Citations
- 849 F. Supp. 1369
Full opinion text
MEMORANDUM OPINION ON DEFENDANTS’ MOTIONS TO DISMISS
KENYON, District Judge.
I. INTRODUCTION
This is a shareholders derivative action brought pursuant to Fed.R.Civ.P. 23.1 by shareholders of Nominal Defendant Tele-dyne, Inc. (the “Corporation”). This action is brought in the name of and for the benefit of the Corporation against its Board of Directors, as well as certain of its present and/or former officers. The Second Amended Complaint (“SAC”) alleges a continuous course of illegal conduct in which all Defendants have participated directly, as part of a conspiracy and/or by aiding and abetting one another.
Specifically, the SAC describes a pattern of criminal and otherwise fraudulent conduct by several of the Corporation’s subsidiaries and units, including: (1) the sale of between 9 and 12 million suspect or defective electromagnetic switches (known as relays) by Tele-dyne Relays to the United States government over a period of years, resulting in various civil and criminal investigations, charges, and complaints, including a False Claims Act lawsuit pending before this Court and a guilty plea (including a $17.5 million fine) by the Corporation to federal criminal charges of 35 counts of making false statements to the government; (2) charges against Teledyne Systems alleging the submission of inflated prices when bidding for government contracts, which has resulted in a False Claims Act lawsuit for some $90 million in damages (and in which, as with the Teledyne Relays suit, the government has intervened) and a related criminal investigation; (3) a False Claims Act lawsuit and related criminal investigation against Tele-dyne Controls, alleging inadequate testing on cockpit instrument systems used in military aircraft, averring damages of some $300 million, and for which the Corporation has already paid $2.15 million in partial settlement; (4) whistle-blower actions involving the Tele-dyne Electronics Unit, alleging bribery to obtain foreign contracts, and the Teledyne Solid-State Unit, the subject matter of which is unknown; (5) admission of Teledyne Electronics, Teledyne Firth Sterling, Teledyne Electro-Mechanisms, and Teledyne Ther-matics into the Department of Defense Voluntary Disclosure Program, resulting in disclosure of military transponder production discrepancies and failures to conform to re--quirements of various government testing programs and military specifications; and, (6) the execution of federal search warrants on, and the receipt of federal grand jury subpoenas by, several of the Corporation’s other divisions.
Plaintiffs bring four separate claims, two federal, two state: (1) claimed violations of RICO, 18 U.S.C. § 1962(a)-(d), are brought against all Defendants; (2) claimed violations of § 14(a) of the Securities Exchange Act and SEC Rule 14a-9 are brought against the Officer and Director Defendants only; common law claims for (3) intentional breach of fiduciary duties and aiding and abetting the same; and, (4) negligent breach of fiduciary duties, are brought against all Defendants. Plaintiffs seek (a) to recover (on the Corporation’s behalf) the damages alleged to have been caused by the corporation’s illegal activities and the Defendants’ participation or acquiescence therein; (b) return to the Corporation of salaries and other compensation paid and given to the Defendants during the time when the Defendants were in breach of the fiduciary duties they owed to the Corporation; (c) a declaration that the elections of the Directors from 1987 to 1992 are null and void; and, (d) costs and expenses, including attorneys’, accountants’, and experts’ fees.
The various Defendants (including the “Inside Directors,” the “Outside Directors,” the “Officer Defendants,” and Defendant Thomas L. McDowell) have moved to dismiss each and every cause of action in the SAC pursuant to Fed.R.Civ.P. 12(b)(6). Although the Defendants ask this Court to dismiss Plaintiffs’ complaint on a variety of grounds, the Court limits its discussion and decision to two issues. The first appears to be a question of first impression: is a parent corporation (or its shareholders suing derivatively) a proper RICO plaintiff when the racketeering activity complained of was conducted by and through its corporate subsidiaries, directed at third parties (primarily the United States government), and intended for the overall benefit of the Corporation (and its shareholders)? The second question is one about which much has been written: assuming that the officers and directors were somehow culpably involved in the pattern of unlawful conduct alleged, do they violate Section 14(a) of the Exchange Act by failing to confess their involvement prior to the commencement of any litigation questioning that involvement? Because the Court answers these two questions in the negative, Plaintiffs fail to state a viable federal claim, and this lawsuit, including the pendent state law claims, must be dismissed. The Court need not and does not reach the alternative arguments raised.
