On June 23, 2010, the Court entered an order dismissing all of the Defendants in this action except for Defendant Thomas L. Clymer. The Court requested additional briefing concerning the claims against Mr. Clymer. After reviewing these additional briefs, and having carefully considered the arguments of counsel, I conclude that Defendants Motion to Dismiss should also be GRANTED with regard to Mr. Clymer.

BACKGROUND

In resolving this motion to dismiss, the Court assumes the truth of all well-pled allegations in Plaintiffs Complaint. As summarized in the Courts previous order, Plaintiffs allege that they were victims of a fraudulent scheme designed to deceive Plaintiffs and the investing public as to the financial stability of Wachovia Corporation (Wachovia). As for Mr. Clymer, Plaintiffs allege that he is a Wachovia officer who resides in Charleston County. Id. 12. According to the Complaint, Mr. Clymer was aware that Plaintiffs had a significant investment in Wachovia and communicated with Plaintiffs about their investment. Id. 246-47. Specifically, Plaintiffs allege that they asked Mr. Clymer whether Wachovia had adequate loan loss reserves and whether more losses were expected by Wachovia, and that Mr. Clymer responded by saying that Wachovia was stable, had adequate loan loss reserves, and that there was not another shoe to drop. Plaintiffs further allege that Mr. Clymer forwarded them two emails containing information from Wachovia, with attachments titled Wachovia Corporations 2Q08 Financial Highlights and Wachovia: The Fundamentals. Id. 252, 254-56.

Plaintiffs allege that they relied on communications from the company, the other individual defendants, and Mr. Clymer in deciding not to sell their Wachovia stock, which saw a sharp decline in value as information Defendants allegedly sought to conceal became public. Although Plaintiffs allege that the other officers and directors named in the Complaint were involved in key disclosure decisions and had access to material nonpublic information by virtue of their positions within the company, id. 13, they do not include Mr. Clymer in this group.[1] Plaintiffs also do not allege that Mr. Clymer owed them a fiduciary duty, acted as Plaintiffs financial advisor or broker, or knew that Plaintiffs intended to sell their Wachovia shares.

DISCUSSION

I. Plaintiffs do not have standing to sue Mr. Clymer directly for the decrease in value of their Wachovia shares.

As discussed in the Courts previous order, both North Carolina and South Carolina law generally prohibit shareholders from bringing direct claims for wrongs that diminish the value of their shares in a corporation. Barger v. McCoy Hillard & Parks, 346 N.C. 650, 658, 488 S.E.2d 215, 219 (1997); Brown v. Stewart, 348 S.C. 33, 51, 557 S.E.2d 676, 686 (Ct. App. 2001). Accordingly, Plaintiffs may seek to recover their Wachovia stock losses from Mr. Clymer only if their allegations against him fall within one of the two recognized exceptions to this general prohibition: (1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, and (2) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders. Barger at 659, 488 S.E.2d at 219 (quoting Fletcher Cyclopedia Corporations 5911).

A. The special duty exception.

To proceed with their lawsuit under the first exception to the general rule, plaintiffs must allege facts from which it may be inferred that [Mr. Clymer] owed plaintiffs a special duty. Barger, 346 N.C. at 659, 488 S.E.2d at 220. Such a duty may arise from contract or otherwise, but it must be one that the alleged wrongdoer owed directly to the shareholder as an individual. Id. Put another way, a special duty is one that arises outside the conventional relationship between a corporation (acting through its corporate officers) and its shareholders.

Plaintiffs do not allege that Mr. Clymer owed them a fiduciary duty, or that he had any particular contractual responsibility or obligation to them. In fact, Plaintiffs specifically omit Mr. Clymer from their breach of fiduciary duty claim, their third cause of action, which is only brought against the Individual Defendants. Instead, Plaintiffs contend that Mr. Clymer owed them a special duty just because he communicated with them directly, forwarding materials from Wachovia and allegedly telling them that Wachovia was stable, had adequate loan loss reserves, and that there was not another shoe to drop.

