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In re AGNC Investment Corp.

United States District Court, D. Maryland

July 3, 2018

IN RE AGNC INVESTMENT CORP (f/k/a AMERICAN CAPITAL AGENCY CORP.), STOCKHOLDER DERIVATIVE ACTION This Document Relates To ALL ACTIONS

          MEMORANDUM OPINION

          THEODORE D. CHUANG UNITED STATES DISTRICT JUDGE.

         James Clem and William Wall, Plaintiffs in these consolidated actions, have brought shareholder derivative suits on behalf of nominal Defendant AGNC Investment Corporation (“AGNC”), alleging that certain AGNC directors and officers (the “Individual Defendants”) breached their fiduciary duties to AGNC and violated federal securities law. Plaintiffs also allege that Defendant American Capital Asset Management, LLC (“ACAM”) aided and abetted the Individual Defendants in the breach of their fiduciary duties. Pending before the Court are two Motions to Dismiss filed by the Individual Defendants and ACAM, respectively. A hearing on the Motions was held on June 15, 2018. For the reasons set forth below, the Individual Defendants' Motion to Dismiss is GRANTED IN PART and DENIED IN PART. ACAM's Motion to Dismiss is GRANTED.

         BACKGROUND

         Plaintiffs, both citizens of California, are shareholders of AGNC. AGNC is a Delaware-incorporated real estate investment trust (“REIT”), with principal executive offices in Bethesda, Maryland. The 11 Individual Defendants include Defendants Gary Kain, Prue B. Larocca, Morris A. Davis, Larry K. Harvey, Malon Wilkus, John R. Erickson, Samuel A. Flax, Robert M. Couch, Randy E. Dobbs, and Alvin N. Puryear, who have each served, at various times, as members of the AGNC Board of Directors, and Defendant Peter J. Federico, who was an officer of AGNC. Defendants Kain, Wilkus, Erickson, and Flax have also served as officers of AGNC. Defendant ACAM is a wholly owned subsidiary of American Capital Ltd. (“American Capital”). ACAM owned American Capital Mortgage Management, LLC (“ACMM”), which in turned owned AGNC.

         The claims in this case relate primarily to a series of transactions involving the management of AGNC. According to Plaintiffs, prior to May 23, 2016, AGNC was externally managed by American Capital AGNC Management, LLC (“AGNC Manager”), a related entity also owned by ACMM. AGNC Manager was subject to the supervision and oversight of AGNC's Board. At the time, AGNC had no dedicated employees of its own. Rather, AGNC Manager was responsible for administering AGNC's day-to-day business activities. AGNC and AGNC Manager were both subsidiaries of American Capital. Other American Capital subsidiaries included American Capital Mortgage Investment Corporation (“MTGE”), another REIT; American Capital MTGE Management, LLC (“MTGE Manager”), which was responsible for administering MTGE's day-to-day operations; Defendant ACAM; American Capital Senior Floating, Ltd. (“ACSF”), and several other related entities. American Capital, AGNC, AGNC Manager, MTGE, and MTGE Manager, along with other American Capital subsidiaries, shared multiple directors and officers, some of whom are Defendants in this case.

         The primary focus of the Amended Complaint is the contract that governed the relationship between AGNC and AGNC Manager before May 23, 2016 (the “Management Agreement”). According to Plaintiffs, the terms of the Management Agreement required AGNC to pay AGNC Manager “exorbitant fees in excess of $100 million” each year, regardless of the performance of AGNC's investment portfolio. Am. Compl. ¶ 6, ECF No. 39. Plaintiffs allege that the fees were unreasonable and in excess of the costs of services performed; subsidized the operations of MTGE and MTGE Manager, both of whose Board of Directors, employees, and management overlapped with those of AGNC and AGNC Manager; and ultimately ended up in the pockets of the Individual Defendants, who served as directors and officers of AGNC, AGNC Manager, MTGE, MTGE Manager, ACAM, American Capital, and other American Capital entities. Plaintiffs assert that the members of AGNC's Board of Directors owed a fiduciary duty to AGNC that required them to renegotiate or cancel the Management Agreement, but because they personally benefited from the payment of the fees, they failed to do so.

