Securities Litigation and the Departing High Level Officer

Originally published for the Stanford Directors' College (June 24, 2014)


Ideally, the departure of a high level corporate officer is a planned-for event. The hand-off is smooth and accompanied by warm words of gratitude from the company, perhaps a retirement party, an introduction to new leadership and new opportunity for capable insiders. With any luck, there is an uptick in the stock price, as the market compliments the Board on its insightful and successful succession planning.

Of course the departure of a high level corporate officer sometimes is not even close to such an all-round revitalizing occasion. The departure may have resulted from the officer turned whistleblower, the Board's disappointment with the officer's leadership or performance, a scandal involving personal conduct, a government investigation/prosecution, an internal investigation, an unexpected resignation, a failed merger, disappointing stock performance, or any combination of those or other unhappy events. On a personal level, the officer is likely to experience a financial and professional setback from an unplanned departure and may be disgruntled, justifiably or not, with his or her treatment. Litigation in the form of a wrongful termination lawsuit or a contract dispute over termination benefits can follow an executive's departure and may be an event easily anticipated by the Company's directors. However, departing officers also can become significant actors, whether voluntary or involuntary, in securities litigation that precedes or follows their departure from the company, and may assume one or more of various roles we describe in this article. Directors should consider these roles in anticipating and assessing how to handle the tenor and consequences of the departure of a high level officer, when they have had little or no notice that it would happen.

The High Level Insider as Whistleblower

Brought to public consciousness dramatically by Watergate, burnished in Enron, and glamorized in film (think: All the President's Men, Serpico, The Insider, On The Waterfront), and now protected by statute, the character of the whistleblower has been a recurring presence in government and private enterprise for over sixty years. Before we get to the issue of officers as whistleblowers, we note that this year, for three reasons, the treatment and ultimately the expansion of rights of whistleblower have been very much in the news in securities litigation.

First, earlier this month, the SEC filed its first administrative complaint alleging that a company had engaged in retaliation against an individual who acted as a whistleblower to the SEC. In In the Matter of Paradigm Capital Management, Exchange Act Release No. 72393 etc. (June 16, 2014), the SEC submitted a settled cease-and-desist order against an investment advisory firm and its majority owner that also imposed compensatory damages and penalties. The SEC alleged that the owner had caused her firm to enter into tax-favorable transactions with a broker-dealer firm which she also owned. But the owner had not obtained the required effective consent for these related-party transactions from a hedge fund for which the firm acted as advisor, and hence the firm had violated Section 206(3) of the Investment Advisers Act (and had made false disclosures). The firm's then-head trader informed the SEC of the violations. When the firm got wind of this, however, he was removed from both his duties and the office, and eventually resigned. In the SEC settlement, the firm agreed to pay $1.7 million to compensate certain investors in the hedge fund and nearly $500,000 in interest and civil penalties, and to hire a consultant with broad powers to make binding compliance changes.

Second, courts currently are addressing the scope of the private whistleblower cause of action created by Section 922 of the Dodd-Frank Act, which added Section 21F to the Securities Exchange Act. [1] The SEC subsequently adopted Rule 21F-2(b)(1), which defines "whistleblower" and attempts to clarify the Section 21F(h) anti-retaliation cause of action. [2] Courts have disagreed as to whether this Rule extends the cause of action to persons who report the information only internally, without requiring the whistleblower to report the information externally to the SEC, as is required in order to obtain a bounty. [3] In February, the SEC submitted an amicus brief in a Second Circuit appeal, Liu v. Siemens AG. [4] The SEC urged that the cause of action be construed to apply to internal-only whistleblowers who do not inform the SEC as well as those who do, arguing that Congress did not unambiguously indicate that the anti-retaliation cause of action was to be limited to persons who blow the whistle to the SEC, and Rule 21F-2(b)(1) was adopted to insure that whistleblowers were incentivized to report internally before going to the SEC. While the Second Circuit has not yet ruled as of the date of this article, a district court judge recently considered and agreed with the SEC's amicus brief in Bussing v. COR Clearing, LLC. [5]

