶ 76. But, a few weeks later, the stock partially recovered (closing at $5.74) when the company hosted a conference call to discuss the internal investigation. Tkachenko Decl. Exs. N, L. By December 7, 2007, GCA was able to announce the preliminary results of the investigation. Compl. ¶ 65; Tkachenko Decl. Ex. L, at 1-2. The investigation confirmed what GCA had already announced — that GCA had internal controls weaknesses regarding its management of commissions payments. Id. The investigators noted — and GCA promptly disclosed — that approximately 20 customer contracts had potentially ambiguous terms related to the calculation of commissions. Compl. ¶ 65; Tkachenko Decl. Ex. L, at 2. GCA advised that it would record a charge of $3 to $4 million to account for potential disputes with these customers. Id. GCA ultimately took a $2.9 million charge to account for potential disputes with these customers. Tkachenko Decl. Ex. G, at 80. GCA did not have to correct any of its previous financial statements. Id. 3 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. ARGUMENT THE BUSINESS JUDGMENT RULE AND RULE 9(b) OBLIGATE PLAINTIFFS TO PLEAD SPECIFIC FACTS AGAINST EACH INDIVIDUAL DEFENDANT. A heightened pleading standard governs plaintiffs’ complaint for two reasons — Delaware’s business judgment rule and Rule 9(b).3 The complaint does not meet these heightened pleading standards. A. Specific Pleading Is Required To Overcome The Business Judgment Rule. Under Delaware law, corporate officers and directors benefit from the “business judgment rule.” Under the business judgment rule, the court must presume that a corporation’s officers and directors “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Cede & Co. v. Technicolor Inc., 634 A.2d 345, 361 (Del. 1993) (“the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments”). “A court will not substitute its own notions of sound business judgment for that of directors and officers unless the presumption is rebutted.” Grassmueck v. Barnett, No. C03-122P, 2003 U.S. Dist. LEXIS 14767, at *10 (W.D. Wash. July 7, 2003); see also Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) (if a board’s decisions “can be attributed to any rational business purpose,” a court “will not substitute its own notions of what is or is not sound business judgment”). The business judgment rule can only be rebutted by specific factual allegations showing a director or officer acted in bad faith or failed to reasonably inform himself prior to acting. See In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1278 (N.D. Cal. 2000). These Plaintiffs’ complaint alleges only state law claims. Under the “internal affairs” doctrine, the law of the state of incorporation applies to claims regarding duties owed by corporate officers and directors. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 106 (1991); see also Burks v. Lasker, 441 U.S. 471, 477-78 (1979). GCA is a Delaware corporation. 3 4 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 allegations cannot be conclusory. They must consist of “particularized facts sufficient to rebut the presumption that the [challenged activity] was the product of a valid exercise of business judgment.” Levine v. Smith, 591 A.2d 194, 207 (Del. 1991), overruled on other grounds by Brehm, 746 A.2d 244; Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1246 (Del. 1999) (“plaintiff must allege well pleaded facts to overcome the presumption”). B. Rule 9(b) Also Applies And Requires Specific Pleading. A complaint alleging fraud must also meet the particularity requirements of Rule 9(b). Rule 9 (b) provides that averments of fraud must be pleaded “with particularity.” Fed. R. Civ. Proc. 9(b). The rule applies whenever a complaint alleges facts that “necessarily constitute fraud” — even if the complaint never “mentions the word ‘fraud,’” and even if fraud is not “an essential element” of the pleaded causes of action. Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1103-05 (9th Cir. 2003). Under Vess, the application of Rule 9(b) depends upon the extent to which fraudulent conduct is alleged. In one scenario, a complaint may allege conduct, which describes “a unified course of fraudulent conduct,” and a plaintiff may “rely entirely on that course of conduct as the basis of a claim.” Id. at 1103. In that case, “the claim is said to be ‘grounded in fraud’ or to ‘sound in fraud,’ and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b).” Id. at 1103-04. Alternatively, a complaint may allege “some fraudulent and some non-fraudulent conduct,” with the averments of fraud merely “supporting a claim rather than [comprising] the claim as a whole.” Id. In that situation, the “allegations of fraudulent conduct must satisfy the heightened pleading requirements of Rule 9(b),” while the “[a]llegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a).” Vess, 317 F.3d at 1105. If a motion to dismiss challenges the adequacy of the pleading, “[t]he proper route is to disregard averments of fraud not meeting Rule 9(b)’s standard and then ask whether a claim has been stated.” Id. (emphasis in original) (quoting Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363, 368 (5th Cir. 2001)). 