John Rivers, Jr. v. Wachovia Corporation ( 2011 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JOHN M. RIVERS, JR., 
Plaintiff-Appellant,
v.
WACHOVIA CORPORATION; WELLS
FARGO & COMPANY; G. KENNEDY  No. 10-2222
THOMPSON; DONALD K. TRUSLOW;
THOMAS J. WURTZ; ROBERT K.
STEEL; DOES 1 THROUGH 25,
Defendants-Appellees.

Appeal from the United States District Court
for the District of South Carolina, at Charleston.
Patrick Michael Duffy, Senior District Judge.
(2:09-cv-02941-PMD)
Argued: October 26, 2011
Decided: December 22, 2011
Before WILKINSON, MOTZ, and DUNCAN,
Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Judge Motz and Judge Duncan joined.
2 RIVERS v. WACHOVIA CORPORATION
COUNSEL
ARGUED: Ian Wesley Freeman, George Trenholm Walker,
PRATT-THOMAS WALKER, PA, Charleston, South Caro-
lina, for Appellant. Robert Walker Fuller, III, ROBINSON,
BRADSHAW & HINSON, PA, Charlotte, North Carolina, for
Appellees. ON BRIEF: Daniel S. McQueeney, Jr., PRATT-
THOMAS WALKER, PA, Charleston, South Carolina, for
Appellant. Louis Adams Bledsoe, III, Stephen Montgomery
Cox, Adam Karl Doerr, ROBINSON, BRADSHAW & HIN-
SON, PA, Charlotte, North Carolina, for Appellees.
OPINION
WILKINSON, Circuit Judge:
A former shareholder in Wachovia Corporation, appellant
John M. Rivers, Jr. seeks to recover personally for the precipi-
tous decline in value of his approximately 100,000 shares of
Wachovia stock during the recent financial crisis. The district
court, however, dismissed Rivers’s suit against Wachovia and
four of its senior executives. The court concluded that Riv-
ers’s complaint stated a claim derivative of injury to the cor-
poration and that he was therefore barred from bringing a
direct or individual cause of action against the defendants.
Because Rivers’s varied attempts to recast his derivative
claim as individual are unavailing, we shall affirm the judg-
ment.
I.
On October 1, 2009, John M. Rivers, Jr. filed suit in South
Carolina state court against Wachovia Corporation (since
acquired by Wells Fargo & Company) and four of its former
officers, G. Kennedy Thompson, Robert K. Steel, Thomas J.
Wurtz, and Donald K. Truslow. Rivers’s complaint fills
RIVERS v. WACHOVIA CORPORATION 3
almost 100 pages and lists seven causes of action: fraud, neg-
ligent misrepresentation, breach of fiduciary duty, construc-
tive fraud, breach of duties as corporate officers, gross
negligence, and violation of the South Carolina Securities Act
of 2005.
The crux of the complaint, however, alleges that the defen-
dants misrepresented the financial health of Wachovia and
that, as a result, Rivers retained over 100,000 Wachovia
shares until they lost nearly all value in the market downturn
of 2008. According to the complaint: "Faced with the chal-
lenging housing market, and resulting strain on the mortgage
system [the defendants] set about on a course of conduct to
falsely represent the financial position and performance of
Defendant Wachovia . . . to discourage the Plaintiff from sell-
ing his Wachovia stock."
Rivers claims that the defendants concealed problems
growing out of Wachovia’s 2006 acquisition of Golden West
Financial Corporation, a California-based lender specializing
in adjustable-rate mortgages that enabled borrowers to make
minimum payments lower than the accrued interest on the
loan. As the housing market declined, Rivers alleges that
defendants understated Wachovia’s credit losses, misrepre-
sented the riskiness of Wachovia’s assets, and overstated the
strength of Wachovia’s balance sheet in press releases, SEC
filings, shareholder conference calls, and other materials dis-
seminated to shareholders. Despite the defendants’ continued
assurances, in late 2007 Wachovia’s true financial condition
began to emerge on the heels of the subprime mortgage crisis.
