This matter is before the Court on Defendants’ motion to dismiss the Complaint.  A hearing was held on the motion before the undersigned on April 13, 2010 at the Charleston County Courthouse.  Present on behalf of Plaintiffs were G. Trenholm Walker and Ian Freeman, of the law firm of Pratt-Thomas Walker, P.A.  Present on behalf of Defendants were Stephen M. Cox, Louis A. Bledsoe, III (admitted pro hac vice), and Adam K. Doerr of the law firm of Robinson Bradshaw & Hinson, P.A.

After reviewing the pleadings and papers of record in this action and carefully considering the arguments of counsel, I find that Defendants’ motion should be GRANTED with respect to all Defendants except Thomas L. Clymer.  I have requested further briefing from the parties as to whether the claims against Mr. Clymer should be dismissed, and I will issue a separate Order with respect to those claims.   

SUMMARY OF FACTUAL ALLEGATIONS

It is axiomatic that this Court must accept the properly pleaded facts in Plaintiff’s Complaint as true for purposes of the Motion to Dismiss presented for resolution.  Gentry v. Yonce, 337 S.C. 1, 5, 522 S.E.2d 137, 139 (1999).  Plaintiffs were allegedly shareholders in Wachovia Corporation, now known as Wells Fargo & Company (“Wachovia”).  The gravamen of Plaintiffs’ Complaint is that Defendants participated in a fraudulent scheme designed to deceive Plaintiffs and the investing public as to the financial stability of Wachovia Corporation.  Plaintiffs’ allegations primarily concern Wachovia’s 2006 acquisition of Golden West Financial Corporation, a California-based bank and mortgage lender with a large portfolio of adjustable-rate mortgages referred to as “Pick-A-Pay” loans, and Wachovia’s subsequent disclosures concerning these mortgage loans.  The Complaint alleges that Wachovia and the Individual Defendants,[1] faced with a rapidly deteriorating housing market and a strained mortgage system, concealed information regarding underwriting standards, collateral quality, and necessary reserves for these loans.  See, e.g., ¶¶ 46-60.  The centerpiece of the Complaint is a lengthy recitation (running to 56 pages) of Wachovia’s allegedly false public SEC filings, press releases, and earnings calls, beginning in January 2007 and concluding in September 2008.  ¶¶ 61-240.  Plaintiffs contend that the Individual Defendants engineered, approved, and disseminated these misstatements.  Based on these allegations, Plaintiffs assert claims styled as fraud/fraudulent concealment, negligent misrepresentation, breach of fiduciary duty, constructive fraud, breach of duties as corporate officers, negligence/gross negligence, and violation of the South Carolina blue sky laws.

DISCUSSION

A. Plaintiffs’ claims against Wachovia and the Individual Defendants are derivative claims that must be dismissed.

Because Wachovia was a North Carolina corporation at all times relevant to this action, see Compl., at ¶ 6, the “internal affairs doctrine” likely compels the application of North Carolina law to Plaintiffs’ claims.[2]   The Court need not resolve this choice of law issue, however, because the loss that Plaintiffs seek to recover in this case is the diminution in the value of their Wachovia stock.  See, e.g., ¶ 284 (“Plaintiffs have been damaged and caused to lose millions of dollars in the value of stock they held in Wachovia which they otherwise would have sold.”).  Both North Carolina and South Carolina follow the same legal principle in such a case:  the “well-established general rule” that shareholders do not have standing to bring 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); see also Brown v. Stewart, 348 S.C. 33, 51, 557 S.E.2d 676, 686 (Ct. App. 2001) (relying on the “general rule that individuals may not sue corporate directors or officers for losses suffered by the corporation”).  Because the injuries felt by Plaintiffs were suffered equally by all Wachovia shareholders, they cannot bring a direct action to recover their proportion of the corporation’s losses, especially when any recovery would come from the pockets of their fellow shareholders. See Brown, 348 S.C. at 51, 557 S.E.2d at 685 (“Permitting [the plaintiff] to bring his action as an individual action would not protect the interests of all stockholders because the diminution in the value of the stock was suffered by all of the shareholders.”).[3] 

B. Plaintiffs did not suffer a separate and distinct injury.

Plaintiffs have resisted the application of this general rule by contending that they are not seeking to recover derivative losses suffered as a result of corporate mismanagement, but direct losses suffered as a result of misrepresentations that induced them not to sell their stock.  This distinction finds no support in relevant legal principles.  “It is only where the injury sustained to the plaintiff’s stock is peculiar to the plaintiff alone and does not fall alike on other shareholders that one can recover as an individual.”  Fletcher Cyclopedia Corporations § 5913.  Plaintiffs’ injury was not peculiar to them.  Indeed, according to Plaintiffs’ Complaint, Defendants lied to Wachovia’s other shareholders, financial markets, and the investing public at large.  See, e.g., ¶ 51 (alleging “concerted actions to conceal the truth and issue reassuring misrepresentations to financial markets and Plaintiffs” (emphasis added)). 

