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Smith v. Stevens

United States District Court, S.D. New York

August 1, 2013

RENEE SMITH, Derivatively on Behalf of Herself and All Others Similarly Situated, Plaintiff,
v.
ROBERT STEVENS, BRUCE TANNER, E.C. "PETE" ALDRIDGE, JR., NOLAN D. ARCHIBALD, DAVID B. BURRITT, JAMES O. ELLIS, JR., THOMAS J. FALK, GWENDOLYN S. KING, JAMES M. LOY, DOUGLAS H. McCORKINDALE, JOSEPH W. RALSTON, FRANK SAVAGE, JAMES M. SCHNEIDER, ANNE STEVENS, and JAMES R. UKROPINA, Defendants, and LOCKHEED MARTIN CORPORATION, Nominal Defendant

Decided: July 30, 2013.

Page 467

For Renee Smith, Individually, Renee Smith, on behalf of all those similarly situated, Plaintiffs: Brian C. Kerr, LEAD ATTORNEY, Brower Piven, A Professional Corporation, New York, NY; Ex Kanos S Sams, II, PRO HAC VICE, Glancy Binkow & Goldberg, LLP (CA), Los Angeles, CA; Lionel Z. Glancy, PRO HAC VICE, Glancy & Binkow Goldberg LLP, Los Angeles, CA; Patrick W Powers, Peyton J Healey, PRO HAC VICE, POWERS TAYLOR LLP, Dallas, TX.

For Robert Stevens, Bruce Tanner, E.C. " Pete" Aldridge, Jr., Nolan D. Archibald, David B. Burritt, James O. Ellis, Jr., Thomas J. Falk, Gwendolyn S. King, James M. Loy, Douglas M. McCorkindale, Joseph W. Ralston, Frank Savage, James M. Schneider, Anne Stevens, James R. Ukropina, Lockheed Martin Corporation, Defendants: James D. Wareham, PRO HAC VICE, DLA Piper U.S. LLP(DC), Washington, DC; John Michael Hillebrecht, DLA Piper U.S. LLP (NY), New York, NY.

OPINION

Page 468

MEMORANDUM ORDER

JED S. RAKOFF, U.S.D.J.

By " bottom-line" Order dated October 12, 2012, the Court, after full consideration of the parties' briefing and oral argument, granted defendants' motion to dismiss the amended complaint in the above-captioned case pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1(b). This Memorandum Order explains that ruling and directs the entry of final judgment.

This case is a shareholder derivative suit brought initially by Renee Smith but now by Duane Howell against certain of the directors and officers of Lockheed Martin Corporation (" Lockheed Martin" ).[1] The initial complaint relied heavily on factual allegations then sub judice in this Court as part of the City of Pontiac General Emp's Retirement Syst. v. Lockheed Martin et al. securities class action, Case No. 11 Civ. 5026 (JSR), which has since settled. Plaintiff's amended complaint added the allegation that " [f]or years, Lockheed has engaged in a pattern and practice of violating the law by submitting false claims and invoices to the United States related to government contracts." Am. Compl., ECF No. 18, P 3. Ultimately, the amended complaint alleged six causes of action: two allege breaches of fiduciary duty arising from the defendants' " disseminating false and misleading information" and " failing to properly oversee and manage the company" ; a count premised on " gross mismanagement" ; a claim for contribution and indemnification; a claim alleging abuse of

Page 469

control; and a claim alleging waste of corporate assets. Id. at 61-65.

Federal Rule of Civil Procedure 23.1(b)(1) requires this derivative plaintiff to allege that he owned stock in the corporation he sues throughout the period of alleged wrongful conduct. See Fed.R.Civ.P. 23.1(b)(1) (the complaint must " allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law." ). Similarly, under Maryland law (Lockheed Martin is incorporated in Maryland, Am. Compl. P 11), the " contemporaneous ownership rule" provides that a shareholder does not have standing to recover against directors for acts that took place before the shareholder acquired his interest in the company. Danielewicz v. Arnold, 137 Md.App. 601, 769 A.2d 274, 281 (Md. Ct. Spec. App. 2001) (" This principle, referred to as the contemporaneous ownership rule, provides that 'a shareholder does not have standing to recover against directors for acts which took place prior to the shareholder becoming a shareholder.'" ). The contemporaneous ownership requirement serves two related purposes: it prevents aspiring derivative plaintiffs from acquiring the right to sue by purchasing stock, and it ensures that derivative actions are brought by shareholders who have actually suffered injury and thus have a genuine interest in the outcome of the case. See Silverstein ex rel. Tetragon Fin. Group v. Knief, 843 F.Supp.2d 441, 445 (S.D.N.Y. 2012).

It is the law of this Circuit that a derivative plaintiff cannot evade the contemporaneous ownership rule by alleging that he owned a share at some point during the period of alleged wrongful conduct -- he must have owned shares throughout the period of the wrongful conduct alleged in the complaint. See id. at 445 (" the Second Circuit, while rejecting the continuing wrong doctrine adopted by some other courts, has held that, in order to comply with Rule 23.1(b)(1), derivative plaintiffs must 'have owned stock in the corporation throughout the course of activities that constitute the primary basis of the complaint.'" ) (emphasis in the original).

Notwithstanding these well-settled procedural requirements, the amended complaint avers only that the plaintiff was a shareholder during a " Relevant Period." Am. Compl. P 10. Though capitalized, " Relevant Period" is not a defined term in the amended complaint, and the amended complaint pleads no dates of plaintiff's share ownership whatsoever, much less any ...


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