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Shareholder Cannot Maintain Derivative and Federal Securities Fraud Actions Simultaneously against Same Company

By Jim Hamilton

A shareholder could not maintain a derivative action against a company while simultaneously maintaining his own individual federal securities fraud action against the same company, ruled a federal judge, since the shareholder could not fairly and adequately enforce a right of the corporation while suing that corporation. The shareholder is engaging in the litigation equivalent of riding two horses until the rider determines which is stronger and faster, said the court, and a willingness to cast aside a derivative claim if it is the slower and weaker horse does not speak well of a person's adequacy as a representative of others. Thus, the court concluded that the derivative action could not proceed with the shareholder acting as the derivative plaintiff. (In re Bank of America Securities and ERISA Derivatives Litigation, 19 Civ. 1234 (PKC), Dec. 14, 2010).

The shareholder is individually seeking damages from the company under the Exchange Act for violations of securities antifraud provisions while simultaneously standing in the company?s shoes to claim that the company was damaged by officer and director misconduct. Under the 1934, the shareholder claims injury caused by misstatements and omissions made by the company with regard to an acquisition. The derivative action asserts common-law claims on behalf of the company against directors and officers alleged to have injured the company through material misstatements and omissions.

Federal courts have long found that plaintiffs attempting to advance derivative and direct claims in the same action face an impermissible conflict of interest. Since this shareholder owned 70,000 shares in the company purchased for over $2 million, noted the judge, his personal recovery under the federal securities claims could be substantial. The court further noted that the derivative action was filed slightly less than one year after the federal securities action and, given the complaints' similar factual allegations, the one year lag does not reflect a zealous approach to the derivative claim.

Full post as published by Jim Hamilton's World of Securities Regulation on January 28, 2011 (boomark / email).