By the end of September 2008 the price of Wachovia’s com-
mon stock had dropped dramatically to below $1 per share
from $13.70 earlier that month and $56.65 in early 2007.
Under such circumstances if the corporation fails or refuses
to assert a claim of injury on its own behalf, the "proper rem-
edy . . . is a ‘derivative action,’ which is an action brought by
a shareholder in the name or right of a corporation to redress
4 RIVERS v. WACHOVIA CORPORATION
an injury sustained by, or to enforce a duty owed to, the cor-
poration." 13 Fletcher Cyclopedia of the Law of Corporations
§§ 5939-5940 (rev. ed. 2011). Rivers, however, declined to
pursue a derivative action, under which any recovery would
inure to the benefit of the corporation. Instead, he sought a
personal recovery for the decline in Wachovia’s share price
on the theory that he had intended to sell his Wachovia stock
before the collapse of the market but was induced not to by
the defendants’ misrepresentations of Wachovia’s financial
stability and health.
The defendants removed the action to federal court on
diversity grounds and moved to dismiss Rivers’s complaint on
the basis that "neither North Carolina law nor South Carolina
law permits direct shareholder claims for losses resulting
solely from a fall in the value of stock." The district court
granted the motion to dismiss all counts of the complaint,
finding that the complaint "boils down to the claim that
Defendants[ ] participated in a fraudulent scheme designed to
deceive Plaintiff and the investing public as to the financial
stability of Wachovia" and that "Plaintiff’s claims . . . are
derivative claims that must be dismissed." Rivers appeals, and
for purposes of this review we take the factual contentions in
his complaint as true. See Braun v. Maynard, 652 F.3d 557,
559 (4th Cir. 2011).
II.
A.
Rivers’s attempt to recover individually for the decline in
Wachovia’s share price contravenes firmly settled corporate
law governing derivative claims. Under both North Carolina
and South Carolina law, "[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." Barger v. McCoy Hillard & Parks, 488 S.E.2d
RIVERS v. WACHOVIA CORPORATION 5
215, 219 (N.C. 1997); see also Babb v. Rothrock, 401 S.E.2d
418, 419 (S.C. 1991) ("It is firmly established by our deci-
sions that individual shareholders may not sue corporate
directors or officers directly for losses suffered by the corpo-
ration.").* Instead, shareholders may pursue such claims as a
derivative suit on behalf of the corporation. The Supreme
Court has described such shareholder derivative suits as a
remedy "for those situations where the management through
fraud, neglect of duty or other cause declines to take the
proper and necessary steps to assert the rights which the cor-
poration has." Meyer v. Fleming, 327 U.S. 161, 167 (1946).
Prohibiting individual suits to recover for injuries that
result in the decline in value of a corporation’s stock is under-
standable, for "the gravamen of [the] complaint is an injury to
the corporation and not to the individual interest of the share-
holder." Hite v. Thomas & Howard Co. of Florence, 409
S.E.2d 340, 342 (S.C. 1991); see Fletcher Cyclopedia § 5913.
An individual action "would not protect the interests of all
stockholders" who suffer a common injury from the decline
in value of the corporation’s stock. Brown v. Stewart, 557
S.E.2d 676, 685 (S.C. Ct. App. 2001). Rather, the recovery of
one shareholder in an individual suit would invariably be at
the expense of other shareholders who suffered an identical
harm.
By contrast, any recovery in a derivative suit redounds to
the benefit of the corporation. Because any recovered dam-
*Rivers alleges that the district court erred in applying North Carolina
law, rather than South Carolina law, in dismissing his claim. This allega-
tion misstates the analysis of the district court, which did not resolve the
choice of law question, but rather held that the suit warranted dismissal
under either North Carolina or South Carolina law. As the district court
stated, "under both North Carolina and South Carolina law, it is a ‘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 corpo-
ration." We agree and therefore need not resolve the choice of law ques-
tion.
