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Foster Rich v. Ralph W. Shrader

September 22, 2011


The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. District Judge


Now before the Court is a motion to dismiss Plaintiff Foster Rich's Second Amended Complaint ("SAC") for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The Court submitted the motion on the written briefs pursuant to Local Civil Rule 7.1(d)(1). See Order Granting in Part and Denying in Part Joint Motion at 2 ¶ (iii). [Doc. No. 40] For the reasons stated below, the Court GRANTS IN PART AND DENIES IN PART the Defendants' motion. [Doc. No. 48] The Court concludes that Plaintiff has not alleged plausible facts to state a claim for relief under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Employee Retirement Income Security Act ("ERISA"), and the Securities Exchange Act of 1934. Although Plaintiff's contract and tort claims appear to be time barred, he has alleged sufficient facts to invoke the delayed discovery rule, and therefore, these two state law claims survive.

I. Background

A. Factual Allegations

Defendant Booz Allen Hamilton, Inc. (hereinafter "Booz Allen" or "BAH") hired Plaintiff in 1987. SAC ¶ 449. Booz Allen is a consulting firm with both commercial and government divisions. Plaintiff planned to work at Booz Allen for twenty years. Id. ¶ 449. As a senior executive with military connections, Plaintiff handled the Warbreaker program in 1992-1993. Id. ¶¶ 77, 427.

In September 2003, Booz Allen evaluated Plaintiff's job performance. Defendant Ralph Shrader (Chairman and Chief Executive Officer) allegedly falsely attacked Plaintiff's performance on the Warbreaker program. The written assessment found that Plaintiff was "[n]ot on track" and recommended that he retire within two years. Id. ¶ 81. In October 2004, Plaintiff was informed that the "termination might be reversed." Id. ¶ 448. Nonetheless, he retired in March 2005.

At the time of his retirement, Plaintiff owned 30,500 shares of Booz Allen stock. Id. ¶ 5. Booz Allen shares were not traded on a public market, rather, the outstanding shares were owned by 280 shareholders, who could only sell their shares back to Booz Allen. Plaintiff had purchased his 30,500 shares throughout his tenure as an executive pursuant to the Officers' Stock Rights Plan (hereinafter "Stock Plan"). The Stock Plan provided, in part:

In the event an Officer ceases to be an employee of the Company or its subsidiaries by virtue of retirement, death, or disability, the Company shall have the right, exercisable at any time following the expiration of 24 months from such event, to purchase all or any portion of the Common Stock held by Officer (or the Officer's estate) at the Repurchase Price in effect at the date of exercise of the Company's right.

Defs.' Ex. B, ¶ 7(b) (approved in 1988); Defs.' Ex. A ¶ 10 (as amended in 2006). Two years after Plaintiff retired, in March 2007, Booz Allen exercised its right and repurchased Plaintiff's stock at book value ($148 per share, for a total of approximately $4.5 million). SAC ¶¶ 90, 432.

In May 2008, Booz Allen entered a contract to sell its government division to the Carlyle Group in a leveraged buyout. Id. ¶ 215; see Bence Decl. Ex. 2. The deal closed on July 31, 2008. SAC ¶ 299. Outstanding shares were repurchased at $794 per share -- significantly higher than the book value. Id. ¶¶ 103, 432. Plaintiff consulted with colleagues and concluded that he had been forced to retire as part of an overall plan to deny him the opportunity to profit from the sale of the government division to a private equity firm.*fn1

Plaintiff seeks the $21 million he would have received for his accumulated stock had he been an employee of Booz Allen for three more years and been able to sell his shares to Carlyle for the higher price. He alleges that had Booz Allen told him it was going to split up the company and sell the government division, he would not have retired in March 2005, but would have waited until after the deal closed in July 2008. By that time, he would have earned $4.5 in compensation and an additional 3,000 shares of stock. Id. ¶¶ 431, 450. His damages total $30 million. Id. ¶ 450.

Plaintiff alleges that Shrader, with his close associates, Defendants C.G. Appleby, Samuel R. Strickland, Joseph E. Garner, and Dennis Doughty, engineered a secret plan to split Booz Allen into two divisions, to take control of the company, and to capture the excess market value. Plaintiff believes that his "dishonest and corrupt review of his job performance" in 2003 was part of this "vast illegal scheme." Pl.'s Opp. Br. at 1. Because Booz Allen re-purchased the shares of its former executives at book value, the hidden plan ensured that Shrader's group benefitted financially when the company was split up and sold to Carlyle in 2008. The steps that Shrader took included (1) misleading the executives that Booz Allen would be "Always Owned by the Partners," that is, the senior executives of the corporation, while simultaneously planning to split off the commercial division to sell to a private equity firm as a publicly traded company; (2) eliminating the voting control of the commercial division and sabotaging its ability to make a profit; (3) modifying the Stock Plan to ensure Shrader, as CEO, controlled the vote; (4) forcing a dozen or more senior executives to retire early so that Booz Allen would re-purchase their shares, thereby ensuring enormous profits for the remaining shareholders; and (5) fixing the bidding process to discourage a competitor (SAIC, Inc.) from buying the government division and to allow Carlyle to buy it "at half price." Pl.'s Opp. Br. at 1; SAC ¶¶ 24-321.

B. Procedural History

Plaintiff filed his original complaint on April 1, 2009, however, after informal discussions with defense counsel, Plaintiff filed a First Amended Complaint ("FAC") on December 8, 2009. Defendants moved to dismiss the 122-page pleading. The Honorable Michael M. Anello granted the motion. Order Granting Defendants' Motion to Dismiss (hereinafter "Order"). [Doc. No. 36] The Court described the FAC as a compilation of "rambling speculations" and found numerous flaws in the claims alleged. Order at 1.