II. ANALYSIS
For purposes of a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court assumes the truth of all of the allegations in the complaint and views the averments in the light most favorable to the Plaintiffs. Leave to amend is ordinarily granted unless the Court concludes beyond doubt that the Plaintiffs can allege no set of facts consistent with their complaint that would entitle them to relief. Schreiber Dist. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir.1986).
A. RICO CLAIMS
1. Background
Plaintiffs purport to state claims under all of RICO’s substantive provisions (i.e., 18 U.S.C. § 1962(a)-(d)). Under § 1964, any person “injured in his business or property by reason of a violation of’ any of these subsections may bring suit therefor. Drawing on prior interpretation of similar wording in the antitrust laws, the Supreme Court recently held that this “by reason of’ language requires that RICO plaintiffs show proximate causation, one aspect of which is a “direct relation between the injury asserted and the injurious conduct alleged.” Holmes v. Securities Investor Protection Corp., — U.S. -, -, 112 S.Ct. 1311, 1318, 117 L.Ed.2d 532 (1992). “Thus, a plaintiff who complains of harm flowing merely from the misfortunes visited upon a third person by the defendant’s acts [is] generally said to stand at too remote a distance to recover.” Id.
The Ninth Circuit recently adopted the position previously taken by this and other courts that to state a § 1962(a) claim, Plaintiffs must allege injury “by reason of’ the Defendants’ use or investment of racketeering income. Nugget Hydroelectric v. Pacific Gas & Elec., 981 F.2d 429, 437 (9th Cir.1992). This Court has similarly agreed with courts that have held that a § 1962(b) claim requires injury “by reason of’ Defendants’ “acquisition or control of an interest in a RICO enterprise.” E.g., U.S. Concord, Inc. v. Harris Graphics Corp., 757 F.Supp. 1053, 1060 (N.D.Cal.1991). To state a § 1962(c) claim, one must allege an injury “flowing] from the commission of the predicate acts.” Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985); Reddy v. Litton Industries, Inc., 912 F.2d 291, 294 (9th Cir.1990). § 1962(d), which makes actionable conspiracy to violate any one of the three previous provisions, imports the injury-violation nexus of each. See Medallion TV Enterprises v. SelecTV of California, 627 F.Supp. 1290, 1297-1301 (C.D.Cal.1986), affirmed 833 F.2d 1360 (9th Cir.1987); Reddy, 912 F.2d at 294-295.
2. Pleading Injury and Causation
Defendants’ principal argument for dismissal of Plaintiffs’ RICO claims is that under Holmes, the racketeering activity complained of was not the proximate cause of the injuries to the Corporation for which Plaintiffs seek recovery. Put another way, Defendants argue that Plaintiffs lack “statutory standing.” Holmes, — U.S. at -, 112 S.Ct. at 1327 (Scalia, J., concurring) (noting that proximate causality is one element of RICO statutory standing).
Defendants point out that according to the SAC the Corporation was the immediate beneficiary of the alleged wrongdoing (e.g., it retained defense contracts it might not otherwise have gotten, and thereby inflated its earnings and profits); the governments of the United States (and Saudi Arabia and Egypt) were the intended targets; and, any injury the Corporation suffered (decreased profits because of payment of fines, penalties, legal fees, and investigation costs, exposure to massive potential liability, and decreased sales to the government, see SAC ¶¶ 8, 39, 116, 126) resulted not directly from the RICO violations alleged, but from revelation of the predicate acts and the government’s independent decisions to investigate the complaints brought to its attention.
Plaintiffs do not respond to the arguments made by Defendants that the SAC does not state a claim under 1962(a) and 1962(b) because nowhere is it alleged that the injuries complained of were caused or “by reason of,” respectively, the use or investment of racketeering income, or Defendants’ acquisition or control of an interest in a RICO enterprise. While failure to respond to an argument may be deemed consent to ruling against the non-opposing party, see Local Rule 7.9, even the most liberal reading of the SAC reveals that these arguments are meritorious.