Of course, a corporation must always communicate with shareholders through its representatives, including its corporate officers. A corporation is not a natural person. It is an artificial entity created by law. Being an artificial entity it cannot appear or act in person. It must act in all its affairs through agents or representatives. Travelers Ins. v. Roof Doctor, 325 S.C. 614, 615-616, 481 S.E.2d 451, 452 (Ct. App. 1997) (citation and quotation marks omitted). If a direct communication between a corporate officer and a shareholder were all that were required to satisfy the special duty exception, the exception would quickly swallow the rule. What matters is not the form of the communication between the corporation and its shareholder, but the nature of the relationship between the two. To give rise to a special duty, a corporate agent or representative must step outside the relationship between shareholder and corporation. See Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 336, 525 S.E.2d 441, 444 (2000) (explaining that a Plaintiff must allege facts from which one might reasonably infer a relationship existed outside of the partnership[2] sufficient to create a duty).

Here, Plaintiffs have failed to allege facts that would permit the Court to infer that Mr. Clymer had stepped outside the relationship between shareholder and corporate representative. For example, the Complaint alleges that Defendant Clymer forwarded Plaintiffs a document entitled Wachovia: The Fundamentals. Id. 255. Significantly, Plaintiffs do not allege that Mr. Clymer prepared or wrote the Fundamentals document to deceive Plaintiffs, only that he forwarded it to them. Plaintiffs go on to allege that it was Wachovias CEO (not Mr. Clymer) who was directly involved in preparing and approving the Fundamentals document. Id.

Accepting these allegations as true, Mr. Clymer was acting as a vehicle for the communication of information to shareholders. A corporate officer takes on a special duty to plaintiffs when he steps outside the relationship between shareholder and the corporation, not when he acts as an intermediary, distributing corporate financial information to shareholders. The communications between Plaintiffs and Mr. Clymer, in their capacity as shareholders and his capacity as a local Wachovia representative, do not give rise to the sort of separate and distinct relationship required to support such a special duty, and Plaintiffs cannot proceed on the basis of that exception.

Holmes v. Grubman, 691 S.E.2d 196 (2010), a recent Georgia Supreme Court case featuring prominently in Plaintiffs briefs, offers no support to Plaintiffs claims. The plaintiffs cause of action in Holmes did not involve a shareholder suit against a corporation. Instead, it was based on a fiduciary relationship, which the stockbroker defendant allegedly breached by knowingly misrepresenting the facts about a corporation and deliberately inducing the plaintiff to hold on to his shares in the corporation. Plaintiffs here, however, have not alleged any fiduciary or similar relationship between themselves and Mr. Clymer. Nor have they alleged that Mr. Clymer knew that they wanted to sell their shares, deliberately and intentionally dissuaded them from selling their shares, or deliberately and intentionally offered false information about Wachovia to Plaintiffs. Thus, Holmes is readily distinguishable.

Holmes also imposes distinct limits on claims for fraud brought by plaintiffs alleging that they were induced not to sell their shares. First, the plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations. Id. at 640, 691 S.E.2d at 200 (quoting Small v. Fritz Companies, 65 P.3d 1255, 1265 (Cal. 2003). In Holmes, the fact that the plaintiff verbally ordered his broker at SSB to sell all of [his] Worldcom stock would satisfy this requirement. Id. at 636, 691 S.E.2d at 197. Here, Plaintiffs do not allege any actionsindeed, they plead no facts at allto provide any indication that they relied on Mr. Clymers statements.

Moreover, Holmes requires a plaintiff to prove that the truth concealed by the defendant entered the marketplace, thereby precipitating a drop in the price of the security. Id. at 641-43, 691 S.E.2d at 200-202. This loss causation requirement, which the court adopted from the Supreme Courts decision in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005), also proves fatal to Plaintiffs claims against Mr. Clymer. Under this requirement, Plaintiffs must identify when the materialization [of the truth] occurred and link it to a corresponding loss. Id. at 642, 691 S.E.2d at 201. Put differently, Plaintiffs must show that Mr. Clymer hid a truth that, when revealed, caused Wachovias stock price to fall and injured Plaintiffs. Plaintiffs allegations against Mr. Clymer fail to meet this requirement. Accordingly, Plaintiffs will not be able to show that it was the revelation of the truth that Mr. Clymer allegedly concealed, and not one of the tangle of factors that affect price, id., that caused their loss.

