Gamoran v. Neuberger Berman, LLC

BENJAMIN M. GAMORAN, derivatively on behalf of the nominal defendant with respect to its series mutual fund the Neuberger Berman International Fund, Plaintiff, v. NEUBERGER BERMAN, LLC, NEUBERGER BERMAN MANAGEMENT LLC BENJAMIN SEGAL, PETER E. SUNDMANJACK L. RIVKIN JOHN CANNON, FAITH COLISH,MARTHA C. GOSS, C. ANNE HARVEY ROBERT A. KAVESH, HOWARD A. MILEAF, EDWARD I. O'BRIEN, WILLIAM E. RULON, CORNELIUS T. RYAN, TOM D. SEIP, CANDACE L. STRAIGHT, AND PETER P. TRAPP, Defendants, - and - NEUBERGER BERMAN EQUITY FUNDS d/b/a NEUBERGER BERMAN INTERNATIONAL FUND, Nominal Defendant.

11 Civ. 07957 (TPG)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

Dated: March 29, 2013

OPINION

Plaintiff, a shareholder in, brings this derivative action on behalf of Neuberger Berman Equity Funds (the "Fund"). The action is against institutional defendants,Neuberger Berman, LLC ("NB"), Neuberger Berman Management LLC ("NBM"), and individual fiduciaries who managed the Fund under RICO, 18 U.S.C. § 1964 et. seq.

The amended complaint in this action asserts six claims. Count One alleges breach of fiduciary duty. Count Two alleges negligence. Count Three alleges waste. Count Four alleges breach of contract against the Investment Advisor defendants only. Count Five alleges a violation of RICO, 18 U.S.C. § 1963(c). Count Six alleges a violation of RICO 18 U.S.C. § 1962(d).

The defendants, collectively, have moved to dismiss the amended complaint with prejudice, arguing that plaintiff has failed to state claims with respect to every Count alleged.

Defendants' motions to dismiss are granted without prejudice.¹

HISTORY OF THE CASE

Plaintiff's first attempt to bring suit, which asserted both derivative and class claims, was voluntarily dismissed in May 2009. See Gamoran v. Neuberger Berman Mgmt. LLC,No. 08 Civ. 10807 (DLC) (S.D.N.Y. 2009). On July 16, 2010, plaintiff brought his second suit, Gamoran II, this time in New York State court. Compl. ¶ 116. Plaintiff made a demand on the board mid-suit during Gamoran II, and recognizing that a mid-suit demand conceded that demand was not futile under Delaware law, the Court dismissed Gamoran II on May 11, 2011 over plaintiff's objection. See Order, Gamoran II, ECF No. 41.

In response to plaintiff's demand, the board appointed a Special Demand Committee ("SDC"), which convened beginning in July of 2011 to start the investigation after selection of independent counsel. Order at 5, July 12, 2012, ECF No. 49. On August 24, 2011, plaintiff filed his first complaint in the present case in the United States District Court for the District of Delaware. Defendants, having appointed the SDC, responded that the suit was premature because the board was reviewing plaintiff's demand. In light of these facts, the board requested that plaintiff withdraw his lawsuit pending the conclusion of the board's review of his demand - plaintiff refused to do so on September 19, 2011. See Terris Decl. Ex. G.

On November 4, 2011, the Delaware District Court granted the Investment Advisor defendants' motion to transfer.² The case was subsequently transferred to this Court pursuant to defendants' motion. See Order, Nov. 4, 2011, ECF No. 20.

On December 8, 2011, defendants moved to dismiss the third case. Shortly thereafter, on March 16, 2012, the Board sent plaintiff's counsel a letter responding toplaintiff's demand. The letter explained that the Board had formed an SDC and that the SDC had investigated, reviewed, and analyzed the allegations and circumstances that were the subject of plaintiff's demand. Henkin Decl. Exh. I at 1, 3. In making this decision, the SDC considered the merits of the suit, the likely harm to the fund that would result from such a suit, and the suit's net financial impact on the fund. AC ¶ 126; Kornobis Decl. Ex. A. The SDC then concluded that the evidence did not support claims for breach of fiduciary duty, negligence, or waste and also did not support civil RICO claims. Id.

On June 12, 2012, the Court dismissed the third case, holding that "plaintiff did not comply with Delaware's demand requirement and Fed. R. Civ. P. 23.1," but granted plaintiff leave to file an amended complaint. See Henkin Decl. Exh. J at 12. On July 16, 2012, plaintiff filed the Amended Complaint in this action.