In the “damages” section of the SAC, the Plaintiffs allege damages in the form of expenditures of significant sums of money “as a result of the improper'pursuit and retention of defense contracts and other fraudulent and illegal actions described above.” ¶ 116. Earlier in the SAC, Plaintiffs describe in great detail the illicit activity carried on by the various Teledyne subsidiaries, ¶¶2-7, and then allege that “[a]s a result of the foregoing pattern of illegal and wrongful conduct, Teledyne has been damaged in that,” inter alia: (a) it pled guilty to criminal charges and paid a $17.5 million fine; (b) its divisions have been and remain subject to other government sanctions, including contract suspension and disbarment; (c) it faces multi-billion dollar exposure from the pending whistle-blower suits; (d) it has been forced to pay large sums of money for legal and other costs to defend itself against the various lawsuits and on-going investigations; (e) its goodwill and corporate, name have suffered irreparable harm. ¶ 8. Most importantly, Plaintiffs’ RICO claim contains only an extremely general and conclusory averment as to the specific causation requirements of each RICO subsection:
As a direct and proximate result of Defendants’ activities in violation of § 1962(a), (b), (c), and (d) of RICO ... Teledyne has been injured in its business or property because it has suffered the loss of substantial amounts of sales and profits and has been exposed to potential liability, including massive claims for consequential, treble and punitive damages, has incurred damage to its business reputation and has expended and will continue to expend millions of dollars for fines, costs, expenses and legal fees in connection with the Defendants’ unlawful acts.
SAC ¶ 126.
The Court finds that as to the requirement of pleading injury by reason of the violations of § 1962(a) and § 1962(b), Plaintiffs’ allegations are “general, conclusory, and vague,” and therefore do not state claims under these two subsections. Nugget Hydroelectric, 981 F.2d at 487-38; see also U.S. Concord, Inc., 757 F.Supp. at 1060. There is simply no averment or explanation of how the damages described were caused “by reason of’ either Defendants’ use or investment of racketeering income or Defendants’ acquisition or control of an interest in the RICO enterprise. Imagineering, Inc. v. Kiewit Pacific Co., 976 F.2d 1303, 1311 (9th Cir.1992) (RICO violar tion must be “but for” as well as “proximate” cause of injuries complained of). Instead, viewing the allegations in the light most favorable to the Plaintiffs, the only theory of injury stated in the SAC is that the damages incurred by the Corporation are attributable (in both a “but for” and “proximate” causation sense) to the alleged predicate acts of racketeering — mail and wire fraud, false claims, bribery, and illegal proxy statements — and their revelation, investigation, and prosecution by third parties. Accordingly, the § 1962(a) and (b) claims are DISMISSED, and the Court moves on to consider whether Plaintiffs state a § 1962(c) claim, which requires only a showing of injury “by reason of’ the predicate acts.
3. § 1962(c) Claim
If the injuries to the Corporation are understood to be indirect, or, more precisely, derivative of the injuries' to the directly harmed parties, Plaintiffs’ RICO claim is barred on proximate causation/standing grounds, even if the harm to the Corporation was foreseeable. This result is made clear by the Supreme Court’s decision in Holmes, and the Ninth Circuit’s application of Holmes in Imagineering, Inc. v. Kiewit Pac. Co., 976 F.2d 1303 (9th Cir.1992).
In Imagineering, the court labelled the prime contractors’ “intervening inability ... to secure the contracts” as the direct and proximate cause of the subcontractor/Plaintiffs’ injuries. 976 F.2d at 1312. This characterization echoed the Supreme Court’s statement in Holmes that it was the contingent “intervening insolvency” of the broker-dealers that caused injury to the investors and triggered SIPC’s duty to pay. — U.S. at -, 112 S.Ct. at 1319. As in Holmes and Imagineering, a persuasive argument can be made that in the instant ease Plaintiffs lack RICO standing because the harms to the Corporation were most directly caused by some identifiable intervening fact, i.e., the independent decisions of the whistle-blowers and the government to initiate and prosecute the violations committed. In fact, in comparison to Imagineering in particular, the instant ease is weaker for Plaintiffs on the proximate causation issue. In Imagineering, the plaintiffs/sub-contractors had already signed up to do work for the primary contractors; thus, when the primary contractors lost out on contracts, the subcontractors necessarily and foreseeably suffered a loss of their already allocated share of that work as well. Here, however, had the whistle not been blown repeatedly on the wrongful conduct' by the Teledyne subsidiaries, not only would harm not have been done to the Corporation, but the Corporation would have benefitted handsomely.