         Plaintiffs also allege that AGNC's directors negligently made false and misleading statements relating to the Management Agreement in proxy solicitations sent to shareholders between 2014 and 2016 (the “Proxy Statements”), in which AGNC's directors requested that shareholders vote to re-elect them to AGNC's Board. The Proxy Statements acknowledged that AGNC would be forced to pay a significant penalty for terminating the Management Agreement without cause, but they failed to disclose or explain favorable provisions of the Management Agreement that provided opportunities to negotiate more reasonable terms. According to Plaintiffs, the Proxy Statements misled shareholders into believing that AGNC was locked into the Management Agreement unless it was willing to pay a large termination fee. Plaintiffs also assert that the Proxy Statements failed to disclose and explain the extent of AGNC's overpayment to AGNC Manager for the value of its services, or that AGNC's management fees were being used to cover the external management of MTGE. Plaintiffs claim that had AGNC's shareholders been aware that the Proxy Statements were misleading, they would not have voted to re-elect the Board.

         The second focus of the Amended Complaint is the May 23, 2016 transaction that altered the relationship between AGNC and AGNC Manager (“the Internalization”). On that date, AGNC announced that it would acquire ACMM, the parent company of AGNC Manager and MTGE Manager, for $562 million, thereby becoming an internally managed REIT. The $562 million was paid to ACAM, which at the time owned ACMM and employed Defendants Wilkus, Erickson, and Flax as executives. According to Plaintiffs, the Internalization was damaging to AGNC because it cost $200 million more than AGNC would have paid had it simply terminated the Management Agreement and arranged to manage its own activities internally. Plaintiffs claim that the Internalization grossly overvalued AGNC Manager, the value of which was inflated due to the excessiveness of the management fees that AGNC had been paying for years. Plaintiffs assert that ACAM, by selling ACMM to AGNC, knowingly assisted the Individual Defendants in breaching their fiduciary duties to AGNC, and that without ACAM's assistance, the Internalization would not have occurred.

         On September 21, 2016, Plaintiff James Clem filed a shareholder derivative complaint on behalf of AGNC. Plaintiff William Wall filed a second shareholder derivative complaint on September 30, 2016. Pursuant to a stipulation, the Court consolidated the cases on October 21, 2016. Plaintiffs filed their consolidated Amended Complaint on December 23, 2016. In Count I, asserted against Defendants Couch, Davis, Dobbs, Erickson, Flax, Harvey, Larocca, Puryear, and Wilkus, Plaintiffs allege a violation of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78n(a) (2012). In Count II, asserted against all of the Individual Defendants, Plaintiffs allege that the Individual Defendants breached their fiduciary duties to AGNC by renewing the Management Agreement from 2014 to 2016 and by approving the Internalization. Finally, in Count III, asserted against ACAM, Plaintiffs allege that ACAM aided and abetted the Individual Defendants in the breach of their fiduciary duties regarding the Internalization. Plaintiffs seek a declaratory judgment, damages, equitable and injunctive relief, restitution, and costs.

         DISCUSSION

         AGNC and the Individual Defendants seek dismissal of Count I, Plaintiffs' Section 14(a) claim, on the grounds that the challenged Proxy Statements did not cause the alleged harm to AGNC. They seek dismissal of Count II, the breach of fiduciary duty claim, because (1) Plaintiffs failed to make pre-suit demand, and (2) Plaintiffs' allegations do not establish that a breach of fiduciary duty occurred. ACAM seeks dismissal of Count III, the aiding and abetting a breach of fiduciary duty claim, on the grounds that (1) the claim is contractually barred; (2) Maryland law does not recognize the tort of aiding and abetting a breach of fiduciary duty; and (3) Plaintiffs failed to allege sufficient facts to support a plausible claim of aiding and abetting a breach of fiduciary duty.

         I. Legal Standard

         To defeat a motion to dismiss under Rule 12(b)(6), the complaint must allege sufficient facts to state a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim is plausible when the facts pleaded allow “the Court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Legal conclusions or conclusory statements do not suffice. Id. The Court must examine the complaint as a whole, consider the factual allegations in the complaint as true, and construe the factual allegations in the light most favorable to the plaintiff. Albright v. Oliver, 510 U.S. 266, 268 (1994); Lambeth v. Bd. of Comm'rs of Davidson Cty., 407 F.3d 266, 268 (4th Cir. 2005). A court may consider documents attached to the motion when determining whether to dismiss the complaint if the documents were integral to and explicitly relied on in the complaint, and the plaintiff does not challenge their authenticity. Phillips v. LCI Int'l, Inc., 190 F.3d 609, 618 (4th Cir. 1999).

