Jones et al v. Zuckerberg et al, No. 1:2013cv02830 - Document 24 (S.D.N.Y. 2013)

Court Description: OPINION re: (108 in 1:12-md-02389-RWS, 16 in 1:13-cv-02830-RWS) MOTION to Dismiss Derivative Complaint, filed by Facebook, Inc., Facebook Inc., (85 in 1:12-md-02389-RWS) MOTION to Remand Matter to the Court of Chancery of the State of Delaw are, filed by Gaye Jones, Holly McConnaughey. Based on the conclusions set forth above, (1) Nominal Defendant's motion to dismiss is denied in part and granted in part; and (2) Plaintiffs' motion to remand is denied as moot. (See Opinion). (Signed by Judge Robert W. Sweet on 12/20/2013) Filed In Associated Cases: 1:12-md-02389-RWS, 1:13-cv-02830-RWS(ja)

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ---------x IN RE FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION, -- -------------------------------------x GAYE JONES, and HOLLY MCCONNAUGHEY, ively on If of FACEBOOK, INC., Plaintiffs, againstMARK ZUCKERBERG, MARC L. ANDREESSEN, ERSKINE B. BOWLES, JAMES W. BREYER, DONALD E. GRAHAM, REED HASTINGS, SHERYL K. SANDBERG, PETER A. THIEL, DAVID EBERSMAN, CIPOLA HERMAN, MORGAN STANLEY & CO. LLC, J.P. MORGAN SECURITIES LLC and GOLDMAN, SACHS & CO., Defendants. FACEBOOK, INC., a Delaware corporation, Nominal Defendant. ----------------x A P PEA RAN C E S: Att Plaintiffs ROBBINS GELLER RUDMAN & DOWD LLP 58 South Service Road, Suite 200 Melville, New York 11747 1 OPINION MOL No. 12-2389 Case Relates to: 13 Civ. 2830 By: Samuel H. Rudman, Esq. Darren J. Robbins, E PRICKETT, JONES & ELLIOTT, P.A. 1310 N. King reet Wilmington, Delaware 19801 By: Michael Hanrahan, Esq. A. Fioravanti, Jr., Esq. Patr k W. Flavin, Esq. Atto for Nominal Defendant Facebook KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, NY 10022 By: Andrew B. Clubok, Esq. Brant W. Bishop, Esq. Susan E. Engel, Esq. Joseph Cascio, Esq. Kellen S. Dwyer, Esq. WILLKIE FARR & GALLAGHER LLP 787 Seventh Avenue New York, NY 10019 Richard D. Bernstein, Esq. Tariq Mundiya, Esq. Todd G. Cosenza, Esq. Elizabe J. Bower, Esq. Sameer Advani, Esq. 2 Sweet, O.J. Pursuant to the transfer order from the Unit Judicial Panel on Multidistrict entered on October 4, 2012 initial 2012, tigation "MDL Panel"), 41 actions stemming from the May 18, offering public (the States ( "I PO") of Facebook, Inc. (IIFacebook") are presently before this Court. The (" Jones II) the lip motions relate and Holly McConnaughey intiffsll) Defendants 1 named ("Facebook, II (collect ly, duty, instant shareholder and the derivative Nominal actions Defendant or II Defendants II) insider trading, Plaintiffs ("McConnaugheyll) "Companyll the to Jones (collectively, against Facebook, IINominal the Inc. Defendant ") alleging breaches of fiduciary unjust enrichment and other violations of Delaware corporate law. Plaintiffs move to remand their shareholder derivative actions ( II Removed Actions") to the Court of Chancery of the The named defendants include Mark Zuckerberg ("Zuckerberg"), Marc L. Andreessen ("Andreessen"); Erskine B. Bowles ("Bowles"); James B. r ("Breyer"); Donald E. Graham ("Graham"); Reed Hastings ("Hast "); Peter A. Thiel ("Thiel"); She K. Sandberg ("Sandberg") (collectively the "Director Defendants"); David A. Ebersman ("Ebersman"); Herman ("Herman") (collectively with Sandberg, the "Officer Defendants"); ~organ Stanley & Co. LLC ("~organ St "); J.P. Morgan Securities LLC ("J.P. Morgan"); and Goldman, Sachs & Co. ("Goldman Sachs") (collectively the "Lead Underwriters" or "Underwriter Defendants"). 3 pursuant to 28 U.S.C. State of Delaware, originally Court, filed the Removed Actions asserting claims against the fiduciary duty, violations of insider Delaware trading, in the law. Plaintiffs Delaware Defendant s unjust corporate § 1447(c). Chancery for breaches of enrichment and other Defendants removed the Removed Actions to the District Court of Delaware, and the MDL Panel transferred the Removed Actions to this Court. 2 Nominal grounds for Defendant dismissal motion to remand. contends should be that considered certain before threshold Plaintiffs' Facebook has accordingly moved to dismiss the Removed Actions on the grounds of standing and ripeness pursuant to Rules 12 (b) (1) and 12 (b) (6) of the Federal Rules of Civil Procedure, and the standing and demand requirements of Rule 23.1 the Federal Rules of Civil Procedure. Upon Facebook's first, the threshold facts and grounds conclusions for dismissal set will rth be below, resolved and their motion to dismiss is granted in part and denied in part. Having granted Facebook I s motion to dismiss in part, actions were consolidated on April 2, 20 3 by the Court of Chancery of the State of DelavJare. As noted below, Defendants removed the actions to the United States District Court for the District of Delaware on AprilS, 20 3, claiming that this Court has original jurisdiction pursuant to 28 u. S. C. § 1331, and the YlDL pane~ transferred the Removed Actions to this Court on April 18, 2013. The JOJ1es action was deemed the complaint, and all cites to the Removed Actions' iant is in reference to the Complaint (the "Complaint" or "Compl."). 4 Plaintiffs' motion to remand is denied as moot. I. Prior Proceedings Actions stemming from the May 18, 2012 IPO of Facebook are presently December 6, before s 2012 Opinion, Court. Pursuant to this Court's the actions alleging violations of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange were Act of (collectively, 1934 the (the "Securities Plaintiffs were appointed. OMX Group Inc. were "NASDAQ") (the and also "NASDAQ Actions") . individual NASDAQ are and Lead (col alleging ral securities negligence claims the derivative currently instant (collectively ctively, and Der in LLC alleging Actions") cases The consolidated Act ions") Stock Market Actions" ) plaintiffs actions. Class consolidated Actions") Act") The class actions against the NASDAQ Securities The "Derivative separate The Negligence "NASDAQ "Exchange not tive motions (the NASDAQ claims (the consolidated, Actions relate to have two and brought of the Derivative Actions. On February 13, 2013, the first four of the Derivative Actions, were di filed by PIa ss (the if Childs, "Dismissed 5 Levy, Derivat Cole and Hubuschman Actions") . In re . 2d 445, 922 F. ,S.D.N.Y. ssed and ss Opinion" ("Derivative 20l3) Deri vat grounds. Actions were Id. into the stipulation, which intend approved those four compla or notify to Court's dismiss" the of on leave I on such by De replead entered March secur ties 7, 2013, an amended Plaintiff 20 days forthcoming s' standing to iffs to "either fi a consolidated dismiss Court amended resolution Op . ") ¢ at The parties Defendants an "Der plaintiffs Id. within twenty days was grant a or class 475 not after this motion(s) action. to (Cascio Decl. Ex. B). A fifth plaintiff, rt rivative suit in Crocitto, filed r claiming s Court on February 4, 2013, owned an "interest[]" in Facebook shares shareholder re the IPO based on his alleged purchase of units in an investment vehicle that Zuckerberg February converted into Compl., 13, Hubuschman 2013 No. motion complaint to dismiss iff Crocitto, until the 20 days 7. In Croci tto v. light Levy, entered into of the Cole, a s lar ferring the filing of an after consolidated 6 ~ the parties the act of IPO." " 13-cv-0786, dismissal stipulation with PIa amended stock the resolution Securities Class of Actions. (Cascio Decl. Ex. B.) On 1, March commenced the On April the action Complaint Plaintiffs instant Removed Actions Chancery. Jones 2013, 2, alleges the breaches in the and McConnaughey Delaware Court of the cases were consolidated, 2013, deemed Jones of operat comp into fiduciary duty, insider The with Jones trading, unjust enrichment and other violations of Delaware corporate law by Defendants. States (Compi. District Court <JI for 1.) the Defendants removed to the United District of Delaware on April 5, 2013, and the MOL panel transferred Jones to this Court on April 18, 2013, after Conditional Trans On remand to the filed Plaintiffs opposition no April 23, Plaintiffs 2013, filed Delaware Court of Chancery. filed the motion to r Order. their The hearing for the motion to remand was scheduled for September 25, Defendant to its motion to di ss the 2013. Removed Nominal Act ions on June 7, 2013. Oral arguments were held on October 8, 2013, motions were marked fully submitted on the same day. II. Allegations of the Complaint 7 and the The allegations in surrounding and a sing out February 1, in S 1 Form 2012, with the "SEC"). Facebook statement several t From the err Facebook's May 18, Statement O. S. involve IPO, (the II 2012 IPO. Commission On (the the stration s before filing their final Form S-l/A on subsequently t 1 Statement, see also mobile us 3 Registration 1 Fa Registration k Statement emphasiz the to the istration Statement, at 4 final importance ased use of mobile devices to access Facebook. 53); events Facebook filed a Feb Securities the "Registration Statement lt ).4 May 16, 2012 Registration Complaint ration for its Registration Sta tement") the of (Compl. ("We believe of Facebook is critical to maintaining user growth and engagement over ion g term."). Registration Statement not Worldwide mobile MAOs [monthly active users] increased by 69% from 288 million as of March 31, 2011 to 488 Information from Securities a:1d Exchange Corrunission ("SEC") :ilings by Facebook, in particular its Form S-l stration Statement and ame:1ded Form S-l/A Registratio:1 Statements are noted where relevant. All of Facebook's Form S-l Disclosures, including amendments, declaration of ef:ectiveness are searchable on the SEC's platform at ://www.sec. /searchedgar/webusers.htrn. 8 and the SEC's EDGAR search million as March 31, 2012. In all regions, an increasing number of our MAUs [monthly active users] are accessing Facebook through mobile devices, with users in the United States, India, Indonesia, and Brazil representing key sources of mobile growth over this period. We estimate that approximately 83 million mobile MAUs [monthly active users] accessed Facebook solely through mobile apps or our mobile website during t month ended March 31, 2012, and we believe that mobi -only users ased relative to the same pe in prior year. The remaining 405 mill mobile MAUs [monthly active users] accessed Facebook from both rsonal computers and mobile ces during that month. Improving our mobile products and increasing mobile usage of Facebook are key company priorities that we believe are critical to help us mainta and grow our user base and engagement over the long term. Registration Statement, at 50. The istration Statement also stat that: While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future . Id., at 14. The Registration Statement included warnings regarding s Facebook's business risks including: 9 ¢ Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, rsonal computers may as a ti tute for use on financial results. negatively affect our revenue Id., at 5. ¢ [monthly active users] who k mobile products in March 2012. While most of our mobile users so access Facebook th personal computers, we anticipate that rate of growth in mobile usage will exceed t growth in usage through rsonal computers t fores le future, in rt due to our focus on ing mobile products to encourage mobile of Facebook. We have histo cally not shown ads to users accessing Facebook through mobile apps or our mobile website. In 2012, we began to i stories users' mobile News However, we do not currently directly generate any ful revenue from use of Facebook mobi products, and our li to do so success ly is unproven. We believe this increased of Facebook on mobile ices has contr to the recent trend of our ily active users (DAUs) increasing more y than the increase in the number of ads delive If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to success lly implement monetization strategies for our mobile users, or if we incur excessive expenses this effort, our financial rformance and 1 y to grow revenue would be negatively affect Id. at 14. ¢ Increasing Mobile Usage. Increasing use of Facebook on mobile devices will also affect our rformance, particularly if mobile use substitutes r use on personal computers. Historically, we not shown ads to users accessing Facebook through mobile apps or our mobile e and we cannot certain that our mobile monetization approaches will be successful in rating meaningful revenue. We cannot quanti extent to which mobi usage of 10 Facebook is substituting for, rather than incremental to, usage of Facebook through personal computers, but we generally expect mobile usage to increase at a faster rate than usage through personal computers r the foreseeable future. Id., at 53. ¢ [Ilncreased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content. Id., at 13. ¢ Growth trends in MAUs [monthly active usersl, DAUs [daily active usersl, and mobi MAUs [monthly active users] are critical variables that affect our revenue and financial results by influencing the number of ads we are able to show, the value of those ads, the volume of Payments transactions, as well as our expenses and capital expenditures. Id., at 52. The Statement Registration advertising revenue grew 69% disclosed that in 2011 compared to 2010 due to a 42% increase in ads delivered and an 18% increase in Registration Statement, at average price per ad delivered. 60-61. On April "Analyst (Compi. 16, Session") <JI 37.) was At 2012, held that an analyst at Facebook' s session, 11 diligence session Ebersman, corporate (the offices. Facebook's Chief 1 told ("CFO" ) Officer analysts t $1.1 was revenues were Analyst Morgan Stanley, Session. Id. quarter <J[ Mo 1 23, <J[ that 2012 Following the and Goldman Sachs Facebook, which took ded for the Analyst 38.) 2012 60.) discussion of the revenue first stration Statement, (the "April 23 Registrat Statement") . April 23 Registration Statement stated that rtising revenue for 37% increase in to a 35% increase in t was delive first quarter of first quarter of 2011 was said to be "due 2012 compared to t ads J. P. and (Id. 2012 into its fourth amended filed on in billion estimates Ebersman had Facebook added a a $1.2 revenue and earnings estimates into account t (Compl. to recasted to be $5 bill Sess prep a billion that the second quarter Facebook's internal revenue forecasts 2012 present number of ads del driven primarily by increase user growth; MAUs [monthly active users] grew 33% from March 31, 2011 to March 31, 2012 and average DAUs ily active users] 2011 to March 2012." 1 23 Registration Statement, at 56. Facebook fil on <J[ May 39.) 3, 2012 The (the a fi "May Registration 3 grew 41% from March amended Registration Statement Registration Statement 12 Statement"). indicated that (d. Facebook $28 and $35 per anticipated the IPO offering price to be share. any The May 3 Registration Statement (Id. ) comment regarding Facebook's second quarter of 2012. On May IPO. 7, 2012, previous to be at the informed Michael Grimes 2012, in the for the low end of the $1.1 to On that night, 40.) <J( s"), ("Gr Facebook advised Morgan r its second quarter revenue tes (CompI. estimate. date roadshow its Facebook During the evening of May 7, going to (Id. ) Stanley that Facebook's est were riences d not contain $1.2 billion Ebersman a Managing Director and Co- Head of Global Technology Investment Banking at Morgan Stanley, that user only recently certain (Id. growth <J( begun product decisions By Facebook had sponsored resulted meeting, because in fewer Grimes stories, ads per and page. informed others reduction at in revenue lowered its revenue decreased its revenue (Id. ) May 8, 2012, Facebook quarter for estimate million) growth mobile had s ad Facebook's Stanley projections. estimates showi Following t 40.) Morgan ng was by below t p 3 had and to 3.5% (i. e. , $150 ously forecasted $5 billion. 41.) 13 to Id. $175 <J(<J( 4, On or around May 8, 2012, Grimes advised Ebersman that Facebook should update its analyst guidance given the uncertainty Facebook had about meeting its revenue projections. Grimes spoke with counsel and Ebersman about a "potential solution that would update analyst guidance without creating the appearance of not providing the underlying trend information to all [i]nvestors.!l amendment quarter to the trend analysts Id. solution Registration information offering filing. 'lI 42.} Statement with a them updated with subsequent guidance was to file updated second communication based upon an the to public Id.} In evening Grimes and others Morgan Stanley's Facebook's Ebersman of May from Morgan counsel Registration expressed had 8, ey, St a guidance to analysts then that business investors. Facebook' s if counsel regarding and updating During this discussion, Facebook were to provide could create an appearance that the information underlying Facebook management, discussion Statement. concern 2012, wasn't red with all (Compl. 'lI 43.) On May 9, 2012, Ebersman emailed Facebook's Board of Directors that an amended Registration Statement would be filed. 14 He noted that are forecasting believe the $1.18B road providing Id. The ~ are have 'sandbagged' lieve us t and this t ts they yare additional dly than (without someone disclosure to claiming big we accounts are only) 44.) 2012, Registration indicated the May 3 meetings (the "May 9 9 investors We selective On May 9, Statement numbers [sic] show any " some le anal $1.14B forecast 11 help us to continue to deliver accurate messages sclosure the and analysts' higher expect at "for Q2 we are trend Facebook filed an amended stration Statement"). Statement of daily contained active users delivered was continuing. stration Statement, made no mention about trends the May a (Comp 1 . ~ 45.) description was increasing more Id. ) As h the 9 Registration Statement yond the second quarter reduced estimates for 2012 yearly revenue and ea The May 9 istration ngs. or the (Id. stration Statement included a discussion on first quarter 2012 revenue: Based upon our experience in the second quarter of 2012 to e, the trend we saw in the rst quarter of DAUs [daily active users] increasing more idly than the increase in number of ads del red has continued. We lieve s trend is driven part by increased 15 usage of Facebook on mobi de ces where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having r ads per page as a result of product decisions. May 9 Registration Statement, at 57. Minutes a Defendant Herman, r Fa k's Treasurer, Stanley, calls to analysts at and other brokera May 9 Registration Statement, li s. J.P. made several Morgan, scr Go Sachs script for the call sta I wanted to rna sure you saw the disclosure we made in our amended filing. The upshot of this is we believe we are going to corne in [on] t lower end of our $1.1 to $1.2 bn range for Q2 based upon trends we described the disclosure. A lot of investors have sed on whether the trend of ad impressions r user declining (primarily as a result of mobile) was a one-time, or continuing, occurrence. As you can see from our disclosure, t trend is cont ng. You can decide what you want to do with your est s, our long term convict is unchanged, but in near term we see these trends continuing, hence our at the low end of the $1,100 + $1,200 range. (Compi. could <j[ run through t 46.) "over Herman also noted that the decrease in revenues the next six to nine months as this run [s] rest of the year," which would amount to "3 to [3.5] off the 2012 $5 billion target." 16 (Id. ) As a Underwriters result cut of the their second The Lead Onderwr estimates. respect reduced revenues quarter by and 2012 ar ers then advised certain of t is as follows: its second 7.28%; revenues (Compl. <]I ir 48.) The Morgan Stanley by and 6.13% quarter revenues Goldman and 2012 by reduced revenues by 4.06% its and second 6.79%. 49.) On as was May 15, increased. 18, r t the ice 2012, On May 17, to of May 2012, , and on May 16, de On 2012 the quarter revenues by 3.61% and 2012 revenues by 5.45%; J.P. <]I quarter Facebook, their own projections for the Company ir previous anal its s 2012 from se revisions. ients about Lead Underwriters revis from calls range for number of shares 2012, Facebook's pri the lPO committee Company 2012, 1. shares offe 421 million r <]I 51.) of re on the , thereby valuing the total size of the IPO at more than $16 billion. After the lPO, Morgan Stan was shares at $38 per share. k common stock to the public at $38.00 NASDAQ stock lPO (Id. <]I 3.) the financial media 's influence on the Company's lPO. 17 gan to report on (Comp1. <]I 68.) On May 21, York 2012, involved Stanley Facebook in exe an that Times underwriting enormous amount cess of say control "[r]ivals that over Morgan important ss" and "ignored some input about pricing. ns aspects of Morgan Stanley also "contacted other bankers to discuss raising the offering price as high as $38 a share, estimates of $28 resisted, to $35 arguing a share," the justify a higher valuation.,,6 Forbes but up from the original "[s] ome company's ( Comp 1. <J[ of als the did firms not 69.) r reported on May 21, 2012: Facebook must now contend with a suppl imbalance because it increased the size offering by 25%, sa Wedbush Securities analyst Michael Pachter. " s is a good lesson in happens when underwriters and companies are greedy believe their own hype," says. "The market s was unprepared to billion worth of stock, and the underwriters have told Facebook to limit the offering, to probably below $10 billion.,,7 (CompI. <J[ 79.) et TE;;: 1\;;:\11 a " ~A~s~~~_ 2 YORK TIMES, s-facebocks-stock-strugg1es 7 Abram Brcwn, 2, 2012, s -below-ipc-price-in-pre-market-tradi~g/, 18 . . . . . . . ____~__~~~~~~~~~~ On May 22, 2012, Reuters revealed: In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company. The sudden caution very close to Facebook' s initial public offering - while an investor road show was under way was a big shock to some, said two investors who were advised of the revised forecast. The people familiar with the revised Morgan Stanley projections said Devitt lowered his revenue estimate for the second quarter and also cut his full-year 2012 revenue forecast. "That deceleration freaked a lot of people out," the investor added. Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates. "They definitely lowered their numbers and there was some concern about that," he said. "My biggest hedge fund client told me they lowered their numbers right around mid-road show." That client, he said, still bought the issue but "flipped his IPO allocation and went short on the first day. ,,8 (Compl. ~~ 70-72.) Subsequent noted the unusual Business Insider to the Reuters report, conduct of Defendants reported that the other commentators leading up to the reduction in IPO. revenue estimates during the roadshow was something that they have never Alistair Barr, Insight: Morgan Stanley Cut Facebook Estimates Just Before I PO, REUTERS, May 22, 2012, http://www.reuters.com/article/ 2 0 12 I 05 I 22 lus facebook-forecasts-idUSBRE84L06920120522. 8 19 seen "during 20 years in and around the tech IPO business."g arti The continued: But, just as important, news of the e imate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook. This is a huge problem, for one big reason: Selecti ve s nation. Earnings forecasts are mate 1 information, especially when they are prepared by analysts who have had privileged access to company management. As lead underwriters on the lPO, these analysts would have had much better information about the company than anyone else. So the ct that these analysts suddenly all cut their earnings forecasts at same time, during the roads how , and then this information was not passed on to the broader public, is a huge problem. 10 (Compl. <]I 75.) On May 23, 2012, Reuters reported that: [Facebook] advised analysts for underwriters to reduce revenue and earnings forecasts around May 9, the day the company published an amended prospectus that included a cautionary note about how Facebook's users were increasingly using mobile devices, which generate less advertising revenue for the company. [I] n the following days, the analysts for lead underwriter Morgan Stanley and at least three other underwriters reduced their forecasts for Facebook' s second-quarter and full-year revenue, and communicated this to at least some of their !NSIDER, http: /www.ousinessinsider. 5#ixzz2mRSwyuUN. facebook-oankers-earnings-forecasts-2012 20 institutional clients. Two sources said Morgan Stanley advised Facebook to urge analysts to lower forecasts. "Morgan Stanley bankers were telling the company how to handle the research analysts," said a source from one of the underwriting firms with knowledge of the si tuation. "Facebook changed the numbers they didn't forecast their bus ss right and they changed their numbers and told analysts," said another source at one of the underwriters with knowledge of the situation. "The underwriters' analysts then all changed their numbers based on what management was telling them. un (CompI. ':JI77.) As the facts emerged regarding Facebook's reduction in projected revenues, the Company's stock price began to fall. 11 to $28.84 per share May 30, 2012, the Company's stock price init from (CompI. ':JI 79.) 30% its of second 1 price By June 2012, IPO value. quarter estimates, IPO results of per Facebook' s In July in $38 2012, line By share, 24% drop. stock had lost nearly when with a Facebook announced the lowered revenue its stock dropped sharply to more than 40% lower than the IPO price. (Id. Plaintiffs assert that the Registration Statement contained untrue and misleading statements of material facts and omitted to state facts necessary Olivia Oran & Nadia Jamouni, I RE:JTERS, May 23, 2013, http: facebook-analysts-idUKBRE84MOTW20120523. 11 21 to make the statements not miglgading the impact quanti tat usage on revenue its and earnings information quarter 2012 Plaintif s year also that projections, on Facebook' s estimates of increasing and the (iii) the mobile revised Lead Underwriters' received non- the Company's revenue. with its knowledge lining ~~ (Compl. of t second quarter Defendants Directors") 5, 52.) non-public 2012 Zuckerberg, second and 2012 Breyer and sold over $ 3 ¢ 9 bill ion of Facebook shares Plaintiffs contend the t IPO. (CompI. ~~ ir 3, 9, the Lead Underwriters and t Officer Defendants also realized profits as a other Director result of t trend figures underwri ters who for concerning allege up-to-date (ii) of 2012 (the "Sell lly he the estimates k had cut financial 86(a).) (i) earnings; and that Thiel of revenues analysts and analysts public disclose quarter performance; k's of to failing hy sale of Facebook shares in t IPO. (CompI. ~~ 9 11.) III. Subject Matter Jurisdiction And The Threshold Grounds for Dismissal A" of a over case ral court generally may not rule on the merits without first det ing category of claim in suit 22 (s that it has jurisdiction ect-matter jurisdiction) and the part s Ltd. v. Mal S. (personal L. 167 Int' 1 Co. 422, 430-31, 127 "[T]he first and 549 U.S. ia Int'l Sh 1184, Sinochem jurisdiction)." Ed. 2d 15 (2007). fundamental question is that of jurisdiction This question the court is bound to ask and answer for itself, even when not otherwise suggested, part s to Steel Co. v. Citizens for a Better Environment, II 523 U.S. 83, 94, 118 S. Ct. 1003, 140 L. Ed. 2d 210 The II and without respect to the relation of the Circuit Second [j] urisdictional questions has should first instance by the District Court." (1998). reiterated be addressed that in Central States Se. the & Sw. Areas Health 433 F.3d 181, 203 (2d Cir. context of removal." v. 425 Bakoss "This is equally true in the Banco De Santander Cent Consalvi 2006); 2005). v. F. Supp. 4529668, at *4 421, 424 (S.D.N.Y. Underwriter No. WL 2d (E.D.N.Y. Sept. 27, 10-CV-1455 (DL1) (LB), 2011) ("This 2011 obligation extends to removal cases."). Article "that a f e d era 1 jurisdiction r III courts court may generally adhere not to hypothesize the principle subject-matter the purposes of deciding the merits;" however, 23 v. Marathon Oil Co. declined to Supreme Court in Ruh t prescribe issues." a strict 526 U.S. mandatory 574, 577, "sequencing of 119 S. Ct. 1563, jurisdictional 143 L. Ed. 2d 760 "It is hardly novel for a federal court to choose among (1999) . denying audience to a case on the mer threshold grounds s." There is "no underlying jurisdictional hierarchy," Id. at 585. and a federal court may adjudicate personal jurisdiction before conside ng a challenge to subject matter jurisdiction. Id. at 578. Plaintiffs contend resolution of Nominal supplemental Plaintiffs' exist action. cases, other since and (Pl. courts competing is subject required 28 that matter pled only Reply have under argument thus they have is jurisdiction under 28 jurisdiction central jurisdiction, remand Defendant's motion to dismiss Court lacks subject matter or that Motion to In 851 Remand, Gibraltar F. Supp. U.S.C. U.S.C. state at 2d law 3.) to § 1331 1367. § federal chosen to examine motions motions. since this question jurisdiction, Delaware before does not causes of In certain remand before Tr 437 (E.D.N.Y. 2011), the District Court granted plaintiff's motion to remand the case to state court rather than decide de the case to a f ndant's motion to transfer rent federal district court. 24 Id. at 441 42. The Gibraltar court noted that rst would not maintain result ral in " ciding [the dismissal, jurisdiction and trans but transfer r would the motion] improperly action to the [Southern District of] Ohio Court" and concluded that the remand issue Met should be ruling on smissal Id. at 123-24 r. (2d competing the to 2007) motion go forward" Inc. Berks 252 F. resolution result - other of purportedly [the competing] also, have an has Consol the obligation subj ect to matter Ene Inc. 483 84 (3d v. App'x 481, Cir. cis ion to remand rather than threshold motion issues would not because change "t end Plaintiffs contend r di ssal, s would survive Nominal Defendant's and since the Removed Act motion dismiss, in --------------~~----------- remand to the state court."). to re (where a result Nominal Defendant has not presented clear grounds motion In Liabilit not court first); (affirming district court's addressing "would we strict the see [hereinafter MTBE] complaints; whether ction 441; Prods. the of determine 2007) first. Tertia 488 F.3d 112, juri exami to remand should be examined rst. supplemental jurisdiction Plaintiffs also cont under 28 U.S.C. § 1367 is exercise supplemental juri unavailable since ction over non-fe 25 courts ral, may only non-diverse causes of action that are present wi thin that same action. See Mendez v. Roman, No. 3:05-CV-1257, 2006 WL 276976, at *2 (D. Conn. not 2, aut 2006) that 28 U.S.C. 1367 § "does ze a court to use one case as a platform for 'pulling-up' claims and part uding juri s in another, sentence of the separate case. statute ind Rather, es, as the supplemental ction may be exercised only over claims and parties that have been joined in "[s] ection 1367 v. (noting Avemco Ins. a single civil action"). s not confer original j Co., No. 02-1498, Summarily, sdiction." 2002 WL 34698097, Divens at *5 (W.O. Pa. Nov. 20, 2002). In contrast, Nominal Defendant asserts that the common justiciability should be Nominal Defendant first notes Derivat and remanding confl "[a] [this one] Der Actions Deri vat [the other and 2d at 456) ss, ive and r denied Op., 922 as 26 moot the 2d at case [s] while potentially (quoting Derivative Op., addressed the issues in the Derivat smis SUpp. F. ivat (internal quotations removed).) ss, remand. Opinion would be duplicative and at 2 r motion ing rules by this Court and a state court." Motion to Di al udicating standing iffs' PIa that associated remand motions, 475, dismissal, before address four r grounds (Def. ly 922 F. Supp. Since the Court has Opinion, Nominal De contends address there is every substantially s reason for s Court r issues in the to Actions. (Id., at 6.) Nominal question will "fede juri Defendant necessarily ction federal issue is: (3) substanti without Congress." arise over (4) ing Gunn that in the Removed law claim ly raised, (2) a federal state Minton, 133 S. will lie and if actually balance Ct. federal Actions, ral court approved 1059, a ed, capable of resolution in fe the v. asserts state a (1) necess and s her 1065 by (2013) (quoting 545 U.S. 308, 313-14 Nominal § 1367(a), Derivative (2005)). Defendant Removed Actions also Actions that the cont "are that so s Court Removed Actions s Op. related" Defendant (Def. points out - that to U.S.C. the r over of the same case or at 21.) Motion to the 28 jurisdiction the claims "form controversy," under "existence of Nomi subject matter jurisdiction in one action" can be used "to provide supplemental jurisdiction underlying McIne over facts claims in a "substantially 464 related over F.3d 27 " 328, action" where Ach tman 335 (2d v. Cir. Ki 2006). Nominal Defendant Litigation removal. further Uniform Standards to (quoting Sinochem, saw find a the U.s. "the were that on 549 Securit "SLUSA" ) acknowledged at not of 851 431) jurisdictional resolution 'arduous inquiry' merits. '" easily In contrast, 2d at 441. s authorizes that '" a F. questions resolved." "the subject j 2d the in at regarding first. ,,12 subject Id. at matter 441. 