Third, in March, in Lawson v. FMR LLC, No. 12-3, __ U.S. __ (Mar. 4, 2014), the Supreme Court expanded the scope of the securities law whistleblower cause of action created by Section 806 of the Sarbanes-Oxley Act to cover employees of a service provider to a public fund. [6] Generally, subsection (a) of the statute prohibits certain companies from discharging, suspending, or otherwise discriminating against employees that lawfully provide information to or assist the SEC, Congress, or the employee's supervisor in an investigation regarding any SEC violation or other fraud at a public company-i.e., for acting as a whistleblower. Subsection (b) of the statute allows such a person to file a complaint with the Secretary of Labor and, if the Secretary does not issue a final decision within 180 days, to bring a federal court lawsuit, and if successful, recover back pay and attorneys fees, among other remedies. Whistleblower termination cases tend to be fact-intensive and the standard for causation is low-the protected whistleblowing activity need be only a contributing factor to the plaintiff's termination. [7] In Lawson, the Court interpreted Section 806 expansively to cover lawsuits brought by two former employees of an firm that was not a public company but that acted as an advisor to a mutual fund, a public company. The plaintiffs alleged they had been fired in retaliation for complaining to their supervisors about improper accounting and disclosures by the fund. The Court held that the plaintiffs could sue under Section 806, deciding that the statute covered the employees of contractors to public companies who blow the whistle on alleged frauds at public companies. In theory, this decision paves the way to extend the Section 806 cause of action to a large circle of service providers to public companies.

All of these expansions of the reach of the whistleblower statutes follow on the heels of the SEC's announcement late in 2013 that it had made a record $14 million payment to an unidentified whistleblower whose original information and assistance enabled the SEC to bring an enforcement action quickly---within six months of the tip. This award certainly advertised a substantial incentive to would-be whistleblowers at every level.

While the plaintiffs in Lawson and Liu were relatively junior in their respective organizations, high level officers can become whistleblowers too. The plaintiff in Bussing is the CEO of a subsidiary, who allegedly was terminated because she attempted to comply with a FINRA investigation. The short history of Section 806 case law also demonstrates that whistleblowers can include high level officers. [8] Thus, directors cannot assume that a departing officer, even at the CEO or CFO level of a subsidiary or parent company is too senior to sue as a whistleblower under Sarbanes-Oxley and Dodd-Frank.

What should boards of directors do in light of increasing interest in whistleblower employment termination lawsuit? As a threshold matter, they should recognize that the government pays close attention to officer termination lawsuits where the officer claims that his or her complaints about illegal activity led to the termination. As a result of this surveillance, an employment termination lawsuit may have a domino effect that leads to an SEC or Justice Department investigation, which often leads in turn to class action and derivative litigation. This can happen regardless whether the officer goes to the SEC, the mere fact that he or she makes allegations in a lawsuit can trigger an investigation. In addition to having the much discussed preventative measures in place: procedures to conduct rapid and appropriate investigation of complaints, regular employee training, whistleblower policies and codes of conduct that encourage internal reporting, directors should make every effort to attempt to identify and take command of circumstances that appear to be headed toward a high level officer departure. They should consider moving the anticipated departure or employment dispute into a negotiation setting, lowering the temperature of the rhetoric employed in the dispute and promptly deal with the perception or fact that the departure results from the officer's unwelcome identification of an internal issue involving possible illegal conduct. In addition, the Board should consider including mediation and/or mandatory arbitration clauses in high level officer employment contracts to allow the company to address the employment disputes that often accompany an officer's departure in a less charged atmosphere than that created by a lawsuit filed in court.

If a negotiated resolution of an employment dispute cannot be achieved and termination is imminent, the company must have a clear record that shows the officer was not fired for whistleblowing. Thus, in a Section 806 case decided in April of this year, a court affirmed a judgment against an officer-director suing his former employer, who claimed to have been fired for making numerous whistleblower complaints, because the evidence showed that he could not prove that whistleblower complaints caused his termination even under low causation standards. [9] The termination letter and other records supported the Company's assertion that the plaintiff actually had been fired for insubordination-as records showed that he had called the outside directors "basically worthless" in a meeting with dissenting shareholders, and had urged the directors to quit lest those shareholders (to whom he had been tasked to dissuade from suing) would sue.