5 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Here, plaintiffs’ complaint is full of allegations of fraudulent conduct. It alleges the defendants engaged in a “common course of conduct” and “conspired with one another” to “conceal” and “deceive.” See, e.g., Compl. ¶¶ 38-43. They allegedly made “improper” misstatements and “failed to disclose and misrepresented the . . . material, adverse facts, which they knew, consciously disregarded, were reckless and grossly negligent in not knowing or should have known . . . .” Compl. ¶ 69. Indeed, the heart of plaintiffs’ case is that the defendants “improperly misrepresent[ed] the financial results and business prospects of the Company” by concealing information regarding internal control weaknesses related to commissions. Compl. ¶¶ 92, 96. These allegations bear the classic hallmarks of allegations of fraudulent conduct. Plaintiffs’ entire complaint, therefore, must meet Rule 9(b)’s heightened pleading standard. See Vess, 317 F.3d at 1103-04. Under Rule 9(b), plaintiffs were obligated to allege “the circumstances constituting the alleged fraud [with enough specifics] to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.” Id. at 1106 (citations omitted). Plaintiffs must detail “the who, what, when, where, and how” of the alleged fraud, and must say exactly what is false or misleading about a statement. Id. And when multiple individuals are named as defendants, the complaint must attribute each false statement to a specific defendant; the group pleading approach does not comply with Rule 9(b). In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 752 (N.D. Cal. 1997) (Rule 9(b) obligates the plaintiff “to distinguish among those they sue and enlighten each defendant as to his or her part in the alleged fraud”); In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995) (a plaintiff satisfies Rule 9(b) “by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations”). Under both the business judgment rule and Rule 9(b), then, plaintiffs’ claims must plead specific facts showing the culpability of each individual defendant. 6 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 II. PLAINTIFFS DO NOT PLEAD A MISREPRESENTATION BY DEFENDANTS SUFFICIENT TO SUPPORT COUNTS I OR II OF THEIR COMPLAINT. Plaintiffs’ first two claims are misrepresentation claims. The first alleges that all eleven individual defendants caused GCA “to improperly represent the financial results and business prospects of the company,” especially with regard to “internal controls and underpayment of commissions and other fees.” Compl. ¶ 92. The second claim similarly asserts that the individual defendants “improperly portrayed the Company’s financial results or business prospects.” Id. ¶ 96. These allegations fall far short of the pleading standards imposed by the business judgment rule and Rule 9(b). They do not identify any false statements, explain why they were false when made, or identify any individual as responsible for the statements. A. Plaintiffs Do Not Specifically Plead Any False Statements. Most of plaintiffs’ complaint focuses on statements about internal controls. Plaintiffs allege that GCA improperly portrayed its internal controls between December 2006 and December 2007. What did GCA say during this period? That it had material weaknesses relating to its internal controls for the calculation of commissions. Compl. ¶ 49; see also Tkachenko Decl. Ex. A, at 101-102. GCA repeated these statements in the next two quarterly financial reports. Compl. ¶ 59 (“the Form 10-Q disclosed that GCA’s internal controls were still not effective as of March 31, 2007”); Tkachenko Decl. Ex. B, at 36-37; Comp. ¶ 61 (“[r]emediation of the material weaknesses identified at December 31, 2006 remains a priority for us during fiscal 2007”). Plaintiffs never allege these statements were false. Indeed, they seem to allege they were true. Plaintiffs’ complaint, for