6 RIVERS v. WACHOVIA CORPORATION
ages "constitute assets which belong to the corporation," "any
action therefor must be brought in the right of the corporation,
for the benefit of all persons entitled to participate in the dis-
tribution of its assets." Gary v. Matthews, 145 S.E. 702, 703
(S.C. 1928). The procedural requirements for derivative suits
further protect the corporation and its stockholders by pre-
venting a "multiplicity of lawsuits," by limiting "who should
properly speak for the corporation" and by precluding "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."
Norman v. Nash Johnson & Sons’ Farms, Inc., 537 S.E.2d
248, 253 (N.C. Ct. App. 2000) (quoting F.H. O’Neal & R.
Thompson, O’Neal’s Oppression of Minority Shareholders
§ 7:07 (2d ed. 2000)) (internal quotation marks omitted). A
derivative lawsuit is thus the vehicle for a shareholder to liti-
gate injuries that result in the diminution in value of the cor-
poration’s stock.
B.
Given these principles, Rivers would appear to have no leg
to stand on. The heart of his complaint is that he did not sell
his shares in Wachovia before their decline in value due to his
reliance on the defendants’ alleged misrepresentations and
misstatements in Wachovia’s public statements from January
2007 to September 2008, including SEC filings, press
releases, and earnings calls. He claims that due to the defen-
dants’ "concerted actions to conceal the truth and issue reas-
suring misrepresentations to financial markets and Plaintiff,"
he "has been damaged and caused to lose millions of dollars
in the value of stock he held in Wachovia which he otherwise
would have sold."
The problem, of course, is that these allegations describe a
classic injury inflicted on the corporation and identify losses
common to all Wachovia shareholders during the credit crisis.
See Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690, 692
RIVERS v. WACHOVIA CORPORATION 7
(7th Cir. 1990) ("[T]he nub of the problem is that the inves-
tors’ injury flows not from what happened to them . . . but
from what happened to [the company]."). As the district court
observed, the "deterioration in Wachovia’s stock price was
felt by all shareholders, and it reflected the injuries the corpo-
ration itself was suffering"; yet, under an individual action,
"any recovery would come from the pockets of the fellow
shareholders."
Rivers’s individual suit thus runs directly afoul of the prin-
ciple that "a shareholder of a corporation may not recover
individually for injury to the corporation that results in dimi-
nution of the value of the corporation’s stock." Allen ex. rel.
Allen & Brock Constr. Co v. Ferrera, 540 S.E.2d 761, 766
(N.C. Ct. App. 2000). Because Rivers’s claim is derivative of
the injury suffered by Wachovia, his individual cause of
action was properly dismissed.
III.
Rivers insists, however, that his suit falls within two well-
recognized exceptions to the general rule against individual
suits for injuries to the corporation. A "shareholder may main-
tain an individual action against a third party for an injury that
directly affects the shareholder, even if the corporation also
has a cause of action arising from the same wrong," under two
circumstances: "(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." Barger,
488 S.E.2d at 219 (quoting 12B Fletcher Cyclopedia § 5911
(perm. ed. 1993)). It is clear, however, that neither the special
duty nor the special injury exception applies to Rivers’s
claim.
A.
In Barger, the Supreme Court of North Carolina explained
the special duty exception:
8 RIVERS v. WACHOVIA CORPORATION
The special duty may arise from contract or other-
wise. To support the right to an individual lawsuit,
the duty must be one that the alleged wrongdoer
owed directly to the shareholder as an individual.
The existence of a special duty thus would be estab-
lished by facts showing that defendants owed a duty
to plaintiffs that was personal to plaintiffs as share-
holders and was separate and distinct from the duty
defendants owed the corporation.
Id. at 220 (citations omitted). In his complaint, Rivers alleges
that the individual defendants "owed a fiduciary duty to [Riv-
ers] to disclose and communicate truthful and accurate infor-
mation about the financial condition and performance" of
Wachovia. But corporate directors and officers owe such a
fiduciary duty to the corporation itself. Rivers seeks to trans-
form the nature of that duty to one owed to him individually,
but under North Carolina law the fiduciary duty runs to the
corporate entity and any breach may only be asserted by a
shareholder derivatively.