Two of the three policy considerations informing the standing analysis of the Holmes majority, borrowed directly from antitrust decisions, also suggest that Plaintiffs herein are not proper RICO complainants. First is the fact that suits by less directly injured parties such as Plaintiffs herein raise problems of speculative damages and damages that are difficult to attribute to. the violations complained of (as opposed to other independent factors). Holmes, — U.S. at -, 112 S.Ct. at 1318. It is of course true that the Corporation has incurred costs related to certain aspects of the alleged racketeering scheme. However, before it was exposed and apprehended, the Corporation presumably also received substantial benefits. The overall impact on the Corporation, therefore, will depend on how accurately those involved with the illegal activity weighed the likely gains of their behavior against the possible costs (including the costs of getting caught), and on how successful the Corporation is in avoiding further exposure and in defending the civil suits pending against it. At the very least, determining this bottom line would require this Court to engage in the very sort of complicated and speculative damages questions which the statutory standing doctrine has been designed and interpreted to avoid. See II Areeda and Turner, Antitrust Law, ¶ 336e at p. 182 (1978) (explaining that antitrust law does not and should not confer on derivative plaintiffs standing to complain of antitrust violations intended to benefit their own corporation because the very “fact” of damage to the corporation is open to question).
Moreover, while the injury to the government, e.g., is easily attributed to the Corporation’s wrongful conduct, there are independent factors in the chain of causation that may be partially, even significantly, responsible for the translation of fraud, etc. perpetrated by the Corporation into injury suffered by the Corporation. Such factors could include what Plaintiffs have characterized as the Corporation’s less than forthright or responsible reaction to the initial exposure of its illegal behavior, lack of managerial or director oversight, failure on the part of responsible Corporate officials to take proper remedial steps once corporate wrongdoing was brought to light, or, insufficient or inadequate defense of the Corporation against the charges levied against it. Of course, to the extent the Corporation’s harm was caused or exacerbated by mismanagement, Plaintiffs have an adequate remedy in state law fiduciary duty doctrines.
The deterrence aspect of tort laws in general, and of the treble damage provisions of the antitrust and RICO laws in particular, also suggests that it is unnecessary, and possibly unwise, to confer standing beyond the direct, intended, and necessary victims. The courts have recognized that directly injured parties make for the best private attorneys generals because they have the most access to the information necessary to uncover violations, information that may be hidden from or inaccessible to others further removed. Holmes, — U.S. at -, 112 S.Ct. at 1318; Carter v. Berger, 777 F.2d 1173, 1176, 1777 (7th Cir.1985). Therefore, the “existence of identifiable persons more obviously suffering ... injury whose self-interest would motivate them to vindicate the public interest in antitrust” or RICO enforcement generally weighs against conferring statutory standing on those who suffer less directly and obviously. R.C. Dick Geothermal Corp. v. Thermogenics, Inc., 890 F.2d 139, 148 (9th Cir.1989) (en banc); id. at 161 (Norris, dissenting in part).
Here, however, Plaintiffs seek the benefits that RICO confers on the private attorney general (treble damages), without having made the contribution which RICO and other similar statutes contemplate: detection and disclosure of the statutory violations. As Defendants note, in bringing the instant complaint Plaintiffs here have merely “cribbed” (1) from the various qui tam and other lawsuits filed against the Corporation by the “identifiable” and “more obviously injured” category of persons and entities mentioned above, and (2) from other publicly available information. By simply stringing together a series of facts established or revealed by others, and drawing an inference that the named Defendants must have been involved in or are somehow legally responsible for the wrongs that have occurred, Plaintiffs contribute little if anything to the goal of exposing and ending the infiltration and conduct of legitimate and illegitimate business by racketeers. Indeed, when, as here, the corporate misconduct is intended to benefit the corporation, this is likely always to be the case: Plaintiffs’ incentive to seek vindication of the law arises only after the Corporation’s wrongdoing has been revealed. Unless and until discovered by others, Plaintiffs’ interests are served, not harmed, by any corporate wrongdoing that inures to the Corporation’s benefit (assuming the wrongdoers have calculated correctly).