example, states that “GCA’s internal controls continued to be defective throughout 2007.” Compl. ¶ 69. That is exactly what GCA told its investors, as plaintiffs’ complaint makes clear. Id. ¶¶ 49, 59, 61. See, e.g., Valn v. United States, 548 F. Supp. 921, 923 (D. Del. 1982) (“a true statement does not give rise to the tort of misrepresentation”). Plaintiffs also say GCA misreported its “cost of revenues, and in particular its commissions,” during 2007, so that its “reported earnings for the first three quarters of fiscal 2007 7 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 were inaccurate.” Compl. ¶ 69. But plaintiffs never say what was wrong with GCA’s financial statements or by how much they were misstated. See Compl. ¶¶ 55, 58, 60, 63. Plaintiffs’ approach is insufficient under Rule 9(b) and Delaware law. Vess, 317 F.3d at 1106; Parnes, 722 A.2d at 1246. In fact, plaintiffs seem to rely entirely on GCA’s own decision to record a $2.6 million charge in December 2007 following its internal investigation.4 But that charge related to “potential disputes” in the future. Compl. ¶¶ 64, 65, 67. And GCA made it clear that the charge did not affect its prior financial statements, as the “amounts [of disputed commissions in prior periods] are not material.”5 B. Plaintiffs Do Not Detail The Role of Each Individual Defendant. Plaintiffs also fail to plead specific facts showing the role each defendant played in the allegedly false statements. Under Delaware law, plaintiffs were required to plead, with regard to each defendant, specific facts showing he acted with “reckless indifference to or a deliberate disregard of the whole body of stockholders, or acted outside of the bounds of reason.” Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 192 (Del. Ch. 2005). Rule 9(b) imposes the same particularity requirement. See Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007) (“Rule 9(b) does not allow a complaint to merely lump multiple defendants together but require[s] plaintiffs to differentiate their allegations . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud”) (internal quotation marks omitted). Plaintiffs’ complaint, however, does not differentiate among the various individual defendants. Instead, the complaint lumps all defendants together. See Crescent/Mach I Partners, The amount of $2.6 million was later revised in GCA’s final annual report to $2.9 million. Tkachenko Decl. Ex. G at 80. 5 Tkachenko Decl. Ex. G at 80 (“Of this amount [$2.9 million], $1.9 million relates to transactions completed in 2005 and 2006. Prior period amounts have not been restated as the amounts are not material.”); see also Tkachenko Decl. Ex. F, at 13 (“Of this amount [$2.6 million], $1.9 million relates to transactions completed in 2005 and 2006 and $0.5 million relates to transactions completed during the six months ended June 30, 2007. Prior period amounts have not been restated as the amounts are not material.”). 4 8 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 L.P. v. Turner, 846 A.2d 963, 985 (Del. Ch. 2000) (claim dismissed where plaintiff failed to plead any “specific factual allegations” amounting to breach of duty of care); Continuing Creditors’ Comm. of Star Telecomm. v. Edgecomb, 385 F. Supp. 2d 449, 466 (D. Del. 2004) (allegations that CFO “assisted” and “participated in” the questioned activity not sufficient to state a claim). Plaintiffs’ approach leads to absurd results with a number of the individual defendants. For example, Mr. Hagerty’s last day at the company was July 27, 2007, but he is alleged to have participated in misrepresentations on August 9, August 14, and November 7, 2007. Compl. ¶¶ 25, 60-63. Mr. Harris left GCA in August 2007, but he, too, is charged with false statements made after he left. Compl. ¶¶ 26, 63. Mr. Betts did not join GCA until October 31, 2007, but is alleged to have participated in misrepresentations made months earlier. Compl. ¶¶ 17, 55-62. Plaintiffs’ complaint thus fails to meet the basic pleading requirements of a misrepresentation claim. It does not specifically identify any false statements, explain precisely why they are false, or attribute them to any responsible individual. Counts I and II must therefore be dismissed. III. COUNT III DOES NOT ADEQUATELY ALLEGE GROSS MISMANAGEMENT. Plaintiffs’ third claim — for “gross mismanagement” — is a form of breach of fiduciary duty claim. Plaintiffs claim the individual defendants “abandoned and abdicated their responsibilities and fiduciary duties with regard to prudently managing the assets and business of GCA in a manner consistent with the operations of a publicly held company.” Compl. ¶ 101. This is what is known, in Delaware, as a “Caremark” claim. In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996). Under Caremark, a director breaches his fiduciary duty if he engages in “a sustained or systematic failure . . . to exercise oversight” – “an utter failure to attempt to assure a reasonable information and reporting system exists.” Id. at 971. Thus, under Caremark, a plaintiff must allege that directors “were conscious of the fact that they were not doing their jobs.” Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003). A plaintiff must plead specific facts showing the “lack of good faith as evidenced by a sustained or systemic failure of a director to exercise reasonable oversight.” Caremark, 698 A.2d at 971; Stone v. Ritter, 911 A.2d 362 (Del. 2006) (Caremark requires allegations that: “(a) the directors 9 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention”). Plaintiffs’ complaint falls far short of these pleading standards. Sure enough, plaintiffs plead the individual defendants were aware of GCA’s internal control problems by no later than March 30, 2007. After all, GCA itself disclosed its control weaknesses on that date. Compl. ¶ 50. But plaintiffs’ complaint nowhere alleges the defendants, after learning of the problem, simply decided not to do their jobs or engaged in a “sustained or systemic failure” of oversight so as to amount to bad faith. To the contrary: plaintiffs’ complaint acknowledges that the defendants undertook various “remediation initiatives” throughout 2007. Compl. ¶ 61. Some of these initiatives specifically addressed the calculation of commissions. Id. GCA fully disclosed these initiatives and, when faced with new allegations, even conducted a thorough internal investigation. Compl. ¶¶ 64-65. These initiatives put the lie to plaintiffs’ claim that the individual defendants abandoned their posts in violation of Caremark. See, e.g., In re Sonus Networks, Inc., 499 F.3d 47, 71 (1st Cir. 2007) (decision to disclose material weaknesses is “actually evidence of directorial supervision, rather than evidence of failure to supervise”); Perkins v. Daniel, No. 06 cv 01518, 2007 U.S. Dist. LEXIS 90104, at *15 (D.N.J. Dec. 6, 2007) (“disclosures ‘appear to be precisely the types of transactions an independent board exercising valid business judgment should take when made aware of a serious problem’”); Kenney v. Koenig, 426 F. Supp. 2d 1175, 1183 (D. Colo. 2006) (directors’ effort to identify and rectify weaknesses in a company’s internal controls evidence of good faith). Plaintiffs’ only answer is to say that the defendants’ remedial measures were “too little, too late.” Compl. ¶ 62. But it is not a breach of fiduciary duty to have material control weaknesses. It is only a breach to make no effort to remedy the problem. In re Baxter Int’l S’holders Litig., 654 A.2d 1268, 1271 (Del. Ch. 1995). Plaintiffs do not allege such a breach of duty. Salsitz v. Nasser, 208 F.R.D. 589 (E.D. Mich. 2002) (fiduciary duty claim dismissed which 10 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 “amount[ed] to no more than a disagreement, with the benefit of hindsight, concerning the timing and scope of remedial actions taken by Ford in response to the tire problems”).6 IV. COUNT IV DOES NOT STATE A CLAIM FOR CORPORATE WASTE. Plaintiffs’ fourth claim asserts a cause of action for corporate waste. Under Delaware law, plaintiffs were required to plead specific facts showing an exchange of corporate assets “[was] so one-sided that no business person of ordinary, sound judgment could conclude that the corporation received adequate consideration.” Brehm v. Eisner, 906 A.2d 27, 74 (Del. 2006); Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993) (no corporate waste if reasonable and informed minds might disagree on the wisdom of the transaction). Plaintiffs’ corporate waste claim identifies four transactions that allegedly amounted to corporate waste: (1) payment of bonuses to executives; (2) unspecified conduct which might give rise to “potentially hundreds of millions of dollars of legal liability”; (3) costs incurred in the internal investigation of a whistleblower’s allegations; and (4) costs incurred in buying back company stock. Compl. ¶ 106. None of these transactions comes close to being corporate waste. Bonuses to executives, for example, cannot constitute waste if the company received some benefit (such as performance of job duties) in return. Plaintiffs do not allege that GCA