The Fourth Circuit delivered a lump of coal right before Christmas to a Wachovia shareholder whose 100,000 shares of the Bank’s stock, once worth about $5.6 million, sank into near worthlessness when Wachovia failed.  The case, decided December 23rd, is Rivers v. Wachovia Corp., and it affirms the dismissal of all of Rivers’ claims.

Rivers sued Wachovia and its top officers and directors for misrepresenting the Bank’s  financial condition in the months leading up to its failure in 2008.  He said that he would have sold his shares but for the positive statements made by  the Bank about its soundness and stability, which he said amounted to fraud.

Judge Wilkinson said that although Rivers sought to cast his claims as belonging personally to him (i.e. "individual"), they were in fact derivative claims (which belonged to the corporation). 

It is almost impossible in North Carolina for a shareholder to sue an officer or director for the loss in value of stock.  The Fourth Circuit said that in North Carolina and in South Carolina as well, "[t]he well-established general rule is that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock."

The reasons that such individual actions are precluded include that they prevent "self selected
advocate[s] pursuing individual gain rather than the interests of the corporation or the shareholders as a group,[from] bringing costly and potentially meritless strike suits."  All Wachovia shareholders were equally injured by the misrepresentations of which Rivers complained.

So, " [a] derivative lawsuit is . . . the vehicle for a shareholder to litigate injuries that result in the diminution in value of the corporation’s stock." The North Carolina Supreme Court has recognized two exceptions to its solidly established rule: "(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."

No Fiduciary Duty Was Owed By Wachovia’s Officers To Rivers As A Shareholder

Rivers argued that the defendants owed him a "special duty," which Rivers said was met by the fiduciary duty owed to him by the officers and directors of Wachovia.

Judge Wilkinson quashed that argument, stating  that "[u]nder North Carolina law, officers and directors of a corporation owe a fiduciary duty to the corporation which does not create an individual cause of action."  In other words, the fiduciary duty of an officer/director is owed to the corporate entity, not to the shareholders individually.  Note that the answer can be different with a closely held corporation. 

There Is No Valid Claim For A "Lost Profit Opportunity"

Rivers’ argument that he had a "special injury" met with the same result.  He argued that he "meant to sell his shares in Wachovia before the decline in share price but forwent the opportunity to sell based on the false statements of defendants."  Rivers characterized this as a "lost profit opportunity," but the Court said this argument was "indistinguishable" from the argument that every Wachovia shareholder might make.  Judge Wilkinson said the "effort to disguise a classic derivative claim for the decline in stock value as a ‘lost profit opportunity’ " was "too clever by half."

Judge Wlkinson also pointed out what he termed a "troublesome paradox" in Rivers’ claim.  Rivers was saying that the fraudulent scheme caused his injury, but the same scheme had inflated the value of the stock in the first place.  He said that "[t]he failure to sufficiently capitalize on the effects of an alleged fraudulent scheme is not an injury we are prepared to credit." 

There is also a hypothetical aspect to a shareholder saying he would have sold his shares.  When? How many shares?  At what price?  Judge Wilkinson said that "[u]nlike a typical securities claim involving a precise date, number of shares, price, and profit or loss," such claims "involve only a hypothetical transaction."

So that’s Rivers’ lump of coal.  And if the Rivers case seems like "deja vu all over again," it is.  The North Carolina Business Court dismissed identical claims (brought by the same Plaintiff’s counsel) early in 2011 in Harris v. Wachovia Corp., 2011 NCBC 3. In fact, that last quote from the Rivers case is straight  from Judge Jolly’s opinion in Harris. But be aware that Mr. Harris suffered more pain than Mr. Rivers.  He owned 900,000 shares of Wachovia stock.  And he didn’t even get a lump of coal for Christmas. 

And for the rest of us, we did better than a lump of coal because it’s not all that often that the Fourth Circuit decides a derivative action case.  There’s now a clearly articulated opinion on the issues decided in Rivers.  It’s a must cite if you are moving in federal court to dismiss a derivative claim masquerading as an individual claim.