4. Plaintiffs’ Argument
Without addressing themselves to any of these issues, Plaintiffs merely assert that foreseeability of injury is enough so long as there is a direct relationship between the injury suffered and the wrongful conduct alleged, citing Standardbred Owners Ass’n v. Roosevelt Raceway Assoc., L.P., 985 F.2d 102, 104 (2d Cir.1993). Plaintiffs’ reliance on Standardbred, however, is misplaced. The RICO violations alleged in Standardbred described “a pattern of direct misrepresentations to plaintiffs.” Id. Here, of course, the RICO violations were directed toward the government and were intended to benefit the Corporation. In addition to this factual dissimilarity, the Second Circuit’s application of Holmes in Standardbred appears to be at odds with the Ninth Circuit’s opinion in Ima-gineering.
Although the Second Circuit clearly has rejected foreseeability alone as sufficient to satisfy RICO’s proximate causation requirement, Sperber v. Boesky, 849 F.2d 60, 65-66 (2d Cir.1988) (foreseeability “proves too much” and “alone does not determine proximate cause”), in Standardbred it continued to apply the pre-Holmes test of proximate cause announced in Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23-24 (2d Cir.1990). That test asks “whether the defendant’s acts ‘are a substantial factor in the sequence of responsible causation,’ and whether ‘the injury is reasonably foreseeable or anticipated as a natural consequence.’” Id.
This Hecht test is difficult to reconcile with the language and especially the outcome of Imagineering, and this Court’s decision is of course controlled by the latter. The Imagi-neering opinion goes to some length to explain that “but for” causation and “foreseeability” are not necessarily sufficient to establish proximate cause under Holmes. 976 F.2d at 1312. More than this, while the subcontractors in Imagineering might reasonably invoke the language of Standardbred to the effect that “an injury to the [contractors] was inevitably an injury to them,” as already explained, the harms allegedly incurred by the Corporation herein were unintended and far from inevitable, and in any event, the Ninth Circuit has clearly held that such “inevitability” is not necessarily enough under Holmes.
Plaintiffs’ failure to so argue notwithstanding, reliance on comparisons to the facts or policy concerns underlying Holmes and Ima-gineering is not entirely satisfactory. Holmes and Imagineering and other derivative injury cases operate on the presumption that it is proper and best that the directly injured party recover in full for all damages caused by the wrongdoers, and that the parties injured only secondarily, that is, only because of their relationship with the direct victim, look to share in the direct victim’s recovery for their own compensation. Holmes, — U.S. at -, 112 S.Ct. at 1321 (secondary victims must “wait on the outcome of the [direct victim’s] suit” and may share in the proceeds if that suit is successful); see also Carter v. Berger, 777 F.2d 1173, 1176 (7th Cir.1985).
Here, however, the Corporation can not expect that the directly injured party — the United States or the qui tam Plaintiffs — will share their recoveries (e.g., fines related to criminal guilty pleas or statutory damages from the qui tam actions). From the perspectives of these victims, the Corporation is the wrongdoer and no distinction is made between the shareholders (who own the Corporation and are the Plaintiffs here) and the officers, directors, and employees (who run the Corporation and are the Defendants here). More than this, none of these directly injured parties would be entitled to (or interested in) recovering for other aspects of the alleged damage to the Corporation, including attorneys fees, investigation costs, or lost opportunities to contract with the government. In short, the concern articulated in Holmes and echoed in Imagineering — that allowing indirectly injured parties to sue would involve Courts in “complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries” (— U.S. at -, 112 S.Ct. at 1318; 976 F.2d at 1312) — is not as clearly implicated here. And, to the extent the racketeering activities complained of caused injury beyond damage incurred by the direct and intended victims, denying standing to the less directly victimized might undercut the deterrent purposes of the RICO statute because the wrongdoers could get away with causing more damage than they may be made to pay for (or, more precisely, more than they are made to pay for trebly under RICO).
5. Further Policy Considerations
a. Target Area Approach
The line of RICO cases employing a “target area” analysis illustrates the importance of the fact that the Corporation was the intended beneficiary and the unintended victim of the alleged RICO violations. See 2 Mathews, Weissman, & Sturc, Civil RICO Litigation § 8.04[C][3] at 8-74 (2d Ed.1992). The “target area” approach was adopted implicitly by this Circuit in a pre-Holmes decision, Reddy v. Litton Industries, Inc., 912 F.2d 291 (9th Cir.1990). In Reddy, the Ninth Circuit followed the unanimous lead of the other circuits and held that “an employee who is wrongfully discharged for refusing to participate in an alleged pattern of racketeering activity lacks standing to sue under § 1962(c)” because “the injury he suffered was the result of his alleged wrongful termination and was not caused by the predicate acts.” Id. at 294.
