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LEVNER v. ALWALEED BIN TALAL BIN ABDULAZIZ AL SAUD

October 14, 1994

LAWRENCE H. LEVNER, Plaintiff,
v.
PRINCE ALWALEED BIN TALAL BIN ABDULAZIZ AL SAUD and CITICORP, Defendants.


Preska


The opinion of the court was delivered by: PRESKA

LORETTA A. PRESKA, U.S.D.J.

 Defendant, Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud ("Alwaleed"), moves for summary judgment on Count I of the amended complaint, and both Alwaleed and Citicorp move to dismiss Counts II through IV. The plaintiff, Lawrence H. Levner ("Levner"), moves for leave to file a second amended complaint. For the following reasons, the defendants' motions are granted and Levner's motion is denied.

 Background

 Levner, the owner of certain Citicorp common stock, has commenced this derivative action against Alwaleed and Citicorp, a bank holding company incorporated in Delaware. The original complaint sought an accounting of all profits made from a 1992 sale and repurchase of Citicorp common stock pursuant to § 16(b) of the Securities and Exchange of 1934, 15 U.S.C. § 78p(b) (the "Exchange Act"). The complaint also sought damages resulting from Alwaleed's failure to comply with the filing requirements of § 16(a) of the Exchange Act, 15 U.S.C. § 78p(a).

 The complaint alleged that, on February 19, 1992, Alwaleed sold one million shares of Citicorp common stock on the open market at the price of $ 17.00 per share and that, on March 5, 1992, Alwaleed repurchased one million shares of common stock on the open market at an average price of $ 16.68. Plaintiff claims that this short-swing profit violated § 16(b). (Complaint P 9.) Alwaleed moved to dismiss this complaint pursuant to Fed. R. Civ. Pro. 12(b)(6). Pursuant to Rule 12(b), upon notice to all parties, the Court converted the motion to dismiss to a motion for summary judgment under Fed. R. Civ. Pro. 56. The parties were provided the opportunity to supplement their submissions on the motion to dismiss. In response, plaintiff submitted a Rule 56(f) affidavit pursuant to Fed. R. Civ. Pro. 56(f) seeking additional discovery. I denied this request on May 17, 1993.

 Thereafter, plaintiff was granted leave to file an amended complaint. The new complaint deleted the § 16(a) claim, retained the § 16(b) claim, and added three new claims. As additional claims, the amended complaint alleged violations of § 10(b) and § 13(d) of the Exchange Act, 15 U.S.C. §§ 78m(d), 78j(b), and common law fraud. These new claims related to the following transactions that occurred in 1991. On February 21, 1991, Alwaleed entered into a private purchase agreement ("Purchase Agreement") with Citicorp for the purchase by Alwaleed of 11.8 million depository shares, each of which represented one/two-thousandth of a share of Citicorp's Series 12 convertible preferred stock ("preferred stock"). The purchase was equivalent to 5,900 shares of preferred stock and was made at an aggregate cost of $ 590 million. (Amended Complaint P 5.)

 The amended complaint alleges that Alwaleed made false and misleading statements in the Schedule 13D filed in connection with this initial purchase of preferred stock pursuant to 15 U.S.C. § 78m(d). *fn1" Specifically, the amended complaint alleges that the following statements contained in Alwaleed's Schedule 13D were false: (i) that he is the beneficial owner of the convertible preferred stock, and (ii) that the source of consideration paid for such stock was his personal funds. (Amended Complaint PP 28, 31, 39.) The amended complaint alleges that Alwaleed violated § 10(b) by purchasing the preferred stock based on these materially misleading representations. (Amended Complaint PP 34, 36, 40.) In addition to the accounting for the alleged short-swing profits in 1992, the amended complaint seeks recision of Alwaleed's purchase of the preferred stock and an injunction requiring Alwaleed to file an amended Schedule 13D making full and accurate disclosure.