The Departing Officer as Source for Third Party Litigation

A departing officer may become a source of information for class action securities actions or shareholder derivative litigation. In some cases, the departing officer becomes a source by doing nothing more than filing his or her employment complaint against the corporation, which then becomes the source for the securities or derivative plaintiffs' allegations in their separate case. For example, the securities plaintiffs' allegations in one case that a corporation had reached a merger agreement earlier than it had publicly stated came from an employment lawsuit filed by the company's former CFO \ General Counsel. [10]

Simply put, directors should assume that if a former officer files an employment lawsuit that accuses the corporation, board, officers or employees of wrongdoing, the securities plaintiffs' bar will learn of the lawsuit (typically from the company's own SEC filings) and, if the stock price has declined, crib from its allegations. Even if the stock price has not reacted, the allegations of the employment dispute may nonetheless give rise to a shareholder derivative lawsuit. Of course securities plaintiffs may not simply copy and paste allegations from other lawsuits into their complaints. [11] However, sooner or later those allegations will impact the securities lawsuit. In addition, the corporation in defending the employment lawsuit must anticipate that everything it says or does will be used by the securities plaintiffs. Discovery produced in the employment litigation also will be sought in the securities litigation.

The departing officer may also become an anonymous source for a securities plaintiff's allegations, or what plaintiffs call a "confidential witness." While many anonymous sources are lower-level employees, many are not. Thus, in the Seventh Circuit's initial decision in a case that later went to the Supreme Court, a securities complaint sufficed in part because it included allegations from twenty- seven anonymous sources, including some high level executives. [12] Other examples abound. [13]

Directors can-and should-know in real time which high level officers have left or are about to leave the company on bad terms as distinguished from leaving for better opportunities. Once again, heading-off the employment dispute through negotiation and addressing any whistleblowing allegations before litigation is the desirable route. While it is often difficult to know in advance that a departing officer is so dissatisfied with management or its policies that he or she is willing to provide information to the corporation's adversaries (and perhaps disregard their confidentiality agreements entered into at the time of departure), there are often signs of such dissatisfaction. In actuality, aside from the whistleblower context, a departing officer has little to gain from becoming a source for securities litigation against the Company. Nonetheless, the probability of this approach increases over time if the corporation's fortunes or reputation do not recover from the events that led to the lawsuit, as former officers may perceive an advantage to be regarded after the fact as having been on the "right" side of the historical decisions that supposedly led to the corporation's adversity.

Allegations that are attributed to officers are frequently credited by a court, at least at the pleading stage. Generally speaking, courts assess the significance of anonymous source allegations based on the level and type of information a source would be expected to know in his or her position at the corporation. Hence, the more senior the officer, the more his or her allegations will carry weight with a court, provided that he or she worked in a division or function with subject matter relevance to the allegations of the case. (Of course, if the anonymous source is an unsuccessful whistleblower, that helps the defense.) [14]

If a securities lawsuit survives a motion to dismiss, most courts will require plaintiffs to disclose the identities of their sources. [15] At that point, the departing officer source becomes a potential witness to be addressed like any other potential witness-albeit a witness to which a judge or jury may give more weight, given his or her heightened responsibilities in the corporation. The departing officer is often presented by plaintiffs as the warning voice in the corporation, whose caution was ignored. He or she may in fact have expressed a different view than management or the Board on the business and disclosure decisions at issue in a securities lawsuit (at least by the time of the lawsuit). But within any corporation-like any large organization-it is to be expected that there will be differences of opinion. The securities laws do not require issuers to disclose the spectrum of opinion within a corporation; [16] and the fact that some officers' views were not adopted in a corporation's decisions, plans or public statements, does not equate to fraud. [17] In addition, the chances are that if a departing officer had spent any length of time at the company, he or she probably expressed a different position at the time of the events in question than he or she later may aver in a later employment action or securities lawsuit.

The Cause--Or Scapegoat

In the preceding sections, the departing officer chooses his or her role by taking action against the corporation. In other instances, the officer may be cast in a securities litigation role not of his or her choosing. This occurs when a corporation blames a former officer for poor business decisions, a lack of due diligence or misleading the company in the merger setting or illegalities that harmed the corporation. The departing officer then is viewed by the corporation as the cause of the problems. Not surprisingly and sometimes accurately, the former officer views himself or herself as the scapegoat.

These differing perspectives can play out when problems are discovered after a merger. In some such cases, management of the acquired company or merger partner is jettisoned and blamed. Two of the largest securities class action settlements in the post-Reform Act era involved this type of situation: Cendant, in which the management of HFS soon discovered and alleged that the management of its merger partner CUC had cooked the books; [18] and HBOC McKesson, in which the management of McKesson alleged the same of the management of its acquisition HBOC. [19]

These roles are not restricted to the merger context. When management concludes that the corporation must restate its financials, the corporation may blame the departed, prior management for the departed, prior numbers. This was a recurring theme in some of the so-called stock option backdating cases that arose in the 2006-2010 time period.

