United States District Court, S.D. California
IN RE BofI HOLDING, INC. SHAREHOLDER LITIGATION
ORDER: (1) GRANTING DEFENDANTS' MOTION TO DISMISS
[DKT. NO. 41] (2) GRANTING DEFENDANTS' MOTION TO SEAL
[DKT. NO. 48] (3) GRANTING PLAINTIFFS' MOTIONS TO SEAL
[DKT. NOS. 42 & 50]
GONZALO P. CURIEL UNITED STATES DISTRICT JUDGE.
the Court is Defendants' motion to dismiss the
Consolidated Verified Shareholder Derivative
Complaint (the “CSC”), Dkt. Nos. 36
& 38, filed by Bof I shareholders Andrew Calcaterra,
Robylee Doherty, and Zhang Yong. Dkt. No. 41. The motion has
been fully briefed. See Dkt. Nos. 43 & 47. The
parties' various motions to file documents, submitted
with their briefs, under seal are also before the Court.
See Dkt. Nos. 42, 48, & 50.
facts of this case are familiar to the Court. The events and
allegations that precipitated this shareholder litigation
dispute are similar in kind and in substance to those that
underlay In re: Bof I Holding, Inc. Sec. Litig., No.
3:15-cv-02324-GPC-KSC (S.D. Cal.) (filed Oct. 10, 2015), a
related class action securities fraud suit.Notwithstanding
these parallels, however, the nature of this suit is
distinct. The instant matter is a shareholder derivative
suit, brought by stockholders of Bof I Holding, Inc., on
behalf of the company, against all nine members of Bof
I's Board of Directors and various other company officers.
Through this suit, Plaintiffs seek to protect Bof I and to
recover against the directors and officers who have allegedly
caused damage to the company. See Response, Dkt. No.
43 at 11. Defendants, in response, argue that Plaintiffs lack
standing to bring this shareholder derivative suit because
they have failed to plead demand futility as to a majority of
Bof I's Board of Directors. See MTD, Dkt. No.
41-1 at 6-7.
is no dispute that Plaintiffs did not make a demand upon the
Board, requesting that the Board respond to the misconduct
alleged herein, before filing the present suit. CSC ¶
142. Thus, the key issue for this Court is whether or not
Plaintiffs' failure to make a demand on the Board is
rightfully excused under the Federal Rules of Civil
Procedure. See Fed. R. Civ. P. 23.1(b)(3).
Defendant Bof I Holding, Inc. (“Bof I”), through
Bof I Federal Bank, provides online consumer and business
banking products. CSC ¶¶ 2, 14. Its deposit
products include consumer and business checking, demand,
savings and time deposit accounts, and its loan portfolio
primarily consists of residential single family and
multifamily mortgage loans, commercial real estate secures
and commercial lending products, finance factoring products,
and other consumer lending products. Id. ¶ 2.
Of chief importance to Bof I Federal Bank is its practice of
providing mortgages to high-net-worth individuals for the
purchase of high-end properties. Id. ¶ 3.
nine-member Board of Directors (“the Board”)
manages Bof I. See Id. ¶ 29. Those individuals
include: Theodore C. Allrich, Chairman of the Board and a
member of the Board's Compensation Committee; James S.
Argalas, member of the Board's Audit Committee and member
of the Company's Internal Asset Review Committee; John
Gary Burke, member of the Board's Compensation Committee
and Chairman of the Internal Assets Review Committee of the
Board; James J. Court; Uzair Dada; Gregory Garrabrants, Bof
I's CEO, President, and Director; Paul J. Grinberg,
member of the Board's Compensation Committee and member
of the Board's Audit Committee; Nicholas A. Mosich, Vice
President of the Board and member of the Board's Audit
Committee; and Edward J. Ratinoff, member of the Nominating
Committee. Id. ¶¶ 15, 17, 18, 19, 20, 21,
22, 23, 26. Every member of the Board is named as a Defendant
(hereafter referred to as the “Director
Defendants”). Id. ¶ 29. The other named
Defendants are Eshel Bar-Adon, Executive Vice President and
Chief Legal Officer of Bof I; Andrew J. Micheletti, Executive
Vice President and Chief Financial Officer, John C. Tolla,
Chief Governance and Compliance Officer; and Derrick K.
