Lee v. Frost
| Decision Date | 31 August 2021 |
| Docket Number | 21-20885-CIV-ALTONAGA/Torres |
| Parties | SAMMY LEE, et al., Plaintiffs, v. PHILLIP FROST, et al., Defendants. |
| Court | U.S. District Court — Southern District of Florida |
THIS CAUSE came before the Court on Defendants' Motion to Dismiss Plaintiffs' Verified Shareholder Derivative Consolidated Amended Complaint [ECF No. 62], filed on May 24, 2021.[1] Plaintiffs, Sammy Lee and Andy Yu, filed a Response in Opposition [ECF No. 63] to the Motion; to which Defendants filed a Reply [ECF No. 68]. The Court has carefully considered the Consolidated Amended Complaint (“CAC”) [ECF No. 61], the parties' written submissions, the record, and applicable law. For the following reasons, the Motion is granted.
This shareholder derivative action arises from OPKO's alleged failure to diversify its Board of Directors and executive management team. (See generally CAC). Plaintiffs are shareholders of OPKO common stock. (See Id. ¶¶ 16-17). OPKO is a Delaware corporation with its principal place of business in Miami, Florida and is publicly listed on the NASDAQ. (See id. ¶ 18). OPKO is a diversified healthcare company engaged in both the diagnostics and pharmaceuticals business. (See Id. ¶ 2).
Defendants Phillip Frost, Adam Logal, Jane H. Hsiao, Steven D. Rubin Robert S. Fishel, Richard M. Krasno, Richard A. Lerner, John A. Paganelli, Richard C. Pfenniger, Jr., and Alice Lin-Tsing Yu (the “Individual Defendants”) are members of OPKO's Board. (See Id. ¶¶ 19-48). The Board “assumes accountability for confirming that OPKO follows federal and state laws that prohibit racial discrimination.” (Id. ¶ 87). Frost is also OPKO's CEO and Chairman (see Id. ¶ 19); and Logal serves as its Senior Vice President, CFO, Chief Accounting Officer, and Treasurer (see Id. ¶ 22). In addition, Hsiao is OPKO's Chief Technical Officer and Vice-Chairman (see Id. ¶ 25), while Rubin is the Executive Vice President of Administration (see Id. ¶ 28).
Krasno, Paganelli, and Pfenniger serve on the Board's Audit Committee. . The Audit Committee oversees the company's audits, reviews its internal controls, ensures “the integrity of [OPKO]'s financial statements[, ]” and ensures “compliance with legal and regulatory requirements[.]” (Id. ¶ 72 (alterations added)). Fishel, Krasno, and Pfenniger serve on the Board's Succession Planning Committee, which recommends to the Board candidates for executive management positions. . Lerner and Paganelli also serve on the Board's Corporate Governance and Nominating Committee , which “identif[ies] individuals qualified to become Board of Directors members, consistent with criteria approved by the Board of Directors[;]” and has “sole responsibility” to formally recommend new Board candidates. (Id. ¶ 69 (alterations added)). Further, OPKO's Code of Conduct states “discrimination is not tolerated” and advises that employment decisions will not be based on factors such as “race” or “color[.]” (Id. ¶ 64 (alteration added)). The Code of Conduct applies to all OPKO employees, including Board members and executive officers, and instructs employees to report suspected Code violations to their supervisors. .
Plaintiffs allege the Individual Defendants have “repeatedly refus[ed] to nominate, appoint, and/or hire Black or Latinx individuals or other underrepresented minorities to the Board or Black individuals to the executive management team[.]” (Id. ¶ 7 (alterations added)). Specifically, Plaintiffs allege that, despite OPKO's purported commitment to “a healthy work place[, ]” “zero Black or Latinx individuals currently reside on [OPKO]'s Board and zero Black individuals work on [OPKO]'s executive management team.” (Id. (); see also Id. ¶ 86). “Instead, the overwhelming majority are . . . White men.” (Id. ¶ 87 (alteration added)). This lack of diversity is particularly significant given other companies' recent social justice initiatives. (See Id. ¶¶ 79-85).
In order to maintain the Individual Defendants' control of OPKO and to “keep Black, Latinx, and other underrepresented individuals off of the Board[, ]” OPKO does not limit the number of terms a Board member can serve. (Id. ¶ 13 (alteration added); see also Id. ¶ 91). For example, at least half of the current Board members have been serving for over 13 years. (See Id. ¶ 91). These policies are not in OPKO's best interests, as studies show investors view long-tenured directors as cause for concern and companies with diverse boards are more likely to experience higher profits. .