As the Fifth Circuit Court of Appeals has explained, “when a corporation, through its officers, misstates its financial condition, thereby causing a decline in the company’s share price when the truth is revealed, the corporation itself has been injured.”  Smith v. Waste Mgmt. Inc., 407 F.3d 381, 385 (5th Cir. 2005); see also Manzo v. Rite Aid Corporation, 2002 WL 31926606 at *5 (Del. Ch. 2002), aff’d 825 A.2d 231 (Del. 2003) (“To the extent that plaintiff was deprived of accurate information upon which to base investment decisions, and as a result, received a poor rate of return . . . she experienced an injury suffered by all Rite Aid shareholders in proportion to their pro rata share ownership.  This would state a derivative claim.”).  The facts of Smith and Manzo are strikingly similar to the facts alleged in Plaintiffs’ Complaint.  In both cases, the plaintiffs alleged that corporate officers and directors used false or misleading statements to induce them into holding on to their corporate stock.  Ultimately, when the truth became public, the stock held by the plaintiffs suffered a precipitous decline in value.  As noted above, the courts readily concluded that claims founded on such losses were derivative, not direct. 

Likewise, Plaintiffs in this case allege that the Individual Defendants disseminated a series of misstatements to investors, including Plaintiffs.  Plaintiffs contend that they held on to their Wachovia stock in reliance on these alleged misstatements, and that they suffered substantial losses when the truth was brought to light.  As the Smith Court explained, however, “[t]he misrepresentations that allegedly caused [plaintiff’s] losses injured not just [plaintiff] but the corporation as a whole.”  407 F.3d at 384-85; see also Barger, 346 N.C. at 660, 488 S.E.2d at 220  (“The only injury plaintiffs as shareholders allege is the diminution or destruction of the value of their shares as the result of defendants’ negligent or fraudulent misrepresentations of [the corporation’s] financial status. This is precisely the injury suffered by the corporation itself.”).  Because Plaintiffs have failed to allege any separate injury that they have suffered distinct from the loss to Wachovia as a whole, they cannot bring direct claims to recover their losses at the expense of their fellow shareholders.    

C. Defendants did not owe Plaintiffs a special duty.

 Plaintiffs have contended that they may pursue direct claims against the Individual Defendants because those defendants owed them fiduciary or otherwise “special” duties.  North Carolina, it is clear, recognizes no fiduciary duty between the officers and directors of a corporation and that corporation’s shareholders.  See N.C. Gen. Stat. §§ 55-8-30, 55-8-42.  Although South Carolina does recognize such a duty, see Official Comment to S.C. Code Ann. § 33-8-300, our Court of Appeals has recognized that “[t]he fiduciary obligation of dominant or controlling stockholders or directors is ordinarily enforceable through a stockholder’s derivative action.”  Brown, supra, 348 S.C. at 49, 557 S.E.2d at 684.[4]  As Brown teaches, any claim that the Individual Defendants owed Plaintiffs a fiduciary duty (a duty also owed to Wachovia itself) must be enforced derivatively.  348 S.C. at 49, 557 S.E.2d at 684. 

To be sure, although North Carolina does not recognize fiduciary duties owed by corporate directors and officers to shareholders, it does recognize that shareholders may bring direct claims against directors and officers if those claims are based on a “special duty.”  See, Barger, supra, 346 N.C. at 660, 488 S.E.2d at 220.  Such a duty is typically based on either (i) an obligation arising outside the corporate-shareholder relationship, e.g., Howell v. Fisher, 49 N.C. App. 488, 498, 272 S.E.2d 19, 26 (1980) or (ii) in the context of a close corporation, e.g., Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d 248, 261 (2000).  Plaintiffs have alleged no such special duty of the Individual Defendants in this case.  Indeed, as the North Carolina Supreme Court has explained, communications directed at shareholders in their capacity as shareholders do not give rise to a direct claim.  Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 337, 525 S.E.2d 441, 444 (2000).  Accordingly, the special duty exception to the general rule requiring derivative recovery of corporate losses does not apply. 

CONCLUSION

For all of the foregoing reasons, Plaintiffs’ claims against all of the Defendants except Mr. Clymer must be, and the same hereby are, DISMISSED WITH PREJUDICE. 

This 23rd day of June, 2010, at Charleston, South Carolina.

___________________________________
Roger M. Young, Sr.
Circuit Court Judge

[1] As defined in the Complaint, the Individual Defendants consist of Defendants G. Kennedy Thompson, Thomas J. Wurtz, Donald K. Truslow, and Robert K. Steel. ¶ 13.

[2] See S.C. Code § 33-15-105(c).  As the Official Comment to this statutory section notes, the section “preserves the judicially developed doctrine that internal corporate affairs are governed by the state of incorporation even when the corporation’s business and assets are located primarily in other states.” 

[3]  Such claims are also barred because awarding damages “directly to a shareholder could impair the rights of creditors whose claims may be superior to that of the innocent shareholder,” Outen v. Mical, 118 N.C. App. 263, 267, 454 S.E.2d 883, 886 (1995), and give rise to “as many suits ... as there were stockholders in the corporation,” Kloha v. Duda, 246 F. Supp. 2d 1237, 1243 (M.D. Fla. 2003) (citation omitted). 

[4] This rule is consistent with the corporate law of Delaware, which also recognizes that directors owe a fiduciary duty to both shareholders and the corporation itself.  See, e.g., Revlon v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173, 179 (Del. 1986).  Because the director’s duty to communicate truthfully is owed also to the corporation, a shareholder cannot bring a direct action against corporate directors for knowingly misrepresenting the corporation’s financial condition.  See Manzo, supra, at *6  (“[A]ny breach of fiduciary claim based upon the mere fact of knowing misrepresentation is necessarily derivative.  To state a direct claim on that basis, plaintiff must identify some resultant injury that either affects some shareholders disproportionately to their pro rata stock ownership, or affects those rights of shareholders that are traditionally regarded as “incidents” of stock ownership.” (emphases in original)).