As accepting the "cause" role is problematic to the departing officer, he or she is likely to decline it. In the departing officer's perspective, he or she is not the cause of any problems, but the scapegoat for them. Officers report to senior management or the Board, and receive (or do not receive) reports from their subordinates and the corporation's advisers. The departing officer cast as the cause, except in those exceedingly rare circumstances when the facts are truly black and white, has ample ability to assert that the alleged problems were either known to others or withheld from his or her knowledge.

Directors should avoid allowing the corporation to rush to judgment against an officer in situations where it appears someone must be held accountable for events that appear to have involved errors of judgment or illegality. A battle between the corporation and its former officers will encourage the corporation's adversaries to sue based on the bullets fired in the battle. If the corporation asserts that its former senior officers engaged in intentional wrongdoing, this cannot help but establish the corporation's own scienter in a securities fraud lawsuit. Directors should not mistake attempts at fact finding done in a rushed and pressure-filled atmosphere, however well-intentioned, as necessarily equating with truth. Although the problem, once identified, must be addressed, laying blame can have long-lasting consequences to the corporation and the individuals involved and should be approached with great caution. Some boards engage in a noisy firing of executives thought to have caused the challenged activity as a way to curry favor with regulators for "cooperation." The thinking is that if the Board steps in and harshly deals with an executive, this will prove that the Board is not going along with the challenged activity, is taking decisive action and will gain leniency for the Company. But this strategy can backfire. First, the facts that appear at first blush to be damning may not turn out to be what they first seem and a correction of the record never has the same impact as the original accusation. Second, if the activity is described in hyperbolic terms and the involved executives demonized, regulators are apt to wonder why it took the Board so long to figure it out and the penalties against the Company may be harsher, not less harsh. Third, a corporation is stuck with its description of the conduct of its officers. "Determinations" against management made by the Company are self-admissions against the Company in litigation. This is akin to handing a firearm to your adversary. A change in management, does not have to be accompanied by public blaming and disparagement. The Board holds all the cards and can force a change of management without engaging in the public disparagement in the Company's disclosures that it can never effectively take back.

Directors should first ask whether it is clear that there has been any wrongdoing at all, as distinguished from decisions that show errors of judgment or shortcomings in the corporations' processes. If there has been wrongdoing, the directors have a duty to deal with the responsible parties-but in so doing, directors should avoid the temptation of simply blaming former officers simply because it is easier to lay blame on people no longer with the corporation. In addition, unnecessary inflammatory language and characterization of acts or omissions as intentional wrongdoing or similar pejorative characterizations in the corporation's public disclosures should be avoided. The wisdom of this approach is shown in cases in which securities plaintiffs cast the departure of an officer as resulting from wrongdoing. Such allegations tend to succeed in alleging scienter only where the corporation issues adverse public spin on the departure. [20]

The Jedi Knight

The last role we address in this article for the departing officer that can give rise to securities litigation occurs most often in private businesses. Casting for this role begins when an officer departs and sells his or her shares back to the company. The next step in the audition process is that the company is acquired at a premium. The departing officer then complains that he was not told by the board that the sale was imminent. He or she is akin to the young Luke Skywalker in The Empire Strikes Back as he asks management or the Board, "Obi-wan, why didn't you tell me?" The departing officer (who may well have been the founder) then sues for the difference in the stock price, perhaps adding that the imminent sale was the real reason he or she was terminated in the first place.

The Jedi Knight lawsuit is relatively easy for directors to predict-whether one is filed is normally a function of the length of time between the buyback and the sale of the company, [21] the involvement of the plaintiff in any sale negotiations, [22] and the difference between the repurchase price and the price at which the company later is sold. This type of lawsuit frequently has consequences for the board, as the sale of a company usually involves a board, and directors are more likely to be witnesses or even defendants than in the typical class action case. [23] Moreover, damages can be very high, as private companies are often sold at a premium. For example, one appellate court sent a Jedi Knight lawsuit back to the trial judge to reconsider plaintiffs' damages, and in so doing indicated that damages would be at least $103 per share-which gave rise to a daunting damage number. [24]

