The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
Master File No. 1:11-2275 (SAS)
This consolidated putative class action, which concerns only state law claims, is part of a larger multi-district litigation.*fn1 It arises out of plaintiffs' investments in the various Stillwater Funds*fn2 and Stillwater's*fn3 merger agreement with Gerova Financial Group, Ltd. ("Gerova"). Plaintiffs' amended complaint alleges, inter alia, breach of fiduciary duty; aiding and abetting breach of fiduciary duty; and breach of contract claims against SCP, Gerova, Net Five Holdings, LLC ("Net Five"), and various officers and directors of those companies. Defendants now move to dismiss all state law claims.Defendants advance three primary arguments in their motions to dismiss:*fn4 first, that the breach of fiduciary duty claims are derivative and therefore plaintiffs lack standing to bring them directly; second, that the claims are precluded by the Securities Litigation Uniform Standards Act ("SLUSA"); and third, that a corporation does not owe a fiduciary duty to its shareholders. For the following reasons the motions of SCP, Gerova, and the individual SCP and Gerova defendants are granted in part and denied in part, and the claim against Net Five is dismissed.
The proposed class consists of those SCP investors who received restricted, unregistered Gerova shares as part of the SCP/Gerova merger*fn6 and SCP investors who sought redemption of their SCP funds, but were not paid in full prior to the SCP/Gerova merger.*fn7
There are ten named defendants in this action. SCP, Inc., is a New York corporation that acts as investment manager for the Stillwater Funds,*fn8 and
SCP, LLC, is a Delaware limited liability company that manages the business affairs of the Stillwater Funds.*fn9 Jack Doueck is a principal of SCP and sits on an investment committee that manages the Stillwater Funds under Gerova's control.*fn10
He became a director of Gerova as part of the merger with SCP.*fn11 Richard Rudy is a principal of SCP and sits on the investment committee with Doueck.*fn12 Plaintiffs allege the same six breach of fiduciary duty claims against each of these defendants: (1) imprudently investing assets and failing to properly value them; (2) failing to sell assets in a timely manner; (3) failing to pay redemptions; (4) failing to perform due diligence on Gerova prior to the merger; (5) entering into the Gerova agreement whereby SCP directors received a lucrative contract at plaintiffs' expense; and (6) failing to submit audits to Gerova so the shares could be registered (Counts I-VI).*fn13
Gerova, was a "blank check company" formerly known as Asia Special Situation Acquisition Corporation, which formed in March 2007.*fn14 The name was officially changed to Gerova in connection with its merger with SCP in 2009.*fn15 Gerova's principal offices are in Hamilton, Bermuda.*fn16 Gary Hirst was a founding director of Gerova and was appointed its president in October 2007; he resigned on February 10, 2011.*fn17 Michael Hlavsa has served as Chief Financial Officer ("CFO") and a director of Gerova since March 2007.*fn18 Keith Laslop was a Gerova director from May 2008 until his resignation on February 10, 2011. He also served as Gerova's Chief Operating Officer ("COO") during part of that time.*fn19 Joseph Bianco served as Gerova's Chief Executive Officer ("CEO") from at least April 17, 2010 until his resignation on February 10, 2011.*fn20 Plaintiffs allege the same three breach of fiduciary duty claims against each of these defendants: (1) failing to register plaintiffs' shares; (2) allowing its assets to deteriorate; and (3) transferring substantial assets to Net Five (Counts VII-IX). Plaintiffs also allege an aiding and abetting breach of fiduciary duty claim against Gerova, Hirst and Hlavsa (Count X), and a breach of contract claim against Gerova (Count XI).
Net Five was formed as a real estate joint venture between Gerova and two other non-parties; it is based in Florida.*fn21 Plaintiffs allege an aiding and abetting breach of fiduciary duty claim against Net Five (Count XII).
C. Stillwater Funds Management and the Gerova Merger
Plaintiffs were investors in the Stillwater Funds, which were managed
by SCP and contained "overvalued troubled assets."*fn22
As investors sought to redeem their funds, the Stillwater
Funds experienced liquidity issues and SCP was unable to pay out the
redemptions.*fn23 In an attempt to solve the
illiquidity of their assets, SCP sought a merger with
As part of the merger agreement, Gerova acquired all of SCP's assets
and liabilities.*fn25 The investor plaintiffs received
"restricted convertible Preferred Stock of Gerova"*fn26
and those who sought redemptions were to be paid by
Gerova.*fn27 As part of the merger, SCP received
266,667 Gerova ordinary shares, approximately $12 million in
cash,*fn28 and the SCP directors - including Doueck
and Rudy - received $24 million in unpaid management fees*fn29
management fees going forward.*fn30 Doueck became a
Gerova director as part of the merger,*fn31 and both
he and Rudy sat on a three-person "investment committee"; the third
person was appointed by Gerova.*fn32 Plaintiffs allege
that this merger was not only ill-advised, but that Doueck entered
into it "for his own benefit, without even performing any due
diligence"*fn33 and that it was done at plaintiffs'
Plaintiffs fared no better after the merger. Even though the Amended
Registration Rights Agreement ("Am. RRA") required Gerova to register
Plaintiffs' shares, the shares were never registered*fn35
and plaintiffs' redemption requests were not
honored.*fn36 Because of this, plaintiffs argue that
they have been forced to "hold virtually worthless restricted shares,"
which have "declined more than 77 percent" in value.*fn37
Plaintiffs allege that life insurance settlement
and corporate loans defaulted as a result of Gerova's failure to pay
adding to the devaluation of Gerova assets. On May 26, 2010, Gerova
formed Net Five as part of a real estate joint venture with two
non-parties.*fn39 Under that agreement, Gerova
transferred "all of the owned real estate properties and real estate
loan assets acquired from the Stillwater Funds" to Net
received a 49 percent equity interest in the joint
Between January 20, 2010 and February 15, 2011, Gerova experienced high management turnover, including three different CEOs during that time.*fn42 On February 24, 2011, the New York Stock Exchange ("NYSE") ceased trading of Gerova stock and Gerova securities were delisted on April 18, 2011.*fn43
Gerova terminated its stock registration on June 15, 2011.*fn44
SCP and Gerova are in negotiations to unwind the SCP/Gerova
merger,*fn45 however plaintiffs assert that
will not allow SCP to recoup all the assets that it originally
contributed to Gerova.