The Court dismissed with prejudice three claims brought pursuant to Delaware law because the Delaware Supreme Court had dismissed similar claims in a parallel lawsuit and Plaintiff conceded that the decision applied to his state law claims. Id. at 11 & 14 (breach of fiduciary duty), 13-14 (breach of implied covenant of good faith and fair dealing), 14-15 (unjust enrichment). The Delaware Supreme Court held that all shareholders -- including the working stockholders -- benefitted equally from the sale to Carlyle; Booz Allen had an absolute right to repurchase the stock of retired executives at the most advantageous time; the Stock Plan established the date of the repurchase (two years after retirement) and the price to be paid (book value); and the retired executives were not entitled to special treatment or favoritism. Nemec, 991 A.2d at 1127-30.

Given the five-year gap between the recommendation that Plaintiff retire and the Carlyle transaction, the face of the FAC revealed problems with the statutes of limitations. Order at 6-8 (breach of employment contract), 12 (tortious interference with contract); see also id. at 12, 22, 25, 33-35 (noting remote and tenuous connection between alleged wrongdoing and injury). In addition, Plaintiff conceded that he had elected to retire in March 2005 when given the opportunity to remain employed, and his voluntary action broke the causal connection between the alleged wrongdoing and his alleged injuries. Id. at 9-10 (breach of contract), 12 (tortious interference with contract).

The Court dismissed the RICO claims because Plaintiff failed to plead conduct that amounted to "racketeering"; failed to allege a plausible scheme to defraud; relied on securities fraud as a predicate act; sought damages that were not recoverable; and did not show his injuries were proximately caused by the alleged RICO violations. Id. at 15-26.

The Court dismissed the federal and state securities fraud claim because Plaintiff could not establish that Defendants had a duty to disclose non-material information about the future. Id. at 26-32 & 34-35. Finally, Plaintiff's conclusory factual allegations did not create a strong inference that Defendants acted with the intent to defraud. Id. at 32-34.

Despite its reservations that Plaintiff could plead a plausible theory for relief, the Court allowed "Plaintiff one final opportunity to amend his complaint as to the principal defendants." Id. at 36. The Court, however, dismissed the eighteen directors who were not mentioned in the FAC.*fn2 Id. at 36-37 & n.14. The Court also denied a motion for reconsideration and clarification. [Doc. No. 45] The case was then transferred to this Court's docket.

Plaintiff Foster Rich's SAC alleges claims for racketeering in violation of the federal RICO statute, interference with pension rights in violation of the federal ERISA statute, and securities fraud as well as breach of contract and tortious interference with contract claims. [Doc. No. 38]

II. Standards

A. Motion to Dismiss

A complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.

"Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. Conclusory allegations of law and unwarranted inferences will not defeat a motion to dismiss for failure to state a claim. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008) ("We need not accept as true conclusory allegations that are contradicted by documents referred to in the complaint."). "While legal conclusion can provide the framework of a complaint, they must be supported by factual allegations." Iqbal, 129 S. Ct. at 1950; Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003) ("We do not necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations.") (alterations in quotation and citation omitted).

When the complaint is based upon fraud, the circumstances "shall be stated with particularity." Fed. R. Civ. P. 9(b); Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).

A court may deny leave to amend when "the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).

B. Documents Outside the Complaint

As a general rule, the court "may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion." Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (internal citation and quotation marks omitted). The court may, however, consider materials that are submitted with and attached to the complaint, as well as unattached evidence on which the complaint "necessarily relies" if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the document. Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006); Lee, 250 F.3d at 688.

As in the first motion, Defendants submit the Officers' Stock Rights Plan. Giltner Decl., Exs. A- B. (There are two versions, but parties have not identified any material differences between the Plan that was approved in 1998 and version amended in 2006.) The Stock Plan is integral to Plaintiff's claims, therefore, the Court considers it as being incorporated by reference. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003).

In addition, Defendants submitted the "2003 Swenson Memo" that Plaintiff describes in the SAC. Giltner Decl. Ex. C. Both parties rely on the Memo in their briefs. Accordingly, the Court deems the Memo incorporated by reference into the complaint. Ritchie, 342 F.3d at 907-08.

Plaintiff submitted three outside documents. Bence Decl. Exs. 1-3. Plaintiff first submits a list of the 280 Booz Allen shareholders as of February 15, 2006. Id. Ex. 1. The second attachment is one page of the prospectus that Booz Allen filed with the Securities and Exchange Commission in 2010. It describes the acquisition of the government consulting business by the Carlyle Group. See SAC ¶¶ 294-95. The final exhibit is from the parallel case filed by other retired employees in the Southern District of New York. Plaintiff attaches the motion to dismiss that the same defendants in this action filed in that related case. Defendants do not object to Plaintiff's three documents and the existence of these external documents appears to be suitable for judicial notice. Fed. R. Evid. 201; Lee, 250 F.3d at 689-90 (taking judicial notice of existence of "matters of public record," but not of facts contained in the document that may be "subject to reasonable dispute").

C. Allegations Omitted from SAC

In several instances, Judge Anello dismissed claims in the FAC because Plaintiff's complaint contained inconsistent and self-defeating allegations of fact. E.g., Order at 7 (dismissing contract claim as barred by statute of limitations because Plaintiff alleged he knew of breach at time it occurred); id. at 9, 12, & 25 (Plaintiff's allegation that he voluntarily retired after rejecting an offer to be reinstated broke the causal chain to his alleged damages); id. at 29 (Plaintiff's characterization of a partnership was inconsistent with fact that Booz Allen was a ...

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