Then too, the Jedi Knight lawsuit can be difficult to defeat. Cases challenging the timing of the disclosure of merger negotiations can be fact intensive-what was the exact status of negotiations at exact points in time?-creating issues that cannot be decided before trial. [25] In addition, there may be broader obligations under State fiduciary duty law than there are under the federal securities laws to disclose information to a plaintiff qua an existing shareholder. This is illustrated by a First Circuit case addressing a lawsuit in which shareowners of a closely held corporation alleged that their shares had been redeemed for less than their true value because the company did not disclose its expectation that it would be sold at a premium due to its recent success. [26] The court affirmed the defendants' victory on securities fraud claims, as the corporation had disclosed its success and there was no duty to disclose any intention to sell. But the court also affirmed the plaintiffs' victory on a breach of fiduciary duty claim, reasoning that applicable Rhode Island law would impose a duty on directors, officers, and majority shareholders of a closed corporation to disclose that management had decided to try to sell the company even if it had not yet entered negotiations.


The noisy departure of a high level officer can lead to employment litigation, government investigations and shareholder litigation. A Board is well served to anticipate, if possible, and take control of such situations, in an effort to recognize and ameliorate its consequences to the Company.


[1] Section 21F is codified at 15 U.S.C. §78u-6.

[2] Rule 21F-2(b)(1) is published as 17 C.F.R. §240.21F-2(b)(1).

[3] Most notably, the Fifth Circuit held that disclosure to the SEC is required in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).

[4] No. 13-4385 (2d Cir.).

[5] See Bussing v. COR Clearing, LLC, No. 8:12-CV-238, Memorandum And Order, slip op. at 7 n.6 (D. Neb. May 21, 2014).

[6] Section 806 is codified at 18 U.S.C. § 1514A.

[7] See, e.g., Van Arsdale v. International Game Technology, 577 F.3d 989, 1003 (9th Cir. 2009), citing 29 C.F.R. § 1980.104(b)(1)(iv).

[8] See Feldman v. Law Enforcement Associates Corp., ___ F.3d ___, No. 13-1849 (4th Cir. May 12, 2014) (Section 806 lawsuit by former president \ director of security equipment company); Van Arsdale v. International Game Technology, 577 F.3d 989 (9th Cir. 2009) (Section 806 lawsuit by in-house attorneys); Bechtel v. Administrative Review Board, ___ F.3d ___, No. 11-4918-ag (2d Cir. Mar. 5, 2013) (Section 806 lawsuit by officer who refused to sign internal Sarbanes-Oxley disclosure forms); Teachers' Retirement Sys. v. Hunter, 477 F.3d 162 (4th Cir. 2007) (referencing Section 806 lawsuit by co-founder of corporation); Fraser v. Fiduciary Trust Co. Int'l, No. 04 Civ. 6958 (PAC), 2006 WL 399468 (S.D.N.Y. Feb. 15, 2006) (certain Section 806 claims allowed by former officer of investment management company); see also R.K. Co. v. Harvard Scientific, No. 99 C 4261, 2007 WL 924737 (N.D. Ill. Mar. 23, 2007) (judgment against CEO for misrepresenting FDA status of company's medical devices, where General Counsel was a whistleblower).

[9] Feldman, ___ F.3d ___, No. 13-1849. See also Livingston v. Wyeth, Inc., 520 F.3d 344 (4th Cir. 2008) (affirming dismissal of Section 804 case where facts did not support employee's assertion that he had been terminated due to complaints about FDA compliance, and in contrast employee had called police to physically remove the key compliance officer with whom he had tussled from an office Christmas party-an act that justified his immediate termination).

[10] Vladimir v. Bioenvision, Inc., 606 F. Supp. 2d 473 (S.D.N.Y. 2009); see also Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683 (E.D. Mich. 2010) (denying motion to dismiss securities complaint alleging that ice company failed to disclose contracts that violated antitrust law, where allegations included ones taken from a whistleblower complaint); In re Nash Finch Co. Sec. Litig., 323 F. Supp. 2d 956 (D. Minn. 2004) (securities complaint including allegations taken from employment lawsuit by the former CFO, who alleged that the CEO had ordered him to take a $2.4 million improper accrual).

[11] See, e.g., Maine State Retirement Sys. v. Countrywide Financial Corp., No. 2:10-CV-0302 MRP (MANx), 2011 WL 4389689, **20-21 (C.D. Cal. May 5, 2011) (granting motion to strike allegations copied from other complaints on this basis).