Walsh, Chief Accounting Officer and Senior Vice President.
Id. ¶¶ 16, 24, 25, 27.
October 2015, Charles Matthew Erhart, a former Bof I internal
auditor who allegedly raised compliance issues to senior
management and federal regulators, id. ¶ 5,
filed a whistleblower action against Bof I. See
Erhart v. Bof I Holding, Inc., Case No. 15- cv-2287-BAS-NLS
(S.D. Cal.) (filed Oct. 13, 2015). The whistleblower
complaint alleged widespread wrongdoing at Bof I. For
example, Erhart alleged that senior officers at the company
had instructed him to “refrain from putting anything in
writing regarding the Company's violations of laws”
and to “label anything he did in his audit function
which might be incriminating as “attorney work
product/communication.” CSC ¶ 5. Other allegations
faulted Bof I for borrowing to foreign nationals “who
should have been off-limits under anti-money laundering laws,
” for keeping accounts without tax identification
numbers “contrary to Bof I's representations to the
Office of the Comptroller of the Currency
(“OCC”), ” and for otherwise failing to
provide “full and timely information to
revelation of these and other allegations included in
Erhart's complaint caused Bof I's shares to fall by
30.2%, or by $42.87, to $99.13 by the close of business on
October 14, 2015. Id. ¶ 6. As mentioned above,
the accusations aired in the complaint have also led to a
class action lawsuit for securities fraud. See In re
Bof I Holding, Inc. Sec. Litig., 3:15-cv-02324-GPC-KSC (S.D.
Cal.) (filed October 15, 2015).
response to these and other allegations, Plaintiffs, all of
whom held Bof I stock during the relevant period, brought
this derivative action. They allege that from February 6, 2013
to the present, Bof I's officers engaged in misconduct by
causing Bof I to issue false or misleading statements about
the company's condition and/or by failing to disclose
that: (1) Bof I's internal controls were inadequate and
“frequently disregarded”; (2) that Bof I's
portfolio contains loans to foreign nationals who are
off-limits because of federal anti-money laundering laws; (3)
that many of Bof I's accounts lacked tax identification
numbers; and (4) that Defendants violated the
anti-retaliation laws of the Sarbanes-Oxley Act of 2002
(“SOX”) and the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”) by
allegedly firing Erhart in retaliation for his
whistleblowing. See CSC ¶¶ 1, 5, 11, 12,
on these representations of wrongdoing, Plaintiffs assert
three claims against all the Defendants, namely, (1) breach
of fiduciary duties, (2) abuse of control, (3) unjust
enrichment, and one claim, (4) breach of duty of honest
services, against Defendants Garrabrants, Micheletti,
Bar-Adon, Tolla, and Walsh only. Id. ¶¶
stated previously, Plaintiffs did not make a demand on Bof
I's Board of Directors before filing suit, urging them to
institute this action against the individual Defendants. CSC
¶ 143. Plaintiffs allege that making such a demand would
have been futile because a majority of the Board of Directors
lacks independence or faces a substantial likelihood of
liability for their misconduct, thus rendering them incapable
of fairly considering a demand. See id.
General Board Allegations
following are demand futility allegations lodged against the
Board of Directors as a whole.
Dismissal of Erhart
avers that the entire Board is compromised, and therefore was
unable to impartially consider a demand at the time of filing
the complaint, because they all face a substantial likelihood
of liability for retaliating against Erhart in violation of
SOX. Id. ¶¶ 149-59. Plaintiffs contend
that the entire Board is responsible for violating SOX
because it authorized and approved the firing of Erhart on
June 9, 2015 with full knowledge of Erhart's protected
status as a whistleblower. Id. ¶ 157.
“All Board members thus face a substantial likelihood
of liability for breaching their fiduciary duties by causing
the Company to violate the anti-retaliation provisions of
Sarbanes-Oxley, Dodd-Frank, and other laws.”
Id. ¶ 158. In addition, Plaintiffs argue, the
Board also faces a substantial likelihood of liability for
failing to act in the face of the unlawful activities alleged
by Erhart. Id. ¶ 159.
149 through 158 of the CSC discuss the circumstances leading
to the alleged termination of Erhart, and together they
narrate the following sequence of events.