440 Gibraltar Sinochem Gibraltar, Gibraltar] matter for denying Supp. Notably, federal 851 and F. Court [did] not sdiction [was] an that requires the Court to decide motion to transfer inquiry" in Gibraltar case that s Supp. (the Act the leeway to choose among threshold grounds audience court that (Def. Op. - Motion to Remand, at 25-29.) The Court court has contends A possible jurisdiction [the] "arduous arises here, since issues of Delaware law and whether a federal question will necessarily arise under Plaintiffs' claims, as well arising under the SLUSA, would have to be addressed. as issues 13 The MTBE Court simi found that it would first examine removal issues upon the determination that denying plaintiffs' claims of sovereign imnunity would not result in the dismissal of the complaint. 488 F.3d at 123-24. While Plaintiffs may characterize their claims as arising solely under Delaware lav" courts must scrutinize each claim and "the al in the complaint," not the aintiff's characterization of his or her claims. In re 168 F. Supp. 2d 136, 141 (S.D.N.Y. 2001); see 335 F.3d 109, 116 n.2 (2d Cir. 2003) (denying remand "disavow or at least minimize" federal law 28 The Supreme Court noted in Sinochem that "[b]oth Steel Co. and Ruhrgas recognized that a federal court has leeway to choose among threshold grounds for denying audience to a case on the merits." Sinochem, 549 at u.S. 43l. Such threshold non- merits grounds for dismissing a claim include "the resolution of 'j usticiabili ty Derivative proper. ' " Freund v. 2008) ) finds issues Rep. before deciding 922 F. Supp. 592 F. Supp. 2d define our standing, its cover authority mootness, Jones v. Deutsch, jurisdiction 2d at France, of Op., "Justiciability beneath whether is the to act advisory an 540, doctrines particular opinion, and 715 F. Supp. 1237, 1242 (quoting 551 umbrella-like various in 454-55 is (S.D.N.Y. term which that shape and ripeness, cases: political question." 1989). (S.D.N.Y. The conclusions in the Derivative Opinion for deciding justiciability apply equally to the Removed Actions. inefficiency consideration of and the Derivative Op., issues." Removed Actions were warrants inconsistency j usticiabili ty issues 922 F. Supp. remanded, this "Avoiding before 2d at Court 456. the the removal Even if the would still be required to address the same justiciability issues of derivative standing and amendment dismiss of ripeness those Crocitto v. in the Dismissed complaints and Zuckerberg, et 29 Deri vati ve Actions when al., Defendants 13-cv-0786 move upon to (S.D.N.Y. Feb. 4, 2013). Two justiciability issues, ripeness, are identical including the Removed Deri vati ve Actions "common issues" conflicting Court. in Actions. and the t this Court" the Dismiss with and beget the Delaware and y and Actions, Removed Actions duplicat by Derivative Adjudicating remanding "would rulings of 1 demand futil its potentially Chancery Derivative Op., 922 F. Supp. 2d at 456. Given address that non-merits jurisdiction consis and district courts threshold that weigh grounds considerations favor of have the the for of discretion dismissal judicial same, the before economy issues to and concerning standing and ripeness will be considered first. IV. Nominal Defendant's Motion to Dismiss is Granted Facebook dismissed pursuant First, 23.1. contends to Fed. Nominal that R. the Civ. Defendant s Removed Actions P. contends specific stock at the time the alleged wrongful therefore cannot that demonstrating that not pl and 12 (b) (1), establish Defendant asserts that Plaintiffs' 12 (b) (6) Plaintiffs and have they owned Facebook transactions standing. should be took place Second, Nominal claims are predicated on t resolution of other litigation since the Removed Actions seek to 30 recover the Securi ties Court. amounts Class standing demand the intif are asserts board is that and liable but now Facebook, R. Civ. s not make did have not a lack pre-suit sufficiently pled Nominal Defendant contends that since trying Plaintiffs in Plaintiffs resented by counsel are the the that sought lead counsel status in Actions, r currently pending Plaintiffs Fourth, are Facebook which s Facebook ility. the Facebook Facebook deri vati ve demand which Actions, Third, to r sue In response, inadequate Secur der tively ies Class on representatives behalf contemporaneous ownership of Facebook' s which establi s Class disgorgement of legations Actions are profits or from independent litigat Third, been since futile r ges Complaint alleges Securities Second, PIa the iffs stock prior to the PIa reputational insider contend Directors adequately contend that the that sent the interests of 31 including and demand Defendants Removed s, t resolution interest in the Facebook IPQ and incomplete Plaintiffs incurred in the dama trading, the IPQ iffs assert that the than the costs from Fed. they have demonstrated Plaintiffs al standing. under of 23.1. P. are to previously s had of do new ot would have ancial a sclosure. Actions se Fourth, fairly shareholders. and As scussed above only threshold issues such as venue and justiciability will be conside prior to jurisdiction. A) The Applicable Standards The Ru Standa R. Civ. P. 12(b) (1) Fed. provides that a defendant may move to dismiss a complaint on the grounds of lack of subject matter j of for See Fed. sdiction. a case 12 (b) (1) or lack of Civ. R. subject P. matter 12 (b) (1) . jurisdiction Dismissal under Rule is proper "when the district court lacks the statutory constitutional power to adj udicate it." Makarova u. S. v. , 201 F.3d 110, 113 (2d Cir. 2000). On 12 (b) (6), as true, Mills 1993) . a motion to pursuant to Fed. R. P. all factual allegations in the complaint are accepted ferences and all v. Polar "The support are drawn in favor of the pleader. 12 Molecular issue is not prevail but whether to dismiss whether claimant F.3d a 1170, 1174 plaintiff will (2d u Cir. imately is entitled to offer evidence the claims." Real Estate Solutions, 261 F.3d 179, 32 187 (2d Cir. 2001) (quoting Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 1995), cert. denied, 519 U.S. 808, 117 S. Ct. 50, (2d Cir. 136 L. Ed. 2d 14 (1996)). To "a 12 (b) (6), survive complaint must accepted as true, to a motion (2007)). s plaintiffs 544, is need "nudge[] their plaus " pursuant contain sufficient I 570, not only 556 U.S. 1 1937, 1940, 173 L. Ed. 2d 868 550 U.S. dismiss to factual Rule matter, 'state a claim to relief that is plausible on its face.'" Ashcroft v. Twomb1 , to (2009) 127 S. intended claims across 663, 129 S. Ct. (quoting Bell Atl. Co Ct. 1955, to allege 662, an cts 167 L. from 1 9 burden, as order to conceivable sufficient the 2d to onerous Ed. v. in Twombly, 550 U.S. at 570. The Rule 23.1 Standard The shareholders derivative of a form of action permits individual corporation to bring an action on behalf of the corporation to protect the corporation's interests from "the misfeasance and of malfeasance faithless 500 U.S. managers." 111 S. Ct. directors 1711, Beneficial Loan Co 114 L. Ed. 337 U.S. 2d 152 541, 33 (1991) 548, (quoting 69 S. Ct. and 90, 95, Cohen v. 1221, 93 L. Ed. 1528 (1949)). "To prevent equity courts established as a the shareholder refused to demonstrate proceed after 'the sui tab conditions'" standing. (quoting Ross v. of this remedy, however, 'precondition for the suit' that extraordinary rd. abuse and corporation demand, satisfy Bernhard, unless the that itself had excused by requirement 396 U.S. 531, 534, of 90 S. Ct. 733, 24 L. Ed. 2d 729 (1970)). To shareholder'S "plaintiff was establish derivative a under standing complaint shareholder or Rule 23.1,14 must alle that member at the time of Rule 23.1 of the Federal Rules of Civil Procedure provides as follows: (a) sites. This rule applies when one or more shareholders or members of a corporation or an unincorporated association bring a derivative action to enforce a right that the corporation or association may properly assert but has failed to enforce. The derivative action may not be maintained if it appears that the plaintiff does not fai and adequately represent the interests of shareholders or members who are simi si tuated in enforcing the of the corporation or association. (b) Pleading Requirements. The complaint must be verified and (1) that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by ion of law; (2) allege that the action is not a collusive one to confer jurisdiction that the court would otherwise lack; and (3) state with parti (A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, froITc the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort. must: (c) Settlement, DisITcissal, and Compromise. A deri vati ve action voluntarily dismissed, or compromised only with the court's approval. Notice of a proposed settlement, voluntary dismissal, or compromise must be to shareholders or members in the manner that the court orders. may be settled, 34 a the the transaction complained of, or that membership later devolved on P.23.1. 15 C rule" is a In plaintiff's share or Fed. R. by operation of law." essence, procedural the this "contemporaneous requirement that "denies a ownership der t plaintiff standing to challenge transactions that occurred prior to the time the plaintiff became a v. Interlogic Trace, (S.D.N.Y. Dec. requirement pla to 19, are iffs from (1) to 1990 WL 213085, at *2 policies prevent underlying potential are with particu the the an by and (2) sharehol rs interest in the Id. to the complaint standing in rity the efforts, action brought suffered injury and have addition that actions the derivative by purchasing stock; actually In obtain "The Ensi 'buying a lawsuit' outcome of the case." provides 90-CV-3497, 1990) . twofold: reholder. " derivative insure who have Inc., No. s a requirement, derivative must 23.1 "allege if any, made by the plaintiff to plaintiff desires comparable authority and, suit Rule if necessary, from the directors or from the shareholders or the Delaware General Siwilarly, Section 327 is the addresses derivative Corporation Law (the "DGCL"), 8 Del. actions. 