Morefield ex rel. Nominal v. Bailey

• Decision Date: 06 August 2013
• Docket Number: Case No. 1:12–cv–1468 (GBL/TCB).
• Citation: 959 F.Supp.2d 887
• Parties: Shirley MOREFIELD, derivatively and on behalf of Nominal Defendant Computer Sciences Corp., Plaintiff, v. Irving W. BAILEY, et al., Defendants, Computer Sciences Corp., Nominal Defendant.
• Court: U.S. District Court — Eastern District of Virginia

959 F.Supp.2d 887

Shirley MOREFIELD, derivatively and on behalf of Nominal Defendant Computer Sciences Corp., Plaintiff,

v. Irving W. BAILEY, et al., Defendants,Computer Sciences Corp., Nominal Defendant.

Case No. 1:12–cv–1468 (GBL/TCB).

United States District Court,

E.D. Virginia,

Alexandria Division.

Aug. 6, 2013.

Mark Hanna, Donna–Marie Kozue McKinnon, Murphy Anderson PLLC, Washington, DC, for Plaintiff.

Bernard Joseph Dimuro, Dimuro Ginsberg PC, Alexandria, VA, David Emmett Carney, Warren Thomas Allen, II, Skadden Arps Slate Meagher & Flom LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

GERALD BRUCE LEE, District Judge.

THIS MATTER is before the Court on Defendants' Motion to Dismiss for failure to comply with Rule 23.1's shareholder derivative demand requirement and Motion to Dismiss for failure to state a claim. (Docs. 40, 43.) This case concerns the activities of a Nevada corporation's board of directors (“the Board”) in connection with their management decisions and public statements related to the company's major contract with the United Kingdom's healthcare system. Plaintiff Shirley Morefield brings this action, alleging one count of breach of fiduciary duty on the grounds of deception and mismanagement by the board of directors. The present Motions present two issues before the Court.

The first issue is whether Plaintiff sufficiently pleaded with particularity that the Board wrongfully refused her demand to sue itself on behalf of the corporation. The Court holds that Plaintiff fails to plead wrongful refusal with particularity as requiredby Federal Rule of Civil Procedure 23.1. The Board's refusal of Plaintiff's demand to sue certain corporate officers indicated various reasons considered by the Board for its refusal to take her suggested course of action. In light of the refusal letter and the facts available to the Board as a result of an internal investigation, a governmental investigation, and federal securities litigation, Plaintiff fails to allege facts that would sufficiently rebut the presumption that the Board's actions are protected by the business judgment rule. Accordingly, the Amended Complaint is subject to dismissal for this reason.

The second issue is whether, assuming the demand requirement was met, Plaintiff sufficiently states a claim for breach of fiduciary duty where she alleges that individuals on the board of directors failed to conduct proper oversight, received reports indicating a dire financial outlook, and disseminated incorrect information regarding the corporation's financial situation. The Court holds that Plaintiff fails to state a claim for breach of fiduciary duty. The Complaint lacks facts sufficiently demonstrating that the named defendants engaged in intentional misconduct or consciously failed to manage or oversee the corporation's internal monitoring systems. Accordingly, Defendants are entitled to dismissal for this reason as well.

I. BACKGROUND

Plaintiff Shirley Morefield brings this breach of fiduciary duty action derivatively and on behalf of Nominal Defendant Computer Sciences Corporation (“CSC”) against current and former CSC directors and officers. (Am. Compl. ¶ 1, Doc. 26.) Plaintiff brings this suit as a CSC stockholder. ( Id. ¶ 14.) CSC is a Nevada corporation that provides information technology and business process outsourcing, consulting and systems integration services, and other professional services. ( Id. ¶¶ 26, 35.) The named defendants are Irving W. Bailey, David J. Barram, Stephen L. Baum, Rodney F. Chase, Judith R. Haberkorn, Michael W. Laphen, Michael J. Mancuso, F. Warren McFarlan, Chong Sup Park, and Thomas H. Patrick (“Individual Defendants”), and Computer Sciences Corporation as a Nominal Defendant. ( See id. at 1.)

Plaintiff's breach of fiduciary duty claim arises from a series of incidents occurring primarily between 2008 and 2012. During this time, CSC held a $5.4 billion contract with the United Kingdom's National Health Service (“NHS Contract”) “to create a fully-integrated patient and medical records Information Technology system throughout the UK.” ( Id. ¶¶ 2, 36, 56.) Plaintiff alleges that “the Individual Defendants were responsible for disseminating numerous false and misleading statements concerning the Company's internal controls and profitability during the Company's fiscal years 2009–11.” ( Id. ¶ 42.) Many of these statements allegedly concerned the profitability of the NHS Contract, CSC's ability to fulfill the terms of the NHS Contract, and the adequacy and effectiveness of CSC's internal controls. ( Id.) Plaintiff alleges that the Individual Defendants “knowingly caused or allowed the Company to issue” such misstatements “in press releases, Form 10–Q filings, Form 10–K filings, and conference calls from August 5, 2008 through August 11, 2010.” ( Id. ¶ 43.) The Complaint summarizes a non-exhaustive list of dates and forms containing misstatements but does not specify the contents of or attach a specific date to any particular misstatement. ( See id.)