The “target area” approach — even if broadly defined to include “not just the immediate victims of the predicate acts, but also any other persons whose injury is an intended and necessary consequence of the conduct” (Civil RICO Litigation at 8-91)— rules out Plaintiffs claims here. Succinctly stated, there can be no credible argument that the Corporation was the intended target or necessary victim of the wrongful conduct alleged.
b. Zone of Interests
Justice Scalia, concurring in Holmes, noted that “another element of statutory standing is compliance with ... the ‘zone of interests’ test, which seeks to determine whether, apart from the directness of the injury, the plaintiff is within the class of persons sought to be benefitted by that statute at issue.” — U.S. at -, 112 S.Ct. at 1328. Here, it is far from clear that RICO was intended to protect corporate owners (shareholders) from harm arising out of corporate wrongdoing intended to benefit the corporation, and in particular from the participation or acquiescence of the directors and officers whom the shareholders have elected and whom they may remove through traditional corporate state law provisions. And to the extent statutory standing analysis is informed by and varies according to the underlying predicate acts of which Plaintiffs complain, see Holmes, — U.S. at -, 112 S.Ct. at 1328 (Scalia, concurring). Plaintiffs herein would not have standing to complain of mail and wire fraud in the form of false claims submitted to the government, bribery directed at the government and in violation of 18 U.S.C. Sec. 201, or interstate transportation of money or property obtained through fraud in violation of 18 U.S.C. See. 2314. See SAC par. 124.
If RICO was intended to protect certain entities or classes of persons from an enterprise such as the one here alleged, particularly in light of the predicate acts that underlie Plaintiffs’ RICO claim, that group is properly limited to the government and those of the Corporation’s competitors which might have been wrongfully denied their share of the business that the Corporation fraudulently obtained. Sperber v. Boesky, 849 F.2d 60, 64-65 (2d Cir.1988) (relying on Justice Marshall’s dissent in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 521-522, 105 S.Ct. 3275, 3302-3303, 87 L.Ed.2d 346 (1985), for the proposition that proper RICO plaintiffs include the target, the competitor, and the customer of the racketeers, as well as the “ ‘honest investor’ who is displaced by the racketeer who wrests ‘control of a legitimate business’ through racketeering”); U.S. Concord, Inc., 757 F.Supp. at 1060 & n. 12. In the instant case the government has decided to vindicate its interests under different federal statutes (although it is not inconceivable that a RICO claim will be brought by the government at some later date), and, as far as the Court is aware, the Corporation’s competitors have not sought redress through the Courts at all. But that is no reason to allow Plaintiffs to bring a cause of action that belongs in the first instance to these more direct victims of the alleged RICO enterprise. See 18 U.S.C. §§ 1964(b), (c) (Attorney General may bring suit under RICO, as well as any entity injured “by reason of a [RICO] violation”).
c. RICO and Intra-Corporate Relations
Also persuasive is the idea that RICO was not intended to federalize internal corporate relationships. If the Corporation and its shareholders were in fact injured by the alleged actions or inaction of the Defendants, they are free to pursue traditional breach of fiduciary duty corporate remedies under state law. Plaintiffs’ third and fourth claims are in fact for common law breaches of fiduciary duty. And, as noted above, state corporate law uniformly provides a framework for removal of officers and directors.