2 Edward F. Welch, et al., Law § 327.1, at GCL-XIII-42 (5th 23.1's contemporaneous ownership and provides: "In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the that the ff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder's stock thereafter devolved upon such stockholder by operation of law." 8 Del. Code § 327. 35 members, and the reasons for the plaintiff I s the action or for not making t effort." failure to obtain Fed. R. C P. 23.1. B) The Plaintiffs Have Established Derivative Standing If wrongdoing "a and books the derivative suit, and records plaintiff's demand sole is purpose LLC suit, v. Thus, 2006) . is investigate to pursue a the plaintiff must have standing to pursue the underlying suit to have a proper purpose." tal to Carrier Access 914 West Coast Mgmt. A.2d 636, 641 (Del. & Ch. "(i] f plaintiff would not have standing to bring plaintiff does not have a proper purpose to investigate wrongdoing because its stated purpose is not reasonably related to its role as a stockho r." CC, 2011 WL 1843813, at *5 Graulich v. Dell Inc., No. 5846 (Del. Ch. May 16, 320 2003) (" (A] throughout 2011) i F.3d 291, see also In 298 (2d Cir. plaintiff must have owned stock in the corporation the course of the activities that constitute the primary basis of the complaint."). Unlike Actions, the plaintiffs Dismissed in Derivative Plaintiffs have pled that they were stockholders during the alleged misconduct and have been continuous stockholders to this day. The Jones Complaint 36 aIle s that Jones owns approximately 2,500 continuously shares s Facebook February 15, McConnaughey alleges that she March s 14, eadings must 570, 2012. Zoullas, (S.D.N.Y. Jan. No. 19, Cal. to Rule a pleading of I the strict standa However, I generally the iffs became Supp. 23.1. of See at *3 is higher than to a In motion to re ~~~~~~~~ 6 (N.D. they that the at requires 2d 919, all time were continuing wrongs This vague allegation does not satisfy of Rule 23.1. "). Nominal Defendant stockholders alleges that February 15, were not actually stockholders s PIa 550 U. S. 23.1 see also 757 F. Accuray at complained of herein. Rule subj ect 12 (b) (6) . "); S'holder Derivat shareholders 15.) These 2012 WL 169874 , pleading standa ("Plaintiffs q[ 15.) q[ standards, ( "Because 2012 ) allegations, pursuant 2010) (Compl. Compl. 11-CV-3996 (AKH) , to Facebook ld Facebook shares continuously (McConnaughey standard applicable Inc. held ightened pleading standards of Rule Metcalf v. dismiss s 2012. satisfy both the and the particulariz and only a er the Plaintiffs 2012 and that IPO. Nominal Defendant notes that Facebook "has no record of eit r Plaintiff Jones or Plaintiff McConnaughey r at any time Mem. - Motion to between February 15 and May 18, smiss, at 18). ing a s 2012." Nominal Defendant 37 rehol (Def. leges that Plaintiffs did not own direct legal title to Facebook shares prior to the I Plaintiffs participated in auctions held by SharesPost Financial Corporation spec (" Shares Post") and purchased units 1 purpose investment vehicle in a Shares Post ("SPV") managed by S that held Facebook shares pre-IPO. 16 resPost (Id. Plaintiffs contend that Shares Post acknowledge receipt of funds from Jones "TO PURCHASE FACEBOOK STOCK," Ex. (emphasis I in original)), that available materials stat and the S it provides shares," March hold rs effi (Cascio 30, an Decl. 2012 e-mail, indirect Ex. that sPost "the la diverse, and most active network of qualifi Ip selling shareho (Rudman Decl. publicly st, most investors . to ently close on the sale of their sPost J) "successful erest the also auction shares of wrote, a bidders will Facebook,Inc." (Rudman Decl. Ex. K.) However, Plainti until s that after the formed subscribers including the Shares Post they would IPO: not hold "Members who shares have of Facebook purchased un stock s in aint materials Nominal Defendant and Plaintiffs have submitted ext for the motion to dismiss. While Plaintiffs insist that such ext aint materials compels the Court to convert the motion to disrLiss to one of summary judgment, (PI. Op. - Motion to Dismiss, at 25) I a court may consider "any docuITcents that are 'integral' to the ntiff' s al even if not explici tly incorporated motion to dismiss stage. In - -3, No. 05 Civ. 6803 (LAK) (MHD), 2009 WL 848 :6 38 _cc____ __________ ~ ~ _ _ _ _ _ _ __ special purpose investment vehicles through a Shares Post auction are distributed shares J. ) The Shares Post llowing the investment fund I PO. " (Cascio Agreement acknowledges Securities, that and it that no that direct Facebook (Cascio [SharesPost] ." stated has Decl. erest 5.) The Shares Post "[t]he Securities Ex. Ex. remained the owner of the Facebook shares until six months after the IPO. Subscription Declo in are Subscriber any held Section Facebook solely 4.2 (b) of by t agreement further provides that Plaintiffs themselves would not become reholders Facebook expiration of . also under Plainti s; no until transfer rest obligation rather, any to ctions." distribute of [Facebook the [SharesPost I s] sale combination of (i) shares in a divest its and Shares Post IPO Id. Shares Post was (ii) Id. ) investment be the form Available Thus, fund that Pia "the stock "shall [Facebook stock], (ii)." and Facebook res Post ] , stock] , of all the stribution post- IPO according to the discretion of all after made, 0 f Cash or (i ) from (iii) iffs to any owned had the option to Id Facebook stock to investors. Plaintiffs assert that even if Jones and McConnaughey d not directly own Facebook stock, they are equitable owners of Facebook stock under Delaware law, the state of incorporation of the Company, and equitable ownership 39 a stock can confer derivative standing. See Rosenthal v. Del. (Del. Ch. 299, 308-13 stock can rna any "motion ain a to plaintiff was transact such a he action stockhol which of 1948) ("an Plaintiffs point to Penni r of "on 3, Taylor, 1973), equitab the owner aff'd, complains 348 A.2d 188 (Del. Ch. 386 time be] 1975), [hereina the proposition that even though Plaintiffs rights Plaintiffs' equitable to future at the of ownersh ownership eventual ownership of of time of the (Del. Ch. and Jones er Taylor], v. for d not directly own Facebook that the of the denied"). Facebook stock prior to and on the date of the lPO, purchased that 1973 WL 463 (Del. 1975) the [should on v. Neu 344 A.2d ground record at ------~---------------- Oct. 30 stockholder's deri vat i ve act ion II and that dismiss" not Ch. Biscuit Plaintiffs stock, and stock lPO. bequeathed See Pennington, 1973 WL 463 at *3; Taylor, 348 A.2d at 192. were Plaintif SharesPost fore SPV stockholders who owned the lPO up until time res of the Shares Post divested its held Facebook shares to Plaintiffs: in other words, ure receipt of Facebook stock. Plaintiffs contracted for the While intiffs did eventually own Facebook stock after the SPV stribution acquisition of of Facebook stock does that may be said to satis shares, not contracts necessarily confer for future an interest the continuous ownership requirement 40 under Delaware law or No. Feb. 28, 2013) 23.1. Rule 3940-VCN, (rej ecting See 2013 WL 771897, direct at *8 action shareholder (Del. Ch. asserting "equitable ownership" because "[aJgreeing to purchase stock does not make even be one a stockholder, especially if the issued until the consummation of the of actions"); 17649-NC, In re New 2004 WL stock at *6 (Del. Ch. ., June (noting that a warrant agreement for shares "[did] interest that requirement") 407 (7th Cir. may said to satisfy the No. C.A. 28, 2004) not confer an continuous ownership 231 F.3d 399, i 2000) duciary duties prospecti ve be not challenged series Derivative Lit 1700530, will ("That prospective stockholders are not owed under Delaware law leads us to stockholders would not be considered conclude I that stockho rs' for standing purposes."). Indeed, in Pennington, a divorce separation agreement required defendant husband to transfer certain stock to his exwife at the Defendant end of husband stock to plaintiff, a was six-year 1 97 3 WL 463 , at *1 . obligated to deliver the period. contractually and plaintiff was obligated to accept legal in See id., Taylor, required to pass to plaintiff via a the shares at issue were will. 348 A.2d at 191 92. 41 In at *3. Similarly, title upon the shares' delivery. both cases, future ownership of shares was a contractual certainty.17 Equitable or contextually defined, "bene cial ownership" of stock and has become a term of art for purposes of establishing fiduciary duties under Delaware law." Petroleum Corp. v. Here, 1988) . future unlike in in the SharesPost Pennington Shares Post SPV could combination of SharesPost. the (Cascio Facebook had a right and was distribute two after Decl. Ta not or, a Facebook the Ex. of first any proposed transfer of 8.15 (a) SPV 5.) lPO the under (Cas 0 Plaintiffs' they purchased shares, at 1176 (Del. certainty. Moreover, refusal s shares. Anadarko 545 A.2d 1171, Panhandle E. Corp., ownership of Facebook shares at the time shares "is cash The or a discretion before the lPO, its bylaws before Decl. Ex. N., art. ("Before any Shares held by a Stockholder may be sold or otherwise of law), transferred (including transfer by gift the corporation or its assignee (s) of first refusal to purchase the Shares . Thus, situation as Plaintiffs the are stockholders not shall have a right .").) stockholders contemplated or operation in in the same and The Plaintiff in 30 Del. Ch. 299, actual owned shares of the defendant bringing a derivative suit against the defendants. The purchased stock was represented by street certificates standing in the names of brokers, and plaintiff was not a stockholder of record. The Court held this was sufficient to constitute the Plaintiff as an equitable owner of the stock. Id. at 302-03. 17 42 Taylor; they uncertain are, contractual stockho are Montgomery v. 2000) are Plywood, inadequate for A.2d stockholder's took future F.3d 399, now (Del. owner provision ownership was when 231 i ve previously 1 [to] have title to the F.3d had no re they challenged at 407, and the standing iff[s] pia is a e, " by Internet, shares operative § time PIa because law." (See iffs it to the "acquisition of had Cascio The "operation of 327. ion "narrow and the suggested Facebook B); see also 8 Del. C. contracts Image Facebook regardless of how certain ip der rt on stockholders. direct Decl. Ex. ownership iffs as stockholders be were prospect "devolved Kerkorian, rev'd in 1975). Plaintiffs had (7th Cir. contemporaneous of stock, cia 407 (contractual rights to acquire place," cannot an purposes." see also Harff v. establish came "into actual possess when standing 231 133 with Prospect 327); fiduciary obligations to Pia Plaintif rs' shares. 