[12] Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 591 (7th Cir. 2006), rev'd, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

[13] This decade alone, cases with high-ranking former officer sources include: KB Partners I, L.P. v. Barbier, 907 F. Supp. 2d 826 (W.D. Tex. 2012) (anonymous sources in lawsuit against pharmaceutical company included director of Formulations and Pharmaceutical Development); Brasher v. Broadwind Energy, Inc., No. 11 CV 991, 2012 WL 1357699 (N.D. Ill. Apr. 19, 2012) (anonymous sources included vice president of predecessor company and high-ranking divisional executive); In re Coinstar Sec. Litig., No. C11-133 MJP, 2011 WL 4712206 (W.D. Wash, Oct. 6, 2011) (anonymous sources included corporation's former Chief Accounting Officer); In re Immucor, Inc. Sec. Litig., No. 1:09-cv-2351-TWT, 2011 WL 2619092 (N.D. Ga. June 30, 2011) (anonymous sources included medical suppler corporation's former Vice President of Quality); In re Sturm, Ruger & Co., No. 3:09-cv-1293 (CFD), 2011 WL 494753 (D. Conn. Feb. 7, 2011) (anonymous sources in lawsuit alleging that firearms company failed to disclose manufacturing problems included former General Manager of manufacturing plant); Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683 (E.D. Mich. 2010) (anonymous sources included corporation's national purchasing and contracts manager); Building Trades United Pension Trust Fund v. Kenexa Corp., No. 09-2642, 2010 WL 3749459 (E.D. Pa. Sept. 27, 2010) (anonymous sources included Senior Vice President of U.K. operations); Local 295/Local 851 IBT Employer Group Pension Trust and Welfare Fund v. Fifth Third Bancorp, 731 F. Supp. 2d 689 (S.D. Ohio. 2010) (anonymous sources in lawsuit alleging undisclosed poor lending standards included a vice president for mortgage compliance).

[14] See In re Ceridian Corp. Sec. Litig., 542 F.3d 240 (8th Cir. 2008) (affirming dismissal of lawsuit involving technology company that conducted five restatements due to a variety of unrelated accounting issues; where OSHA had investigated the firing of plaintiffs' best anonymous source, an alleged whistleblower, and found against her).

[15] See, e.g., In re American Int'l Group 2008 Sec. Litig., No. 08 Civ. 4772 (LTS) (DF), 2012 WL 1134142 (S.D.N.Y. Mar. 6, 2012) (collecting cases).

[16] See, e.g., Data Probe Acquisition Corp. v. Datalab, Inc., 722 F.2d 1, 5 (2d Cir. 1983); Hanrahan v. Hewlett-Packard Co., No. C 05-02047 CRB, 2006 WL 1699573 (N.D. Cal. June 16, 2006) (fact that company disclosed that the terms of a merger deal had been unanimously approved did not create a duty to also disclose one director's private reservations about the deal); Cooperman v. Individual, Inc., No. Civ. A. 96-12272-DPW, 1998 WL 953726, *10 (D. Mass. May 27, 1998), aff'd, 171 F.3d 43 (1st Cir. 1999); In re Kulicke & Soffa Indus., Inc. Sec. Litig., 697 F. Supp. 183, 188 (E.D. Pa. 1988); Polin v. Conductron Corp., 411 F. Supp. 698, 703 (E.D. Mo. 1976); accord, First National Bank v. Bellotti, 435 U.S. 765, 785 n.22 (1978) ("Corporations, like individuals or groups, are not homogeneous," and do not have a monolithic view).

[17] See, e.g., Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 999 (9th Cir. 2009) (internal disagreement is "far from the deliberate, conscious recklessness required for a strong inference of scienter"); Geffon v. Micrion Corp., 249 F.3d 29, 37-38 (1st Cir. 2001) (granting summary judgment on scienter even though one officer disagreed with terminology used in public statements); In re PXRE Group, Ltd. Sec. Litig., 600 F. Supp. 2d 510, 546-47 (S.D.N.Y. 2009) (officers not reckless even if aware of "concerns" by Chief Actuary that loss reserves were inadequate); In re Seagate Technology II Sec. Litig., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,530 (N.D. Cal. Feb. 8, 1995) (summary judgment granted notwithstanding deposition testimony that a marketing manager had "concerns" about the company's prospects).