Plaintiff presents a series of allegations concerning public statements and events occurring no earlier than November 2010, whereby CSC made significant adjustments to financial outlooks, including adjustments in light of accounting errors and irregularities, reflecting the fact that CSC's “internal controls and procedures were not effective as of October 1, 2010.” ( Id. ¶¶ 44–49.) During this time the Securities Exchange Commission (“SEC”) initiated a formal civil investigation into CSC's accounting practices. ( Id. ¶ 47.) No later than February 2011, CSC initiated reviews and investigations of its internal controls. ( Id. ¶ 49.) During 2011, CSC continued to release public documents reflecting its discovery of internal accounting errors while carefully refraining from commenting on the details of such errors in light of the SEC investigation. ( Id. ¶¶ 50–55.) CSC made further adjustments to financial projections, particularly those concerning the NHS Contract, in February and May of 2011. ( Id. ¶¶ 56–57.) Company-wide revenue expectations declined by approximately $2 billion with respect to new business, while the value of the NHS Contract decreased in value by nearly $1 billion. ( See id.)

Plaintiff further describes a series of internal communications allegedly sent in 2008 to Defendant Laphen and other individuals concerning the accounting inefficiencies in CSC's Nordic operations. ( Id. ¶¶ 61–70.) Some of these letters stated the belief of certain individuals that the internal audit practice in the Nordic region posed a “significant risk to [ ] CSC” and that the chief audit executive “seriously compromised the integrity of the practice as well as the financials of this firm.” ( Id. ¶¶ 66–67.) Plaintiff also presents allegations concerning an internal review team and its belief that CSC would be unable to meet deadlines imposed by the NHS Contract. ( Id. ¶ 72.) This review team—the DA Red Team—allegedly spent two weeks assessing projections related to the NHS Contract and concluded that, due to the project being behind schedule, CSC “could not deliver the solution set” required by the NHS Contract. ( Id. ¶¶ 72–80.) This report was allegedly presented to the Board of Directors in May 2008. ( Id. ¶ 80.) A second review team, commissioned in September 2008, concluded that some aspects of CSC's project made solid progress but ultimate delivery on schedule would be highly unlikely and test results were “abysmal.” ( Id. ¶¶ 81–83.)

Plaintiff alleges that CSC ultimately failed to timely deliver the programs required by the NHS Contract, causing a decline in the value of the NHS Contract. ( Id. ¶ 86.) The withdrawal of the Penine Trust Foundation from the NHS program allegedly caused a cancellation of at least $175 million in revenue. ( Id.) As of June 15, 2011, the value of the NHS Contract allegedly fell to $3.4 billion from $5.4 billion. ( Id.) The failure to timely deliver the NHS Contract requirements also led to a Parliamentary investigation in the United Kingdom, whereby Parliament concluded that CSC knew of the incapability of delivering on the contract by August 2008, if not earlier. ( Id. ¶ 87.)

CSC faced a securities class action in this Court, filed in 2011. See In re Computer Sciences Corp. Sec. Litig., No. 1:11–CV–610–TSE (E.D.Va. filed June 3, 2011). That action involved claims that the defendants in that case, which include some of the Individual Defendants, violated federal securities laws by knowingly disseminating the materially false and misleading statements identified by Plaintiff's Amended Complaint. (Am. Compl. ¶ 92.) On August 29, 2012, Judge Ellis granted in part and denied in part the defendants' motion to dismiss the class action, finding that Defendant Laphen “at least recklessly disregarded” findings that CSC could not perform its obligations.¹ ( See id. ¶¶ 90, 93.)

On September 19, 2011, Plaintiff made demand on the Board of Directors to sue the Individual Defendants, the members of the Audit Committee in particular, for breach of fiduciary-duty of loyalty and good faith. ( Id. ¶ 97.) On November 1, 2011, counsel for the Board responded with a four-page letter informing Plaintiff that the Board refused her demand. ( See Am. Compl. Ex. D.) The letter outlined the reasons for the refusal, including the impact on the pending SEC investigation and federal securities action, a pending internal investigation by the Audit Committee, and a cost-benefit analysis of a potential recovery in light of the costs of bringing and defending the Individual Defendants in such a suit. ( See id.) On September 25, 2012, Plaintiff, through counsel, again made demand on the Board to reevaluate its November 2011 letter, in light of Judge Ellis's partial denial of the motion to dismiss, and sue the Individual Defendants. (Am. Compl. ¶ 101.) On October 31, 2012, Plaintiff received notice that her demand had once again been refused. ( I...