7), aff'd in relevant 347 transaction future 1974) to stockholders Inc., § (Del. under 8 Del. C. § the to "'stockhol (interpreting 8 Del. 220 prospect right not Aetna 324 A.2d 215, stock instead, " contemporaneous shares through does not qualify." Inc. , 954 A.2d 911, 43 937 (Del. Ch. 2008); cf. v. 303 Louis intiff A.D.2d administratrix 151, who 152 was (N.Y. also husband's estate, could bring res) . 50% rivative s which her late husband owned ir Compla App. Div. 2003) benefi of against company in Plaintiffs did not allege that stock ownership devolved by operat law, and the Court of ines to so hold. Plaintiffs also assert that lI[tJhe sole purpose continuous ownership requirement the ma n occur to a evil smiss, the exempting statute 327 and Rule 23.1 person purchasing shares attacking a purchase of the stock. at 24.) [Plaintiffs are] a § action der prior to provis of of of as under However, 'good t II in is to order to transaction (Pl. Op. - Mot lithe statute does not include faith' purchasers from its terms. this Court to ignore the clear language the guise of a I liberal construction. I" 7547 Partners v. Beck, 682 A.2d 160, 163 (Del. 1996). Given owners of transgress that Facebook Plaintiffs stock at were the not actual time of or t Plaintiffs lack standing to bring its claim. C) Plaintiffs Have Not Adequately Pled Demand Futility 44 equitable alleged rivative In addition to the requirement of standing, must also meet the demand requirement. law of the state of Plaintif Fed. R. Civ. P. 23. incorporation determines requirement and futility for a derivative suit. the The demand See Kamen, 500 U.S. at 98-101. Because Facebook is a Delaware corporation, the sufficiency the of Derivative Plaintiffs' demand futility allegations is analyzed under Delaware law. Pursuant to Delaware law, a derivat demand action must upon the allege (2) 1993); overruled the board would he directors Lewis, has to made take Brehm v. have been futile, s showing that a the 808 Eisner, (Del. 746 White v. plaintiff may not inforUSA Inc. 2007) . The Panic, A.2d plaintiff board 783 A.2d 543, pleading Liti burden 953 imposed 45 244 that a demand upon is must present "incapable 551 (Del. A.2d by 963, Rule 985 23.1 2001). The In re (Del. is of aims rely on mere conclusory allegations. S'holders 930 1984) sing its power and authority to pursue derivative directly." a the 634 A.2d 927, 473 A.2d 805, In order to sufficiently al rticularized exe v. other (Del. 2000). of that See Rales v. Blasband, Aronson on board (1) the reasons why such a demand upon the board would be futile. (Del. either: corporation I s requested action; or aintiff in a shareholder a Ch. high hurdle 1262, for aintiffs 1269 (Del. Ch. to ear. 2008) McPadden v. (noting that Sidhu, this 964 A.2d burden "is more onerous than that demanded by Rule 12(b) (6) ."). When a in a challenged decision of rivative the board suit, ermine whether demand is futile. 14 0 a ( De 1. two tests transaction duties." Id. must plead sufficient "(1) the [majority independent and must allege under an i is being available to 953 A.2d 136, i.e., where it is Under facts of to the] the Aronson raise a directors alleged the breach of their test, a pla iff doubt reasonable are that that: disinterested and (2) the challenged transaction was otherwise the product of a val exercise of business judgment." Thus, A.2d at 814. are Wood v. Baum, directors made a conscious business decision fiduciary directors The Aronson test "applies to claims involving 2 0 0 8) ¢ contested of Aronson, in order to survive dismissal, 473 a complaint cts that the corporate "officers and directors are luence which sterilizes their discretion, [so that] they cannot be considered proper persons to conduct litigation on behalf of the corporation." Id. at 814. In some cases, however, recogni eventuates t not Delaware Supreme Court has Aronson test does not apply, from a board's 46 ision but where a loss rather from consi red inaction. where the decision The second test, subject of oversight of a Board dut aintiffs s. " rivat but Wood, must fer a A.2d is filed, at 467 (quoting Rales test, made Rales, at is 934 a (Del. Omnimedia 2004). facts that show threat "interested" for that [the] 502 924 A.2d 908, of (Del. 928 . t could have properly ss judgment in 422 Supp. F. 1993)). r 2d at Under the determination a to 2007) have ficiently render demand. 2003); 1049 the plaintif liability" Ch. . 845 A.2d 1040, consider (Del. time . directors Ch. cases, Beam ex. ReI. Martha Stewart, rsonal of purposes 823 A.2d 492, Barrows, v. A key inquiry "is whe substantial Huang, Inc. these fact specific the context of a particular case." (Del. pled A.2d "[i]ndependence Stewart 50 634 Board's allegations'" bus Derivative Op., business t In as of res "applies a of factual the board of directors demand.'" not 140. "'particularized exercised its independent and dis responding to a is violation which "'create a reasonable doubt that, complaint les test, suit r 953 the them Guttman v. see also Desimone v. (where a derivative plaintiff does not challenge a specific transaction approved by the board, of the object a the plaintiff must adequately plead that company's board of rectors were incapable ly responding to a demand because they either sufficiently substantial threat 47 of personal a maj ori ty (1) of "face liability," and are thus themselves interested, or (2) lity to act independently of the re Ci ti Inc. 2009 WL 2610746, interested directors") i S'ho No. at *3 ausibly allege properly "are compromised in their that exercised (S.D.N. Y. the its Aug. board 25, 2009) directors independent and judgment in responding to a demand''') 07 Civ. In 9841, (plaintiff must cou not disinterested (quot Rales, '" have business 634 A.2d at 934). aintiffs contend that Facebook' s board of directors (the "Board") consisted of eight complaint was filed, four of the eight evenly and they need only show demand futility for rectors if they can show that between divided directors. See Beam v. 2004) three ("If Rosette, n.36 Ch. between of Board was non-independent 845 A.2d 1040, 1046 n.8 a board six rson rectors are independent, C.A. May 28, No. 2010) 20213-VCN, icted and non-conflict independent and the ile."); Desmond-Hellman. at *7 is evenly divided members is not cons ide At the time of the fil of Facebook added a ninth director, Susan sinterested.") . action, not there is not a 2010 WL 2171613, ("A board that (Del. are independent directors and demand would be Gentile v. (Del. and independent Stewart, directors independent and three majority rectors at the time the Jones Plaintiff McConnaughey 48 must show that five members of Facebook nine-person board would have been unable to independently consider shareholder demand. Secs. Inc. 1994) (" [C] onsolidation will have no effect on the substance of the pla Ltd. P' See In re Prudential iffs' 158 allegations[.]"); F.R.D. Ogden 562, v. Jones Complaint (Zuckerberg, improper financ financial 1 profits benefits, distributions Defendants Breyer challenges and including and stock sa Andreessen, substantial personal s Graham, (iii) compromised by his 'll 86 (f) (iii) ) ; dis executive Company) in daughter's (i v) erestedness officer Graham's and ts is and further other value, share 20, vesting increased equity value, id. 'll'll 10, with compromised 18, is 21 22, further in Zucke Facebook id. independence Sandberg's to (ii) received from independence subordinate 23); Sandberg including employment Defendant derived 17, cted stock units, Defendant and share subsequent stock sales and other events 26) ; significant in Hasting bene the Selling 'll'll 3, (Compl. Board's the (i) IPO increase financial and settling of rest the 540, obtained Theil) from No. (same). independence and disinterestedness by alleging: Directors (S.D.N.Y. Collins, 2009, 2010 WL 4816059, at *5 (Del. Nov. 29, 2010) The 571 and that rg s (CEO is of an the and cannot be deemed to act independently of her boss obj ecti vely considering an act 49 against him (Pl. Op. Motion to Dismiss, interested at 15 all where he Director Bowles ng demand because is is a and faces litigation against Morgan is also a Defendants Defendant (v) incapable of cons rector of Morgan Stanley, Stanley, n.23); fiduc have (Compl. strong err financial 19); and incent (vi) to s maintain the status quo in order to avoid disgorgement dama sought by Pla iffs (id., at 16). Plaintiffs' pleadings in the Compla the Rales Plaintif test. Defendants were allegation because interes they personal financial benefits from the presumed to s "good act faith." 906 A. 2 d 27, 52 fail to satis that expected IPO fails. In ( De 1. the re to derive Directors are Walt 2006). Director Disne Co. The mere fact that the Director Defendants sold stock, or otherwise benefitted from, a an IPO is unremarkable. director that is establish that he or Guttman, demand. not a Mere sales of corporate stock by ling sel is " rest transaction does "for purposes of finding 823 A.2d at 502; see also, In re Dow Chern. Co. No. 4349-CC, 2010 WL 66769, at *14 n.88 Ch. Jan. 11, 2010) ( " [A] whenever a derivative pla sales Conti of company stock.") rector is not deemed (internal quotations (Del. interested iff cursorily alleges that Credit not made omi tted) ; 385 50 Supp. 2d 449, 461 (D. Del. 2004) F. However, did not merely allege that Plaintiffs gain (same). contend personal that financial "the Board signed on Director benefits: Defendants Plaintiffs to misleading and materially incomplete amendments to the Registration Statement after having been made aware of second quarter [2 012] sed revenue estimates; and Facebook should (Plo " further stock the that IPO, with the "knew that that higher-priced at 13-14.) Directors, the and Board dec t larger, Selling who material IPO Plaintif sold non-public Company second Facebook and analyst estimates could quarter results and revi reduce the size, p a Motion to Dismiss, Op. allege in proceed . results ce and prospects r success of the IPO" and that they made "misleading partial disclosure while withholding the critical results and revised est tes in order (Compl. facilitate their sales of Facebook shares in the IPO." <J1 to 94.) The crux of the Complaint is that the Defendants were "aware" of However, al the revenue pleading projections "awareness" is not but did enough. particularized facts showing that the "knew" that not disclosing was illegal. 51 Wood, not PIa disclose it. if must rector Defendants 953 A. 2d at 142 (Del. 2008); see also Harold Grill 2 IRA v. Chenevert, No. CS, 2013 WL at likelihood substantial 3014120, *3 of (Del. liability allege that the directors nondisclosures] Ret. v. (S. D. N. Y. July had He sse No . 