THE COMPLAINT

THE ILLEGAL GAMBLING OPERATIONS

This is plaintiff's fourth suit grounded in the same theory: that the fund was injured because defendants invested in London Stock Exchange-traded shares of two companies, NETeller and 888. AC ¶¶ 26-41. These internet gambling operations earned most of their revenues from gamblers in the U.S. in violation of U.S. anti-gambling laws. Id. 888 is located in Gibraltar, and NETeller is located in the Isle of Man. AC ¶¶ 27, 37. Seeking investment capital to expand their illegal operations, both entities listed their shares on theLondon Stock Exchange. AC ¶¶ 28-37. They did not list their shares on any U.S. exchange. AC ¶ 41.

Plaintiff alleges that defendants caused the Fund to take ownership stakes worth approximately $25.4 million in NETeller and $18.5 million in 888 in violation of 18 U.S.C. § 1955, which, among other things, prohibits a person or entity from owning all or part of an "illegal gambling business." AC ¶¶ 1-53, 55-58. In 2006 the United States Department of Justice initiated a crackdown, which led to arrests and prosecution of NETeller's founders. They pleaded guilty to gambling offenses, including the Gambling Act, and agreed to forfeit $100 million in criminal proceeds. In addition, NETeller agreed to forfeit $136 million in criminal proceeds and admitted that its principal business violated U.S. federal law. AC ¶ 40.

Plaintiff alleges that the value of the illegal gambling businesses plummeted after law enforcement choked off their primary source of revenue. AC ¶¶ 1, 91-95. Thus, he contends that the stock that defendants purchased on behalf of the fund lost all of the value attributable to the illegal revenue. AC ¶¶ 106-12. In addition, plaintiff alleges that by knowingly causing the Fund to "own" a "part" of an "illegal gambling business," defendants caused the fund to violate the Gambling Act; and - because they aided and abetted the fund's violation of federal law and conspired to do so - the defendants are individually liable as aiders and abettors. Id.

Plaintiff further claims that by causing the Fund to violate the Gambling Act repeatedly, defendants conducted the affairs of the Fund through a "pattern of racketeering activity" in violation of RICO. See 18 U.S.C. §§ 1961(1)(B), 1962(c). AC ¶¶ 149-164. The complaint additionally states common law claims for breach of fiduciary duty, negligence, and waste. Id. And finally, plaintiff contends that advisors breached a managing agreement by causing the fund to own shares in illegal gambling businesses contrary to numerous federal and state criminal law and the common law legal principle that it is wrongful to seek to profit from the wrongdoing of another. AC ¶ 166.

Although plaintiff concedes that he made a demand on the board and that a Special Demand Committee was appointed to investigate his claims, he maintains that the board did not base its decision not to prosecute the claims "on any legitimate business judgment, but on incorrect legal assumptions and erroneous legal principles." Id. ¶ 136. Plaintiff also argues that the board made "the impermissible legal conclusion that asset managers may weigh the risks associated with seeking to profit from criminal activity as if that were a legitimate business decision." Id. ¶ 136. And finally, plaintiff contends that the SDC based its recommendation on two "purely legal conclusions": (1) "whether Defendants are required to have subjective knowledge of criminal statutes," and (2) whether a claim of waste is viable if the Fund received "'consideration' for its purchases in the receipt of stock in the illegal gambling businesses." Id. ¶ 136.

DISCUSSION

MOTION TO DISMISS

A trial court considering a Rule 12(b)(6) motion must "accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). At the same time, "conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to defeat a motion to dismiss." Achtman v. Kirby, Mclnerney & Squire, LLP, 464 F.3d 328, 337 (2d Cir.2006).

A court considering a Rule 12(b)(6) motion applies a flexible plausibility standard, which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible. Boykin v. KeyCorp, 521 F.3d 202, 213 (2d Cir.2008). To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). With respect to preclusive effect on a party's claims, it is well settled in this Circuit that dismissal with prejudice is a harsh remedy to be utilized only in extreme situations. Theilmann v. Rutland Hosp., Inc., 455 F.2d 853, 855 (2d Cir. 1972).

Derivative lawsuits must also meet "a pleading standard higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6)." Fink v. Weill, 2005 U.S. Dist. LEXIS 20659, at *9 (S.D.N.Y.2005), (citing Fed.R.Civ.P. 23.1). In such cases, "[t]he complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparableauthority ... and the reasons for the plaintiff's failure to obtain the action or for not making the effort." Fed.R.Civ.P. 23.1.

Although Rule 23.1 outlines the procedural rules with which a derivative action in federal court must comply, state law provides the substantive law governing a...