         II. Count I: Section 14(a)

         Plaintiffs allege that Defendants Couch, Davis, Dobbs, Erickson, Flax, Harvey, Larocca, Puryear, and Wilkus, who served on AGNC's Board of Directors from 2014 to 2016, negligently caused AGNC to issue false and misleading Proxy Statements, which solicited shareholder votes for their re-election to AGNC's Board. In response, Defendants argue that, since Plaintiffs allege that AGNC was harmed by the Board's annual decision to renew the Management Agreement with AGNC Manager, and that decision was not directly approved by the shareholders in response to the Proxy Statements, the claim should be dismissed because the renewals of the Management Agreement were not directly authorized by the votes solicited by the Proxy Statements.

         Section 14(a) of the Exchange Act makes it unlawful to solicit, through an instrumentality of interstate commerce, “any proxy or consent or authorization in respect of any security” in contravention of rules established by the United States Securities and Exchange Commission (“SEC”). 15 U.S.C. § 78n(a)(1) (2012). As relevant here, SEC Rule 14a-9 prohibits the use of a proxy statement that is “false or misleading with respect to any material fact or which omits to state any material fact necessary in order to make the statements therein not false or misleading.” 17 C.F.R. § 240.14a-9(a) (2018). “The purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation.” Gaines v. Haughton, 645 F.2d 761, 773 (9th Cir. 1981). To assert a claim for a violation of Section 14(a), a plaintiff must show “that (1) the proxy statement contained a material misrepresentation or omission (2) that caused the plaintiff injury and that (3) the proxy solicitation was an essential link in the accomplishment of the transaction” that produced the injury. Hayes v. Crown Cent. Petrol. Corp., 78 Fed.Appx. 857, 861 (4th Cir. 2003) (per curiam) (citing Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932 (3d Cir. 1992)). The second and third elements have been termed “loss causation” and “transaction causation, ” respectively. Grace v. Rosenstock, 228 F.3d 40, 47 (2d Cir. 2000); Wilson v. Great Am. Indus., 979 F.2d 924, 931 (2d Cir. 1992).

         Here, Plaintiffs address loss causation by asserting that the repeated renewals of the Management Agreement caused an economic loss to them. As for transaction causation, Section 14(a) is violated when “the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction” that resulted in the economic loss at issue. Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 385 (1970). Thus, the United States Courts of Appeals have consistently held that successfully pleading “transaction causation” in a Section 14(a) suit requires a showing that the challenged proxy statement induced shareholders to directly authorize the specific transaction that resulted in the economic loss. See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 796-97 (11th Cir. 2010) (“Goodman”); Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 933 (3d Cir. 1992).

         For example, in Cathcart, the plaintiff alleged a Section 14(a) violation based on a proxy solicitation that omitted reference to corporate misconduct, including fraudulent billing, failing to supervise a flawed nuclear power plant construction project, and reckless real estate investments. Id. at 929. However, the proxy statements that formed the basis of the Section 14(a) claim solicited shareholder votes to re-elect the Board of Directors and to amend certain corporate governance documents so as to limit liability for company directors. While the plaintiff alleged that the Board would not have been re-elected by the shareholders had the proxy statements revealed the directors' misconduct, the United States Court of Appeals for the Third Circuit nevertheless held that transaction causation had not been satisfied, on the grounds that the proxy statements “did not create any cognizable harm because the shareholders' votes did not authorize the transactions that caused the losses.” Id. at 930, 933. The Court concluded that “the mere fact that omissions in proxy materials, by permitting directors to win re-election, indirectly lead to financial loss through mismanagement will not create a sufficient nexus with the alleged monetary loss” to satisfy the requirement of transaction causation. Id. at 933.

         The United States Court of Appeals for the Eleventh Circuit has likewise concluded that allegedly false statements in a proxy solicitation, which was issued to secure the re-election of the Board of Directors and shareholder approval of certain corporate policies, did not cause the losses resulting from a stock option backdating scheme perpetrated by the directors. Goodman, 594 F.3d at 796-97. The court reasoned that because “the election of directors who violated” stock option policies “only indirectly caused the shareholders' loss, ” the “decision to violate company policies was not accomplished or endorsed by any proxy solicitation materials.” Id.; see also Fisher v. Kanas, 467 F.Supp.2d 275, 283 (E.D.N.Y. 2006) (finding a lack of transaction causation when the challenged proxy statements related to the election of the Board of Directors, not to the adoption of the change-in-control executive compensation agreements alleged to have caused economic losses to the company).

         The United States Court of Appeals for the Ninth Circuit has essentially reached the same conclusion. Noting that “[t]he purpose of § 14(a) was clearly to prohibit management from deceptively securing stockholder approval for transactions requiring such approval, ” the court concluded that “for damages claims relating to the directors' failure to disclose misconduct and/or mismanagement (other than self-dealing or fraud against the corporation), there is no . . . ‘transactional causation,' without regard to ...


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