26, June where 18, 2013) "complaint does (no not were aware broken ------~------------- Ch. 799 law"); the [that the company's Mun. 12 Ci v . 2013) La. 4 017, (rej ecting Police 2013 WL 4 516427 , allegation that at * 11 directors faced liability for approving company's "tax strategy" that "had not been adjudicated as illegal"). Plaintiffs pled with suf None of the facts alleged by cient particularity that Defendants knew it was illegal to not disclose the projections. Plaintiffs rectors' sufficient sales stock li also lihood of fail to that illegal were show and personal liabil Directors that rendered them interested. disgorgement based on insider are To insufficient. plaintiff must Brophy possess materi fiduciary us the nonpublic corporate trades because substance of that Litig., 867 A.2d company information." 934 on (Del. 52 the a Selling claims for Selling Directors r trading corporate information; formation that was mot i vated, 904, y Selling created Plaintiffs' ins that: three thus trading by the state a all the imprope in whole or aim, a fiduciary and y 2) the by making In part, by In re Oracle Ch. 2004). "This doctrine is not designed to punish inadvertence, misconduct." to police intentional Guttman, 823 A.2d at 505. Plaintiffs satisfy the but have not second prong of made the sufficient allegations test.: 8 Brophy As to previously noted, Plaintiffs merely allege that the Selling Directors sold stock while information. in knowing possession of material non-public Such simple allegations do not support a plausible inference that the sales were "entered into and completed on the basis of, 922 Supp. F. While and because of" such information. suspicious ng, insider t WL 9978, director "took 2d at *5 at timing (quoting of see St Guttman, sales may (Del. of Ch. v. Carroll stock their Jan. 29, sales inside 823 support Civ. ------~--------------- defendants! advantage 469 Derivative Opinion, 1999) A.2d an A. at 505). inference No. (suspicious supported ference information by 8040, of 1991 timing of that selling they their stock before material adverse information was disclosed") (internal quotations omitted) , Plaintiffs' conclusory 18 Regarding the first prong 0 the test, the Jer-=-vative Op-=-nion previously noted that "'internal calculations and ections are not material facts that are require[d] to be disclosed' in a strat-=-on statement." Derivative .,922 F. Supp. 2d at 472 (quoting 938 F. Supp. 171, l77-78 (S.D.N.Y. 1996)), Complaint provides more particularized allegations as to why the general warnings that increased mobile use "may" reduce revenue and f-=-nancial results were misleading w-=-thout disclosure of the actual reduction of revenue during the second quarter of 2012 and the resulting revision of revenue estimates. (Pl. Op. Motion to Dismiss, at 18.) G-=-ven that Plaint ffs' pleadings are insuff-=-cient to meet the second prong of the Court declines to op_ne on the "material, nonpublic information" portion of the test. 53 allegations Directors' have sale not of shown how stock Facebook the timing in the of IPO the was Selling suspicious. Plaintiffs have not shown how private shareholders of a company selling shares in an shareholders are constitutes IPO, supposed suspicious a process to sell shares timing. allegations, without more, where the the to private public, aintiffs' are insuf cient. conclusory The situation here is not analogous to the situation in Strougo, where the sale of shares occurred companies and disclosed. in the just before Director Plaintiffs from the allege crrcrr the 10, 18, sales ga some benef demand. See at and did, these s discussions adverse between information to did these and show director not sell interest stock Director Defendants stock ring's in of was were 21.) Some Director among the on See 21, Defendants Statement, Plaintiffs have not 26). illegal, Registration and the mere fact that the (PI. Op. sell Facebook stock in November 2012, IPO. IPO. "benefitted effect of their [restricted stock units]." after (CompL fail price Dismiss, eligible to, months buyout material who that infl to also Defendants vesting or va Motion of 1991 WL 9978, at *1, *5. aintiffs the context at were six 54; alleged that a director from the challenged conduct does not excuse Moreover, even if the Defendant Directors 54 "expanded the size of the IPO and raised t result of their allegedly illegal conduct, units would have been sold IPO price" t as a restricted stock November 2012 at a price between $22-$28, well below the IPO price. Plaintiffs' contentions that Graham independence due to Graham's daughter's and Bowles' relationship with Morgan and Bowles employment Stanley at lack Facebook similarly fails. Graham's daughter was not employed by Facebook at the time the Jones Plaintiffs filed this lawsuit, (4/26/13 Facebook Form Def.14/A Graham, (Cascio (filed with SEC) the daughter of Donald E. Graham, of directors, Decl., at Ex. 40 2 ("Molly a member of our board was employed by us unt il December 2012. If) ) ), and demand futility is calculated at the time of the filing of the litigation, is see Rales, relevant challenged is not transaction 634 A.2d at 934 n.8 ("What, whether that was the or board was not in the end, approved that interested sabled transaction but whether the present board is or is not from exercising litigation.") . its and Plaintiffs' in the presumptively able rejec right contention to consider control regarding Opinion, Derivative to duty as independently the corporate Bow s was "directors are whether to take legal action that could cause tangential harm to a company with which they are affiliated." Deri vati ve Op., 55 922 F. Supp. 2d at 471. Plaintif those in allegations the Derivative regarding Bowles are the Opinion, and they same as similarly are incapable of showing lack of independence or disinterestedness. The contention that Sandberg is not disinterested due to her subordination to Zuckerberg is unconvincing. "challenge a director's particularized that a given independence," "allegations that director a plaintiff must provide raise is so In order to a reasonable beholden to an inference interested director that his or her discretion would be sterilized" under In re INFOUSA both the Aronson and Rales tests. 953 A.2d 963, Delaware omi tted) . "Delaware law does 985 (Del. Ch. law presumes not assume interest in preserving their pos v. Stanton, merely 928 allege F.2d 1318, Sandberg's 1330 lack 2007) (internal quotations directorial that independence, directors ions. " (2d of Inc. S'holders have RCM Secs. Cir. 1991). independence and a self- Fund, Inc. Plaintif and do not providing any pleadings that would call into question Sandberg's directorial independence; as such, Sandberg's presumption of independence stands. Analysis of Plaintiffs' allegations under the Aronson test does not lend further support to demand futility. the Aronson test requires a Passing plaintiff to plead demand futility 56 either by alleging particularized facts that satisfy the Ra s or by alleging facts that plausibly suggest the "challenged t transaction was [not] business judgment." board I that the Aronson, the transaction was approval cannot The bus of fraud, that meet Adams fai th] . " egregious test of personal allege The major a v. y financial business [corporate exercise of Challenging the requires its a face showing that board judgment." of the bene t cision Cal varese "self-dealing." term on business or self-dealing, h, As previously noted, "a valid judgment Farms Id. at (Pl. Op. s' IPO" fiduciary] on the "describes both Inc. --------~------------------------~----- expect is sides to Dismiss, situation of 663 A. 2d derive insufficient a at to 15.) when a transaction." 115 6 , 1995) (internal quotations omitted) Here, the Directors did not sell stock to Facebooki 11 6 9 (De l. (citing 8 Del. C. § 144 (a)). Selling Directors sold shares in an IPO. rather, The Selling interests were aligned with Facebook and ot 57 [good conclusory allegation Motion to "self-dealing" is in Civil Action Board the - acted (Del. Ch. Sept. 17, 2010). Facebook from should presume Maint. Plainti ts court directors No. 4262-VCP, 2010 WL 3944961, at *18 that a ss judgment rule presumes that "absent evidence bad fa making "so the of 473 A.2d at 814. valid exercise of business S 815. product sharehol the rectors' s, all of whom were selling stock to the IPO syndicate and, These trades, the public. Defendants proper and market business Guttman, which were made between the Director buyers, judgment 823 A.3d at 502 do or excused between the defendant-directors because defendant-directors 2010 WL interested 66769, 'whenever the the excuse at demand. sales See were [the company], but buyers"); In *14 ("a n.88 derivative of "self-dealing" and challenged and presumption marketplace and a rebut (alleged trades not not Chern., not otherwise demand the ultimately, director plaintiff is "not between re not Dow deemed cursorily alleges that he made sales of company stock in the market at a time when possessed he material, non-public informa tion. ' ") (quoting Guttman, 823 A.3d at 502). The cases Plaintiffs cite are inapposite. involved actual sides of a 950, self-dealing transaction. (Del. 952-54 corporate instance, authorizing of directors"); 887 ( De 1. merger § 144"); Ch . "clearly Weiss assets to "payments from Swanson, alleged 948 literal 58 --------------------------..,.,.,.---- company] 433, In 448 both "directors by, to a for number 751 A. 2d 879, the terms on 611 A. 2d use," Hui zenga, interest A.2d was that private [the Partners v. the director Datapoint Corp., their (director's implicate [d] v. a (plaintiffs Harbor Fin. 1 999 ) which Heineman v. 1992) funnel [ed] in All but one target of (Del. 8 of Del. Ch. a C. 2008) (holding that "demand is excused where the challenged decision is the directors' decision to award themselves compensation, and there are allegations supporting an inference that the decision breached fiduciary duties"). The one case that did not involve a director who was on both sides of a insider trading scheme where the that resulted in guilty pleas of transaction involved an complaint pled actual fraud "to criminal charges arising out . SEC and criminal investigations of the trading scheme." In re Cooper Co., Oct. 31, 2000) . particularized Given No. these 12584, 2000 WL 1664167, have Plaintif allegations demonstrating circumstances, demand at *4 also not bad futility (Del. pled ith under or Ch. any fraud. Aronson is unavailable. Given Plaintiffs' the reasoning and authorities assessed above, merely conclusory allegations are not sufficient to plead demand ility under either Rales or Aronson. D) The Plaintiffs' Claims Are Not Ripe For Adjudication peness is a "constitutional prerequisite" exercise of jurisdiction by federal court. Alliance Shalala, ripeness v. doctrine 144 F.3d provides 220, that 59 225 a (2d to the Nutritional Health Cir. dispute 1998). may only The be adjudicated when between parties defini te and Vehicle Mfrs. there (citations is having not DEC, omitted); real, adverse concrete, v. lIa legal F.3d also 1298, Pac. or 1305 Gas Ct. 1713, prevents a 75 the se). L. Ed. 2d premature 752 (1983) adjudication Consequently, "when resolution of 1996) 190, 203, that an Motor 11 v ripeness issues dispute Cir. Co. u.s. (the of (2d Elec. & a abstract. 