Under North Carolina law, officers and directors of a cor-
poration owe a fiduciary duty to the corporation which does
not create an individual cause of action. See N.C. Gen. Stat.
§ 55-8-30 ("A director shall discharge his duties as a director
. . . in a manner he reasonably believes to be in the best inter-
ests of the corporation."); Id. § 55-8-42 (same with respect to
a corporate officer). As the commentary to the statute empha-
sizes, the prior version of the law "provided that officers and
directors stand in a fiduciary relation ‘to the corporation and
its shareholders,’" while the amended version omits mention
of a fiduciary duty to shareholders. The amendment was
intended "to avoid an interpretation that there is a duty run-
ning directly from directors to the shareholders that would
give shareholders a direct right of action on claims that should
be asserted derivatively." Commentary to N.C. Gen. Stat.
§ 55-8-30. Rivers therefore misplaces reliance on Gilbert v.
Bagley, 492 F. Supp. 714 (M.D.N.C. 1980), for authority that
RIVERS v. WACHOVIA CORPORATION 9
he may bring a direct claim for the defendants’ alleged breach
of their fiduciary duty. Among other reasons, Gilbert is inap-
plicable because it predated both the amendment to § 55-8-30
and the general rule against direct claims articulated in Bar-
ger.
South Carolina law is a bit different. It specifies that offi-
cers and directors of a corporation have a fiduciary duty to act
in the best interest of the corporation and its shareholders. See
S.C. Code Ann. § 33-8-300(a) ("A director shall discharge his
duties as a director . . . in a manner he reasonably believes to
be in the best interests of the corporation and its sharehold-
ers."); Id. § 33-8-420(a) (same with respect to a corporate
officer). But under South Carolina case law, a breach of this
fiduciary duty must be pursued through a derivative, and not
an individual, action. See, e.g., Brown, 557 S.E.2d at 684
("The fiduciary obligation of . . . directors is ordinarily
enforceable through a stockholder’s derivative action.")
(internal quotation marks omitted); Clearwater Trust v. Bun-
ting, 626 S.E.2d 334, 339 (S.C. 2006) ("Appellants allege cor-
porate malfeasance that resulted in identical harm to all
shareholders: such a breach of fiduciary duty gives rise to a
classic shareholders’ derivative suit.").
Nonetheless, Rivers contends that several cases establish
that the defendants owed him a special duty individually.
These cases, however, discuss two categories of special duties
that do not apply here. First, the cases recognize a special
duty where the defendant’s misrepresentations to the individ-
ual plaintiff predated the shareholder-officer relationship and
induced the plaintiff to become a shareholder. See, e.g., How-
ell v. Fisher, 272 S.E.2d 19, 26 (N.C. Ct. App. 1980) (observ-
ing that the "claim cannot be a derivative one, on behalf of the
corporation, when the alleged negligence occurred before
[plaintiffs] were even stockholders"); Allen, 540 S.E.2d at 766
(holding that alleged wrongful acts by defendants which
induced plaintiff to become a shareholder provided a possible
basis for individual recovery). By Rivers’s own account, the
10 RIVERS v. WACHOVIA CORPORATION
defendants’ alleged misrepresentations did not induce him to
become a Wachovia shareholder, but to refrain from selling
stock he already owned.
Second, several cases extend special protection to minority
shareholders in a closely held corporation. See, e.g., Norman,
537 S.E.2d at 260 (holding that "majority shareholders in a
close corporation owe a ‘special duty’ and obligation of good
faith to minority shareholders"); Jacobson v. Yaschik, 155
S.E.2d 601, 605 (S.C. 1967) (holding that officers and direc-
tors of a corporation owe a fiduciary duty to a minority stock-
holder to make a full disclosure of all relevant facts when
purchasing shares from the stockholder). Rivers was not a
minority shareholder in a closely held corporation but one
among many who held Wachovia’s publicly traded shares.