[18] See In re Cendant Corp. Sec. Litig., 264 F.3d 201, 264 F.3d 286 (3d Cir. 2001) (approving $3.2 billion class settlement).

[19] McKesson HBOC then tried to sue the former HBOC shareholders, on the argument that they had been unjustly enriched because McKesson had paid too much for a company whose financials had been inflated. The Ninth Circuit rejected that lawsuit in McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc., 339 F.3d 1087 (9th Cir. 2003).

[20] For example, such allegations were rejected in In re Cyberonics Inc. Sec. Litig., No. H-05-2121, 2007 WL 2914995 (S.D. Tex. Oct. 4, 2007), where the corporation had made kind public statements upon the departure of its CEO and CFO, and had even hired one back as a consultant. Allegations based on officer departures also were rejected in In re Rackable Systems, Inc. Sec. Litig., No. C 09-0222 CW, 2010 WL 199703 (N.D. Cal. Jan. 13, 2010); In re Pegasus Wireless Corp. Sec. Litig., 2009 WL 3055205 (S.D. Fla. Sept. 21, 2009); Communications Workers of America Plan for Employees' Pensions and Death Benefits v. CSK Auto Corp., Nos. CV-06-1503-PHX-DGC etc., 2007 WL 951968 (D. Ariz. Mar. 28, 2007); In re Silicon Image, Inc. Sec. Litig., No. C-05-456 MMC, 2007 WL 607804 (N.D. Cal. Feb. 23, 2007), and In re Stonepath Group, Inc. Sec. Litig., No. Civ. A. 04-4515, 2006 WL 890767 (E.D. Pa. Apr. 3, 2006). Allegations based on departures were accepted in Fouad v. Isilon Sys., Inc., No. C 07-1764 MJP, 2008 WL 5412397 (W.D. Wash. Dec. 29, 2008), where there were other adverse allegations and the CEO and CFO had been terminated at the same time the corporation announced an internal investigation.

[21] That being said, a departing officer was able to survive a motion to dismiss even where the company was not acquired at a premium until three years later. Filing v. Phipps, No. 5:07 CV 1712, 2010 WL 3789539 (N.D. Ohio Sept. 24, 2010) (granting defendants' motion for summary judgment), aff'd, 503 Fed.Appx. 297 (6th Cir. Oct. 23, 2012).

[22] See Fishman v. Meinen, No. 02 C 3433, 2003 WL 444223 (N.D. Ill. Feb. 2003) (dismissing lawsuit by former director alleging bank's misrepresentation to induce sale of shares as part of repurchase program while not disclosing merger prospects; the plaintiff was in a position to know the state of affairs and had received some proposed transaction documents).

[23] See Industrial Technology Ventures LP v. Pleasant T. Rowland Revocable Trust, 688 F. Supp. 2d 229 (W.D.N.Y. 2010) (dismissal denied in part minority shareholder breach of fiduciary duty and fraud lawsuit alleging fraudulent inducement to sell shares at artificially low price as part of a plan to take over the company and increase the CEO's compensation, without disclosing a third party's intent to buy the company at a premium; former director could be liable for breach of duty by agreeing to help the CEO increase her compensation before he resigned from the board).

[24] See Lawton v. Nyman, 327 F.3d 30 (1st Cir. 2003); see also Werner v. Werner, 267 F.3d 288 (3d Cir. 2001) (dismissal reversed to allow plaintiffs to amend complaint filed after company agreed to repurchase the stock from estates of two sisters at approximately $1000 per share, when company later was sold for $2500 per share); Rizzo v. The McManus Group, Inc., 158 F. Supp. 2d 297 (S.D.N.Y. 2001) (denying motion to dismiss in lawsuit by former CEO alleging that corporation and its parent defrauded plaintiff by repurchasing his 15,000 shares of stock for $750, when weeks later the parent announced a merger that valued plaintiff's former holdings at $14.8 million).

[25] See, e.g., Giardina v. Ruth U. Fertel, Inc., No. CIV. A. 00-1674, 2001 WL 1005922 (E.D. La. Aug. 30, 2001) (summary judgment denied in part in lawsuit by ex-senior manager alleging fraud in repurchase of shares at time when corporation was considering two merger offers).

[26] Lawton, 327 F.3d 30.