received nothing from the executives who received bonuses. Landy v. D’Alessandro, 316 F. Supp. 2d 49, 69 (D. Mass. 2004) (corporate waste claim dismissed because even a “corporation that issued unauthorized or unlawful compensation could very well have received consideration for that compensation”). Actions giving rise to potential litigation liability also do not qualify as corporate waste. In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114, 1135 (W.D. Wash. 2006) (corporate waste claim alleging company incurred “potentially millions of dollars of legal liability and/or legal In any event, plaintiffs cannot win a claim for breach of the duty of care because GCA has adopted a charter provision pursuant to Delaware Corporations Code section 102(b)(7). Under section 102(b)(7), a Delaware corporation can adopt a provision that protects directors from liability for monetary damages for breach of the duty of care. Directors can only be liable for damages if they engage in intentional misconduct or secure for themselves an improper personal benefit. See Aronson, 473 A.2d at 813 n.6. Global Cash Access has a section 102(b)(7) provision in its articles of incorporation. Tkachenko Decl. at Ex. K, Art. VIII. 6 11 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 costs to defend defendants’ unlawful actions” dismissed; no allegation that costs were egregious or irrational). Similarly, GCA’s directors cannot be faulted for incurring legal and accounting costs in connection with investigating the whistleblower’s allegations. The internal investigation, after all, was an important step toward identifying and resolving the company’s financial control weaknesses, and directors often must respond to allegations, however unfounded. And repurchasing the company’s stock helped support the company’s stock price, and the company received value — its own shares — in return.7 There is no corporate waste claim on these facts. V. PLAINTIFFS’ COMPLAINT DOES NOT PROPERLY PLEAD AN UNJUST ENRICHMENT CLAIM. Plaintiffs’ last claim is for unjust enrichment. They allege that all eleven individual defendants “were unjustly enriched at the expense of and to the detriment of GCA.” Compl. ¶ 110. Plaintiffs do not explain how or why, or in what manner, the individual defendants were unjustly enriched. An unjust enrichment claim requires allegations of “the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.” Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988) (internal quotation marks and citation omitted). To state a claim for unjust enrichment, plaintiffs must allege “1) an enrichment, 2) an impoverishment, 3) a relation between the enrichment and the impoverishment, 4) the absence of justification and 5) the absence of a remedy provided by law.” McKesson HBOC, Inc. v. N.Y. State Common Ret. Fund, 339 F.3d 1087, 1093 (9th Cir. 2003) (citing Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del. Ch. 1999)). Moreover, plaintiffs’ theory regarding the buyback of stock cannot be squared with the facts they plead. Plaintiffs allege that the buyback was authorized on February 6, 2007. Compl. ¶¶ 70-71. However, plaintiffs also allege that “it was clear, no later than March 30, 2007, the Individual Defendants were actually aware of the Company’s materially deficient internal controls with respect to how GCA calculated its commissions, the key financial metric for GCA’s business.” Compl. ¶ 50. Knowledge at the end of March cannot impugn a decision made at the beginning of February. 7 12 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Plaintiffs’ complaint does not plead any of these essential elements. See Compl. ¶¶ 109111. It provides no information about what any defendant unjustly received from GCA, or how GCA was harmed by that transaction. Nor can plaintiffs pursue an unjust enrichment claim against former and current officers just because they received compensation. To do so, plaintiffs would have to allege that the value of these defendants’ services was less than the value of the compensation they received — an allegation that cannot be found anywhere in the complaint. See, e.g., Highland Legacy Ltd. v. Singer, No. Civ. A. 1566-N, 2006 WL 741939, at *7 n.73 (Del. Ch. Mar. 17, 2006) (“as a matter of law, the court cannot reasonably conclude that the defendants were unjustly enriched when [they] received compensation for providing services to Motient pursuant to a contractual agreement approved by the Motient board”). Plaintiffs appear in part to base this final cause of action on allegations of “improper insider