 Defendants have made several motions in response to the complaint. First, Alwaleed notified the Court by letter that he wished to renew his motion for summary judgment on the § 16(b) claim contained in the amended complaint. In a separate motion, Alwaleed has moved to dismiss the additional claims contained in Counts II through IV for failure to comply with Fed. R. Civ. P. 9(b), 11, and 23.1. Citicorp also has moved to dismiss these new claims for failure to comply with Rule 23.1.

 Discussion

 A. Counts II through IV.

 Both Citicorp and Alwaleed move to dismiss Counts II through IV of the amended complaint, which assert violations of § 13(d), § 10(b), and common law fraud, for failure to allege with particularity the efforts made by plaintiff shareholder to obtain the action plaintiff desires from the directors of the corporation, in violation of Fed. R. Civ. P. 23.1. Additionally, they move to dismiss because the amended complaint fails to allege with particularity that Citicorp wrongfully rejected plaintiff's demand.

 A derivative action permits a shareholder of a corporation to bring suit "to enforce a corporate cause of action against officers, directors and third parties." Ross v. Bernhard, 396 U.S. 531, 534, 24 L. Ed. 2d 729, 90 S. Ct. 733 (1970) (emphasis in original). To prevent abuse of this right and to permit directors to retain their traditional status as "conductors of the corporation's affairs," Elfenbein v. Gulf & Western Indus., 590 F.2d 445, 450 (2d Cir. 1978), courts have mandated that the shareholder demonstrate "'that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions.'" Kamen v. Kemper Financial Serv., 500 U.S. 90, 96, 114 L. Ed. 2d 152, 111 S. Ct. 1711 (1991) (quoting Ross, 396 U.S. at 534). *fn2"

 The amended complaint, which was filed on May 4, 1993, alleges, that

 
on August 3, 1992, plaintiff demanded that Citicorp directly bring the claims alleged [in the amended complaint] with respect to his sale and repurchase of Citicorp stock in violation of § 16(b), and with respect to Alwaleed's failure timely to file documents required by the SEC, concerning, inter alia, the transfer by Alwaleed, in the spring or early summer 1992, of his Citicorp stock to a Cayman Islands Corporation he purported to own . . . . In light of [this transfer], plaintiff also requested that Citicorp take action with respect to the possibility that Alwaleed was acting on behalf of others in connection with his purported purchase of the Citicorp convertible shares. . . .

 (Amended Complaint P 17 (emphasis added).) Accordingly, the amended complaint clearly alleges that a demand was made for the § 16(b) claim involving the 1992 transaction. The issue is whether the underscored language alleges with sufficient particularity that a demand was made upon the Citicorp board for the claims arising out of Alwaleed's 1991 transaction involving the preferred stock.

 In deciding this issue, the well-pleaded allegations of the complaint are accepted as true. See Grobow v. Perot, 539 A.2d 180, 186 (Del. Supr. 1988). Rule 23.1 *fn3" is not the source of the demand requirement but, rather is the procedural manifestation of the state law of corporate governance regarding the right of a shareholder to bring a derivative suit on behalf of a corporation. See RCM Sec. Fund v. Stanton, 928 F.2d 1318, 1329 (2d Cir. 1991); Levine v. Smith, 591 A.2d 194, 200 (Del. Supr. 1991). The substantive requirements of demand are governed by the law of the state of incorporation, in this case Delaware. See Stoner, 772 F. Supp. at 795-96 (citing RCM, 928 F.2d at 1329).

 The demand requirement is based on the "bedrock" principle of Delaware corporate governance law that "the directors of a corporation and not its shareholders manage the business and affairs of the corporation." Levine, 591 A.2d at 200. Consequently, a plaintiff's "pleading burden under Rule 23.1 is also more onerous than that required to withstand a Rule 12(b)(6) motion to dismiss. Id.4 Under Rule 23.1, "conclusory 'allegations of fact or law [that are] ...


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