“in the course of performing his duties as Bof I's
Staff Internal Auditor, ” realized and reported that
certain Bof I senior officers, including Director Defendant
Garrabrants, Defendant Bar-Adon, and Defendant Tolla, had
violated securities and other laws. CSC ¶¶ 77, 149. At
some point, he informed those three officers of his
“good-faith whistleblower complaint, ” but
Garrabrants, Bar-Adon, and Tolla each “brushed
aside” his concerns. Id. ¶¶ 149-50.
As a result, Erhart “lodged his complaints with the OCC
and SEC.” Id. ¶ 150. He also filed a
complaint with OSHA recounting the unlawful activities he had
witnessed and the retaliation he was facing for having spoken
out. See Id. ¶ 151.
news of Erhart's allegations and audit findings were
climbing through the company's chain of command. In
mid-December 2014, Jonathan Ball, the Vice President of
Internal Audit (id. ¶ 61), drafted an
evaluation of Erhart's job performance. Id.
¶ 152. That performance was later revised by Tolla, who
“downgraded Erhart's performance in retaliation for
his whistleblowing activities.” Id. Ball, who
was troubled by Tolla's actions, “directly advised
the Audit Committee about Tolla's downgrading of
Erhart's performance evaluation.” Id.
Allegedly, however, the Audit Committee did not correct
Tolla's conduct and, in fact, approved of it.
Id. (“Upon information and belief, the Audit
Committee ratified and approved the retaliation against
Erhart by failing to instruct Tolla to restore Erhart's
performance grade to the level determined by Ball.”)
later, on March 12, 2015, Erhart was approached by Bar-Adon
who said that he sought to speak with Erhart in his capacity
as “General Counsel to the Audit Committee.”
Id. ¶ 153. Based upon this encounter,
Plaintiffs allege that the Audit Committee had
“directed Bar-Adon to meet with Erhart regarding such
activities” and, therefore, “had actual knowledge
of Erhart's whistleblowing complaints.”
the Audit Committee met in San Diego for a formal meeting on
April 27, 2015. Id. ¶ 155. Grinberg, Argalas,
and Mosich, the three Audit Committee members, were all
present at the meeting, along with Micheletti, Bar-Adon,
Tolla, Tony de la Mora, Interim FVP of Internal Audit, and
other company auditors. Id. At the meeting,
Plaintiffs allege that Grinberg presented to the Audit
Committee all complaints received by him as Chair of the
Audit Committee. Id. They further allege that
“[u]pon information and belief, Grinberg advised the
other Audit Committee members about Erhart's
number of weeks later, on May 21, 2015, the entire Board of
Directors convened, with all nine members present.
Id. ¶ 156. According to Bof I's 2015 proxy
statement, the Audit Committee “reports to the full
Board at regular meetings concerning the activities of the
committee and actions taken by the committee since the last
regular meeting.” Id. ¶ 154. Plaintiffs
allege that on May 21, 2015 Grinberg “presented a
report to the full Board from the Audit Committee, which
report upon information and belief included all details
regarding Erhart's complaints and the fact that Erhart
had claimed whistleblower protection. The Board also met in
Executive Session to discuss Erhart's complaints and
other matters.” Id. ¶ 156.
go on to state that three weeks after the May 21, 2015 Board
meeting, and in spite of having “actual knowledge of
Erhart's whistleblowing activity, and despite knowing
that Dodd-Frank, Sarbanes-Oxley, and other laws prohibit
retaliation against employees who report alleged wrongdoing,
the Board authorized and approved the firing of Erhart on
June 9, 2015.” Id. ¶ 157
False and Misleading Statements
further argue that: (1) “no reasonable stockholder
would reasonably believe that a majority of the members of
the Board would be able to independently and properly
consider a demand in good faith” because the Board
violated their fiduciary obligations by approving and signing
the company's SEC filings containing false and misleading
statements. Id. ¶ 161. Specifically, the CSC
avers that the entire Board wrongly approved and signed the
Form 10-Ks dated September 4, 2013, August 28, 2014, and
August 26, 2015, all of which contained false and misleading
statements about Bof I's compliance with securities and
other laws. See id.
Compensation & Participation in Mortgage-lending
also alleges that the Director Defendants are interested for
purposes of demand futility because they “are more
interested in protecting themselves than they are in
protecting the Company by bringing this action.”