trading” by Messrs. Sanford, Fitzgerald, Kortschak, and Hagerty. Comp. ¶¶ 73-75. These allegations are totally lacking in merit. Insider trading, of course, requires allegations of specific facts showing an individual sold stock using material non-public information. Usually, this is done by alleging facts showing certain stock transactions were suspicious in timing or amount. See Guttman, 823 A.2d at 50304; In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989). None of the stock sales alleged by plaintiffs, however, meet this test. Take the sales attributed to Messrs. Kortschak and Fitzgerald. They are managing directors of Summit Partners, LLP, a venture capital firm that was one of the early investors in GCA. The stock sales attributed to them were actually made by Summit Partners. Both men disclaimed beneficial ownership of the stock but were required to disclose the sales in SEC filings due to their roles as managing directors of Summit Partners. Tkachenko Decl. Exs. I-J; see Nathenson v. Zonagen Inc., 267 F.3d 400, 420-21 & n.19 (5th Cir. 2001) (director not interested because of stock sales by affiliated investment fund where director disclaimed beneficial ownership). The sales were made by Summit Partners in February 2007. The sales thus predated 13 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the first announcement of an internal control weakness by five weeks. Compare Compl. ¶ 73 with Compl. ¶ 50. Plaintiffs do not allege any facts showing Messrs. Kortschak and Fitzgerald possessed any material non-public information at the time the sales occurred, and they plead no facts showing the sales were unusual in timing or amount. Plaintiffs do not, for example, provide any information about Summit Partners’ other GCA stock sales. Moreover, GCA’s stock price did not change when its internal controls weaknesses were announced. “[L]ack of market movement certainly is persuasive evidence of immateriality.” State Teachers Ret. Bd. v. Fluor Corp., 566 F. Supp. 945, 950 (S.D.N.Y. 1983). Or take the sales by Mr. Sanford and Mr. Hagerty. They are largely consistent in amount and timing (e.g., equivalent amounts at the beginning of every month), or they correspond to the date on which they resigned from GCA.8 Compl. ¶ 73; Greebel v. FTP Software, Inc., 194 F.3d 185, 206 (1st Cir. 1999) (“It is not unusual for individuals leaving a company . . . to sell shares. Indeed they often have a limited period of time to exercise their company stock options.”). In any event, plaintiffs never explain how GCA was “impoverished” as a result of any stock sales by these individuals. Under Delaware law, unjust enrichment requires a finding that “the defendant was unjustly enriched at the expense of the plaintiff.” Schock v. Nash, 732 A.2d 217, 232 (Del. 1999). GCA, however, was not involved in any of the stock sales by these defendants. See Cray, 431 F. Supp. 2d at 1132 (no common law derivative claim for insider trading where there is no allegation of damage to the nominal defendant corporation); see also 3A William Fletcher, Fletcher Encyclopedia of the Law of Corporations, § 1174 (2006) (“most courts considering the issue have rejected a common law corporate cause of action against directors and officers for insider trading”). Mr. Hagerty resigned on July 27, 2007 and made his last sales that same day. Compl. ¶¶ 25, 73. Mr. Sanford resigned on October 31, 2007 and made his last sale the next day. Compl. ¶¶ 16, 73. 8 14 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Dated: June 19, 2008 CONCLUSION For all of the reasons set forth above, the individual defendants respectfully request that the complaint be dismissed in its entirety. Dated: June 19, 2008 DARRYL P. RAINS ERIK J. OLSON OLGA A. TKACHENKO MORRISON & FOERSTER LLP By: /s/ Darryl P. Rains Darryl P. Rains BROWNSTEIN HYATT FARBER SCHRECK LLP JAMES J. PISANELLI 100 City Parkway, Suite 1600 Las Vegas, Nevada 89106 By: /s/ James J. Pisanelli James J. Pisanelli Attorneys for defendants Scott H. Betts, Robert Cucinotta, Fred C. Enlow, Charles J. Fitzgerald, Harry C. Hagerty III, William H. Harris, Geoff Judge, E. Miles Kilburn, Walter G. Kortschak, Karim Maskatiya, and Kirk Sanford 15 pa-1262301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CERTIFICATE OF SERVICE I hereby certify a true and exact copy of the Individual Defendants’ Motion to Dismiss Complaint for Failure to State a Claim has been served on all filing users through the Court’s electronic filing system on this 19th day of June, 2008. /s/ James J. Pisanelli James J. Pisanelli 16 pa-1262301