As further proof that the Individual Defendants have perpetuated a non-diverse and non-inclusive corporate culture, Plaintiffs cite “numerous complaints regarding the lack of room for growth based on merit via reviews left by former and current employees of OPKO on websites such as Niche, Glassdoor, and Indeed.” (Id. ¶ 88). The cited reviews state “many positions are filled based on who you know” or who is “liked by Management[, ]” and the company's leadership “is not focused on the welfare of [the] employees.” (Id. ()). Further, on July 16, 2019, BioReference Laboratories, Inc., a wholly owned subsidiary of OPKO, was sued for alleged discrimination and harassment based on race. . BioReference settled the lawsuit in November 2020. (See Id. ¶ 78).
In addition to failing to diversify the Board or ensure compliance with state and federal antidiscrimination laws , the Individual Defendants have failed to maintain adequate internal controls and continue appointing an ineffective independent auditor to assess OPKO's internal controls regarding diversity and antidiscrimination .
Despite their knowledge of the alleged discriminatory misconduct - by virtue of their participation in and failure to rectify or monitor it - the Individual Defendants caused OPKO to make misleading statements in three of its annual Proxy Statements regarding the company's commitment to diversity and compliance with its Code of Conduct. . OPKO's 2018, 2019, and 2020 Proxy Statements assured investors the Code of Conduct “applies to all employees, officers, and directors of the [c]ompany[;]” but failed to disclose the Code of Conduct was not followed due to the Individual Defendants' discrimination in filling Board positions and their failure to report such Code violations. (Id. ¶¶ 95, 103, 111 (alterations added; quotation marks omitted)).
The Proxy Statements also represented that the Board values “diversity of knowledge base, professional experience[, ] and skills[;] and the Corporate Governance and Nominating Committee takes these qualities into account when considering director nominees for recommendation to the Board.” (Id. ¶¶ 96, 104, 112 (alterations added; quotation marks omitted)). Yet, the Proxy Statements (1) failed to disclose that the Individual Defendants were repeatedly refusing to hire or nominate Black, Latinx, or other underrepresented minorities to the Board or executive management team ; (2) failed to disclose the lack of director term limits due to a racist desire to keep Black, Latinx, and other underrepresented individuals off the Board ; (3) failed to disclose that the company's internal controls were inadequate to ensure compliance with the Code of Conduct and protect underrepresented individuals from discrimination in the Board and executive team selection processes ; and (4) failed to disclose that the company's longtime independent auditor was neither independent nor effective at ensuring the adequacy of the company's internal controls .
In sum, Plaintiffs allege the 2018, 2019, and 2020 Proxy Statements were materially misleading because OPKO had no interest in addressing the alleged lack of racial diversity and discriminatory practices regarding the nomination and appointment of minority Board and executive team candidates. . The Individual Defendants “deceived the public by claiming to abide by certain antidiscrimination policies” (id. ¶ 10), while “doing very little to curb discrimination occurring at the [c]ompany or its subsidiaries” (id. ¶ 4 (alteration added)). In doing so, “the Individual Defendants have breached their duty of candor and have also violated the federal securities laws.” (Id. ¶ 10). As a result of the material misstatements contained in the 2018, 2019, and 2020 Proxy Statements, shareholders elected or re-elected the Individual Defendants to the Board, which allowed the discriminatory practices to continue, and ratified the repeated appointment of the company's ineffective independent auditor. .
Plaintiffs did not make a demand on the Board to institute this action under Federal Rule of Civil Procedure 23.1. Instead, they allege such a demand would have been futile and is therefore excused. (See Id. ¶¶ 124-87). Plaintiffs bring claims for breach of fiduciary duty and violations of Section 14(a) of the Securities Exchange Act. (See Id. ¶¶ 193-216).[2] Defendants now move to dismiss the CAC, arguing: (1) Plaintiffs failed to make a pre-suit demand and have not pleaded with sufficient particularity why such a demand would have been futile; (2) Plaintiffs fail to state a claim for breach of fiduciary duty or violation of Section 14(a); and (3) the CAC is a deficient shotgun pleading. (See generally...
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