The wrongs complained of here were done by corporate directors, officers, or employees, acting on “behalf’ of the Corporation, and therefore their wrongs must be considered wrongs perpetrated by the Corporation itself. A derivative action is brought on a corporation’s behalf, alleges causes of action that belong to the corporation, and ultimately benefits the corporate owners — the shareholders (usually including, as here, the directors and officers). It is simply illogical to allow a suit to go forward when it is brought in the name and on behalf of a corporation and seeks to recover for damages flowing from wrongful acts (or, more precisely, from the discovery of those acts) which the law understands as having been committed by the corporation (and purportedly for its benefit). Cf. Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 456 (7th Cir.), cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982) (“Fraud on behalf of a corporation is not the same thing as fraud against it. Fraud against the corporation usually hurts just the corporation; the stockholders are the principal if not only victims.... But the stockholders of a corporation whose officers commit fraud for the benefit of the corporation are beneficiaries of the fraud. Maybe not net beneficiaries, after the corporation is unmasked and the corporation is sued.... But the primary costs of a fraud on the corporation’s behalf are borne not by the stockholders but by outsiders to the corporation, and the stockholders should not be allowed to escape all responsibility for such a fraud.... ”). It is worth noting that this exact category of derivative suit emphatically has been rejected by the leading antitrust commentators for many of the same reasons outlined above. II Areeda and Turner, Antitrust Law, ¶ 336e at p. 182 (1978).
6. The Result
Proximate causation, as an element of statutory standing, is one of the few legal principles that courts openly confess is guided by “normative legal policy considerations” reflecting “ ‘ideas of what justice demands, or of what is administratively possible and convenient.’ ” Hecht, 897 F.2d at 23; Holmes, — U.S. at -, 112 S.Ct. at 1318. No one consideration is dispositive, and in the end the Court is called on to balance the relevant factors and make a judgment call.
Reading the complaint in the light most favorable to the Plaintiffs, and accepting all allegations as true, the Court finds that there are few if any compelling reasons to confer RICO standing on Plaintiffs in this case. On the other hand, as explained in detail in the preceding pages, virtually every test at this Court’s disposal for grappling with the elusive questions of proximate causation and statutory standing suggests that the RICO sword is not properly wielded in an action by shareholders such as Plaintiffs seeking to clean their own corporate house. Plaintiffs’ § 1962(c) claim is therefore DISMISSED. The Court has already dismissed Plaintiffs’ § 1962(a) and (b) claims. Accordingly, Plaintiffs’ § 1962(d) conspiracy claim must be DISMISSED as well.
The Court does not believe that Plaintiffs will be able to state a viable RICO claim under any theory consistent with the facts alleged and this Court’s explication of the controlling legal principles. Accordingly, Plaintiffs are ORDERED TO SHOW CAUSE within twenty-one (21) days of the signing of this Order why the RICO claims should not be DISMISSED WITH PREJUDICE. Defendants may respond within fourteen (14) days of the filing and receipt of Plaintiffs’ arguments should they wish to do so. The matter will then stand submitted.
B. Securities Exchange Act Claims
1. Background
Plaintiffs bring a claim under § 14(a) of the Exchange Act seeking invalidation of the Corporation’s elections for the Board of Directors. The Plaintiffs allege that the Director Defendants repeatedly secured their spots on the Board by distributing misleading proxy materials that failed to disclose “the extent and nature of the nominees’ participation, aiding and abetting and/or willful acquiescence in the [defense contracting] wrongdoing referred to herein including, in particular, the continuing cover-up of fraudulent and illegal Government contract activities.” SAC ¶ 132. More specifically, Plaintiffs aver:
The Proxy Materials were false and misleading in seeking and obtaining the election of the Company’s directors for the period from 1987 to 1992 without disclosing (a) Defendants’ repeated illegal acts and violations of law, including the Teledyne Relays Electromagnetic Relays Scheme, the Teledyne Systems Contract Government Fraud Scheme, the IFF False Testing Scheme, the Teledyne S.A. Egyptian Bribery Scheme, the Teledyne Controls Fraudulent Scheme and the Teledyne Wah Chang Albany Illegal Export Scheme described [in the preceding paragraphs of] this Second Amended Complaint.; (b) that the Officer and Director Defendants had violated the law in a manner which would subject the Company to huge fines and other penalties as well as other damages complained of herein; and (c) that the Officer and Director Defendants participated in the wrongdoing complained of herein in order to continue and prolong the illusion of Teledyne’s success as a leader in the defense industry, to inflate the price of the Company’s common stock, and to conceal the adverse facts concerning Tele-dyne’s illegal conduct, management and future prospects so that they could (1) protect and perpetuate their directoral (and, for the Officer Defendants, their Executive) positions so as to continue their receipt of the substantial compensation, power and prestige they obtained thereby, and (2) inflate the price of Teledyne common stock in order to enhance the value of their security holdings an