Id. ¶ 164.
support of this allegation, Plaintiffs offer each Board
member's compensation for fiscal year 2015: Garrabrants,
$6, 310, 485; Allrich, $514, 598; Argalas, $188, 210; Court,
$188, 210; Dada, $85, 061; Grinberg, $281, 133; Mosich, $253,
970; and Ratinoff, $188, 210. Id. In further support
of this position, the CSC contends that the independence of
Allrich, Argalas, Burke, Garrabrants, Grinberg, and Mosich is
further compromised by the fact that each obtained a mortgage
on their primary residence at below market interest rates
through participation in Bof I's mortgage-lending
program, which is made available to Bof I's directors,
officers, and employees. Id. ¶ 165. “As
such, Allrich, Argalas, Burke, Garrabrants, Grinberg, and
Mosich are more interested in maintaining their lucrative
positions at Bof I than they are in protecting Bof I by
bringing this action.” Id.
Individual Board Member Allegations
furtherance of pleading demand futility, the CSC lodges a
variety of individual demand futility allegations against
specific Board members based upon their roles or conduct at
CSC's demand futility allegations contend that
Garrabrants, notwithstanding any allegations attributed to
the Board, independently lacks independence. Id.
Plaintiffs argue, lacks independence because he
“prepared, signed, or caused the Company to issue many
of the false and misleading statements” that Plaintiffs
cite in the CSC. Id. In particular, Plaintiffs note
that Garrabrants signed the company's SEC filings, all of
which allegedly contained false and misleading statements,
including: the Forms 10-K dated September 3, 2013, August 28,
2014, and August 26, 2015, and the Forms 10-Q dated November
5, 2013, February 5, 2014, May 6, 2014, November 4, 2014,
January 29, 2015, and April 30, 2015. Id. ¶
addition, Plaintiffs allege that making demand upon
Garrabrants would have been futile because he faces a
substantial likelihood of liability for his misconduct.
Garrabrants, they contend, is “a named defendant in the
currently-pending federal class actions, alleging he violated
§ 10(b) of the Exchange Act and Rule 10b-5 when he
disseminated or approved the false and misleading
statements.” Id. ¶ 145. Thus, because
“pursu[ing] these derivative claims . . . would expose
his own misconduct in the class action for violations of the
federal securities laws . . . Garrabrants is fatally
conflicted and, therefore, unable to render a disinterested
decision as to whether the Company should pursue these
derivative claims.” Id. ¶ 146.
another fact demonstrating the likelihood that Garrabrants
will face liability for his conduct, they argue, is the fact
that “Garrabrants also participated in conference calls
with analysts and investors during the Relevant Period . . .
[and] therefore faces a substantial likelihood of liability
for breaching his fiduciary duties.” Id.
Audit Committee Members (Argalas, Grinberg, Mosich)
singles out Argalas, Grinberg, and Mosich as particularly
lacking in independence or likely to face a substantial
likelihood of liability because of their conduct and duties
as Audit Committee members. Plaintiffs contend that the Audit
Committee defendants “had a clear duty to be kept
informed about the Company's accounting procedures,
” but failed to do so by reviewing and approving Bof
I's SEC filings that contained false and misleading
statements. Id. ¶ 163.
argue that Grinberg additionally lacked independence to
consider a shareholder demand because he “breached his
fiduciary duty by failing to disclose a related party
transaction between Bof I and his employer Encore
Capital.” Id. ¶ 166.
derivative shareholder's claim allows an individual
stockholder to bring “suit to enforce a corporate cause
of action against officers, directors, and third
parties.” Kamen v. Kemper Fin. Servs., Inc.,
500 U.S. 90, 95 (1991) (quoting Ross v. Bernhard,
396 U.S. 531, 534 (1970)). “Devised as a suit in
equity, the purpose of the derivative action was to place in
the hands of the individual shareholder a means to protect
the interests of the corporation from the misfeasance and
malfeasance of faithless directors and managers.”
Id. (quoting Cohen v. Beneficial Loan
Corp., 337 U.S. 541, 548 (1949)) (quotations omitted).
derivative right, however, is not absolute. Before a
shareholder can act on behalf of the corporation in this
manner, he or she must demonstrate “that the
corporation itself had refused to proceed after suitable
demand, unless excused by extraordinary conditions.”
Id. at 95-96 (quoting Ross, 396 ...