For all of these reasons, Holmes offers no help to the Plaintiffs in overcoming the special duty exception. At bottom, Holmes is premised on the special fiduciary relationship existing between an investor and a broker, not a relationship between a shareholder and a corporate representative. The case cannot be invoked, then, to overcome the general prohibition on individual shareholder lawsuits for derivative injuries.

B. The separate and distinct injury exception.

Application of the separate and distinct injury exception turns on the nature of the alleged injury. Plaintiffs alleged injury is based on a decline in Wachovias share price. This injury, which Plaintiffs allege occurred as a result of a failure to disclose problems with Wachovias mortgage assets and collateralized debt obligations, damaged all shareholders in direct proportion to the number of shares they held: it was a derivative injury. Although Plaintiffs now contend Mr. Clymer caused them a separate and distinct injury that permits them to sue him directly, Plaintiffs do not allege that Mr. Clymer provided them with information that was materially different from the information the company was allegedly providing to other shareholders. For example, Plaintiffs allege that Mr. Clymer told them that Wachovia was stable, had adequate loan loss reserves, and that there was not another shoe to drop. Id. 252. This statement is essentially identical to the information that Plaintiffs allege the company was communicating to the market and the public at the same time. The same is true of the allegations that Mr. Clymer forwarded Plaintiffs reassuring emails from the Company, including quarterly highlights and the Fundamentals document. Id. 255.

The dominant theme of Plaintiffs Complaint is the allegation that Defendants engaged in concerted actions to conceal the truth and issue reassuring misrepresentations to financial markets and Plaintiffs. Complaint 51. This alleges that Plaintiffs were victims of a scheme to mislead the market as a whole. The allegation not only fails to allege a separate and distinct injury, it is wholly inconsistent with such an injury. Put another way, Plaintiffs cannot claim an injury that is separate and distinct from that suffered by their fellow shareholders based on allegations that the Defendants sought to deceive the market as a whole.[3]

CONCLUSION

Because Plaintiffs seek damages measured by a decline in the value of their Wachovia stock and do not plead facts giving rise to an exception to the general rule prohibiting individual shareholder actions for derivative injuries, they lack standing to sue Mr. Clymer directly. Moreover, Plaintiffs have failed to plead fraud with particularity, especially with regard to the elements of knowledge or reckless disregard of falsity, intent that the representation be acted upon, and materiality. See Ardis v. Cox, 314 S.C. 512, 515, 431 S.E.2d 267, 269 (Ct. App. 1993). Accordingly, Plaintiffs claims against Mr. Clymer must be, and the same hereby are, DISMISSED WITH PREJUDICE.

This 17 day of August, 2010, at Charleston, South Carolina.

[1] The other named defendants, referred to in the Complaint as the Individual Defendants and treated as a group for pleading purposes, were G. Kennedy Thompson (CEO), Thomas J. Wurtz (CFO), Donald K. Truslow (Chief Risk Officer), and Robert K. Steel (CEO). The Individual Defendants were dismissed pursuant to this Courts order of June 23, 2010.

[2] Energy Investors involved claims by limited partner against a partnership, but the court based its holding on the law applicable to the relationship that exists between corporate shareholders and the corporation. Energy Investors, 351 N.C. at 335, 525 S.E.2d at 443.

[3] Plaintiffs contend that Defendants arguments rely on cases applying Delaware law, which they assert is at odds with the law in North Carolina and South Carolina. However, the Delaware case that Plaintiffs cite in support of this proposition uses the same approach as appellate courts in North Carolina and South Carolina. Compare Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) (explaining that the shareholders injury must be independent of any alleged injury to the corporation) with Barger, 346 N.C. at 659, 488 S.E.2d at 220 (requiring an injury separate and distinct from any damage suffered by the corporation) and Brown, 348 S.C. at 49, 557 S.E.2d at 684 (A shareholder may maintain an individual action only if his loss is separate and distinct from that of the corporation.). In any event, this Court has applied controlling law from North and South Carolina here and has looked to the Delaware cases only for additional guidance and insight.