461 s. controversy interests, hypothetical 79 see substantial issue 103 doctrine may never turns on whether there are nebulous future events so contingent in nature that there is no certainty they will ever occur, ripe for 31, 34 adjudication. (2d Cir. 1998) In II order adjudication, 'both the hardship a to the 143 II F.3d ripe for (internal quotations omitted). to court fitness the case is not determine must of the parties whether issue is a ct-specific for rna issues of an judicial decision and the withholding court evaluation of consideration.'" U.s. v. Fell, 360 F.3d 135, 139 (2d Cir. 2004). A claim is fit for development review when crystallize the it requires legal no issues further and aid factual the s. in 523 U.s. them. 118 court Ct. F.2d 468, 1665, 478 140 L. (2d Cir. Ed. 1989) 2d 921 (1998); Isaacs v. to resolving 726, 737, Bowen, 865 (liThe fitness inquiry is concerned 60 with whether the issues sought to be adjudicated are contingent on future events or may never occur."). possible hardship to the parties, the In court assessing considers the "whether the challenged action creates a direct and immediate dilemma for the part jury" outside without New York C the the prospect " of 1 Liberties "mere possibility causing Union v. "present Grandeau, 528 of future detriment." F. 3d 122, 131 (2d Cir. 2008). In the Derivative Opinion, Dismissed Derivative Actions were the not Court ripe [in the Dismissed Derivative Actions had] the alleged costs were caused Complaint, like 922 Op., that the dollars laws, the Director in as liabil the F. Defendants 2d (Compl. amounts for the Company is "Plaintif corporate wrong, at Plaintif 474-75. Facebook billions of of numerous securities SI 11), and Plaintiffs "seek[] to recover which Facebook found target liable Op "where noted: 61 the to alleges securities now the of also federal . ," previously actual "exposed class action litigation ion the not demonstrated that Derivative Actions, viola tions y all event Supp. Dismissed company is class actions," an because that on the resolution of other ligation." which is not predicat Derivative by found id. is liable in the SI 14). 'the federal in the securities As the Derivative claim of damages is contingent on the claim not De is vative outcome ripe Op. , and F. 922 a of the separate, complaint Supp. No. (D. Kan. Mar. at *3 federal secur damages, ies if any, 4, 1993)). law must 474 2d at pending lawsuit, dismiss be {quoting 90-2251 EEO, the '" In re United 1993 WL 100202, Any liability for those alleged violations has yet to have yet to be determined, established, and such claims by Plaintiffs are not r Plaintiffs from the Dismissed contend that Removed Actions Derivative the in Actions that differ they seek sgorgement of "the unlawful insider trading proceeds from the Selling Directors," see Compl. 14), ~ and disgorgement of financial benefits is a distinct remedy that is not dependent on damages to a corporation, However, Plaintiffs' (Pl. Op. - Motion to smiss, at 31). allegations of insider trading are not new and do not solve their ripeness problem or distinguish them from the Supp. 2d See smissed Derivative Actions. flowing at 68-71; insider Plaintiffs allege ~ (citing Hubuschman/Cole Compl. Childs Compi. trading Derivative ("Derivative <j[ Actions, (see as F. 65; Facebook Levy Compl. Plaintiffs here make identical 42). allegations 922 damages sale of Facebook stock by individual from Defendants. ") ~<j[ 474 Derivative Op., those alleged Compl. 62 ~~ in 81-84; the Dismiss Cole Compl. 55-62; <J1<J1 Hubuschman Derivative Actions Compl. sought the sought by Plaintiffs here, § C (demanding Selling for judgment Defendants' Rei f D § including all Defendants"); ties"); act ill gotten Hubuschman Compl., Prayer for that Relief proceeds of the Compl. , Prayer Co of from ins Dismissed remedy as the "disgorgement Ii the same disgorgement "disgorging trading such and (see Levy Compl., (demanding Plaintiffs allege 55-62), <J1<J1 all the prof s Insider Selling Prayer for Rei ief § D (same)). ility bas on the Defendants' non sclosure of the second quarter 2012 and 2012-year projections "in the at stration Statement," 18; see also federal law governs ctuses pro Compl. for a the ':ll 5), (PI. but content national mandated registration 0 1996 that statements securities offering. reprinted signat [es] in the 1996 or See National ("NSMIA"), 40 15 U.S.C. sales a state's practice "impos[eJ intiffs "power abuses," requirements I (NSMIA 3878 ral government as the exclusive regulator H.R. Conf. ted in 1996 U.S.C.C.A.N. (1996), serves 3877, U.S.C.C.A.N. of national offering of securities"); at has smiss, 77r(a)i Report of Committee on Commerce, H.R. Rep. 104 622, at 16, " Congress of Securities Markets Improvement Act § Motion to Op. but on insider trading to prevent it the does 3920, fraud not contents Rep. and allow of 104 864, 3921 (NSMIA brokerdealer a state to prospectuses"). aims are ultimately contingent on 63 the federal Plaintiffs' Securities claims C re s Actions litigation. 19 no better than those in the As such, Dismissed Derivative Actions. Accordingly, Plaintiffs have not demonstrated that the alleged damages were caused by a corporate wrong which predicated other on the resolution of litigation, and is not their aims are not ripe and therefore dismissed on this basis. E) The Plaintiffs Are Not Inadequate Representatives Of The Class Under Rule 23.1 Adequacy of representation is a threshold issue which can be appropriately decided be remand. 546 F.3d 1051, 1055 (9th Cir. 2008) of the requirements federal Corp., of Rule 2 3.1 jurisdictional questions.") 527 U.S. (1999)). When 815,831,119 S. a shareholder is a See brings v. ("[T]he satisfaction logical antecedent (citing Orti z v. Ct. Potter Fibreboard 2295,144 L. Ed. a action derivative to 2d 715 "to enforce a right that the corporation or association may properly assert but has failed to enforce," such an action "may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders . 19 64 . who are s larly situated in enforcing the Fed. R. P. been an 23.1(a). inappropriate "Where a fai the of is corporation." found the to reholders, a ive litigation will not preclude led derivative action brought by a shareholder who can s." represent the shareho S'holder 4298588, Derivative at *7 Litig., (S.D.N.Y. In re JPMo No. Sept. 08 19, Chase & Co. 974 (DLC) , Civ. The 2008). 2008 WL irement of resentation is analogous to the requirement fair and adequate that a of plaintiff representative judgment entered in that der a later right representat party in a adequately protect the ass act erests of the c must ss." " . irly and Civ. R. P. 23(a)(4). "Inherent licting couns any interests class among the action class is ultimate members 67 F.3d 1072, 1077 Ii ty ensure respons are not subordinated representatives court." Id. at Jenret te Secs. to to or class 1078. See v. Corp. , 222 (2d Cir. that the F.3d Thus, interests rests Baffa v. 61 s, for class Par interests 52, potential 1995). the counsel also the representat , and absent class members." Petroleum Co., class in of class either th the Donaldson, (2d of [t] he II Cir. the strict Lufkin & 2000). "[P]laintiffs attempting to advance derivative and direct claims in the same action face an impermissible conflict of interest. 65 II St. Clair Shores Gen. Ret. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _- L_ _ _ _ _ _ _ _ _ _ S ~ v. Eibe ______________ r, No. ~ 06 C 688(SWK), 2006 WL 2849783, at *7 (S.D.N.Y. Oct. 4, 2006). resul t lict, of is impermissible some courts to certify a plaintiff as a class "As a refused sentative, while ot refused to allow the derivative action to proceed." However, "[iJn the context of a derivat courts have generally found that the showing that rs Id. suit under Rule 23.1, fendant s the burden of plaintiff is an inadequate sentat " In re JPMorgan Chase, 2008 WL 4298588, at *8. Nominal Defendant conte barred since they "do not interests counsel under aintiffs ented Rule (Def. Mem. 23.1(a) IPO-based Motion to because their actions securit rivatively on behalf of against Facebook but now bring claims Facebook." ims are 'fairly and adequately represent the reholders' of iffs' that PI smiss, at 24 (emphasis in original) . ) However, Plaintiffs' attorneys , Stull v. Baker, (questioning "how ---'----""- (S.D.N.Y. 1976) represent" compromising both his rect and not concurrently vate claims aga bringing securities actions and Facebook. are 410 F. an attorney derivative independence of 66 Supp. t and for 1326, 1336-37 can properly plaintiffs "without professional judgment loyalty to these two conflicting interests" action groups derivative and 2849783, at *7 where of the action claims); (noting clients St. that with potentially contained Clair plaintiffs both Shores, were class 2006 WL "advance[ing] derivative and direct claims in the same action"); Ryan v. Aetna Life Ins. Co., 765 F. Supp. 133 (S.D.N.Y. 1991) (holding that shareholder could not simultaneously pursue derivative and class actions because of conflict counsel filed of motions to withdraw from Plaintiffs' interest). representation lead in the securities class actions before filing suit for the Plaintiffs. (Plo Op. Motion Plaintiffs' to Dismiss, at 34.) At no time did attorneys actually bring conflicting actions against Defendants. Nominal claiming as an Defendant inj ury costs and damages lead counsel to points Facebook out in by filing the at Defendant, Plaintiffs' Plaintiffs 21 (citing however, has Ryan, not lead counsel has currently seek 765 F. quantified Plaintiffs arising out of the Defendants' and first securities Motion to 133).) Nominal Supp. the class Reply - costs and damages from alleged wrongful acts. 67 the litigation Plaintiffs' caused on the Company. injury are Removed Actions (Def. action arising out of Facebook's IPO. Dismiss, the from the class action instigated that damages Moreover, litigation Bringing litigation to hold a defendant liable for an alleged wrong in this instance does not, without more, compel a finding of inadequate representation. I. Conclus.ion Based on the conclusions set forth above, (1) Nominal Defendant's motion to dismiss is denied in part and granted in part; and (2) Plainti s' motion to remand is denied as moot. It is so ordered. New York, NY DecemberJo ' 2013 OBERT W. SWEET U.S.D.J. 68

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