Absent any allegation that Rivers was party to a separate
contract with the defendants which created distinct duties per-
sonal to him, or that he was individually subject to misleading
inducements outside the officer-shareholder relationship, Riv-
ers "fails to set forth any allegations which, even taken as
true, support a special duty between [him] and defendants."
Energy Investors Fund, L.P. v. Metric Constructors, Inc., 525
S.E.2d 441, 444 (N.C. 2000). As in Energy Investors, Rivers
was only one of many to receive or rely upon alleged misrep-
resentations. The misrepresentations allegedly contained in
the filings and releases were available to all shareholders: a
breach of duty to one was perforce a breach of duty to all.
B.
Under the second, special injury exception to the general
rule, the plaintiff must allege an injury "peculiar or personal"
to him. Barger, 488 S.E.2d at 220. An injury may sustain an
individual cause of action where "a legal basis exists to sup-
port plaintiffs’ allegations of an individual loss, separate and
distinct from any damage suffered by the corporation." Id.
(quoting Howell, 272 S.E.2d at 23); see Stewart v. Ficken,
RIVERS v. WACHOVIA CORPORATION 11
149 S.E. 164 (S.C. 1929). A common example of a distinct
injury is a "claim of stock dilution and a corresponding reduc-
tion in a shareholder’s voting power." Fletcher Cyclopedia
§ 5913. This "alleged reduction in [plaintiff’s] individual per-
centage of corporate control is separate and distinct from any
general diminution in the value of corporate stock." Hite, 409
S.E.2d at 342.
Like the special duty exception, the special injury excep-
tion is inapplicable to Rivers’s complaint. It is clear, as we
have noted, that the decline in the corporation’s share value
did not inflict any special or distinct injury on Rivers, but
rather injured the corporation. As such, it does not provide
Rivers with an individual cause of action. See Barger, 488
S.E.2d at 220. Rivers attempts, however, to differentiate
between mismanagement which injured the corporation and
misrepresentations which injured him individually. But this is
a distinction without a difference. When the price of
Wachovia’s common stock dropped from $56.65 per share in
January 2007 to below $1 per share in September 2008, the
corporation was injured and monetary loss was common to
every Wachovia shareholder.
Equally unavailing is Rivers’s "lost profit opportunity" the-
ory of harm. Under this theory, Rivers 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 defen-
dants. This theory suffers multiple flaws. Most basically, the
alleged injury of a "lost profit opportunity" is merely an
opaque way of restating that Rivers was harmed by the
decline in value of Wachovia stock. As the Fifth Circuit stated
in Crocker v. FDIC, 826 F.2d 347, 350 (5th Cir. 1987), the
"lost profit opportunity" theory of harm is indistinguishable
"from the classic model of diminution in the value of corpo-
rate stock," as the "end result" is the same, with the stock of
all shareholders losing value. See also Arent v. Distribution
Scis., Inc., 975 F.2d 1370, 1373 (8th Cir. 1992). Rivers’s
claim that he should recover for the lost opportunity to sell his
12 RIVERS v. WACHOVIA CORPORATION
stock at a better price depends, as the district court noted, on
the allegation that "he suffered losses when Wachovia stock
declined along with the U.S. housing market during the credit
crisis." This effort to disguise a classic derivative claim for
the decline in stock value as a "lost profit opportunity" is thus
too clever by half.
Moreover, courts have recognized that permitting direct
claims for a "lost profit opportunity" presents substantial
problems of proof too speculative to litigate on an individual
basis. See, e.g., Crocker, 826 F.2d at 351. "Unlike a typical
securities claim involving a precise date, number of shares,
price, and profit or loss," such claims "involve only a hypo-
thetical transaction." Harris v. Wachovia Corp., 2011 NCBC
3 ¶ 79 (N.C. Super. Ct., Feb. 23, 2011). As a result, the theory
of liability for these claims depends crucially on the element
of shareholder intent, specifically whether the shareholder
would have sold his shares but for the defendants’ alleged
fraud. Such assertions of intent, however, would often require
courts to extract recollections from the recesses of a particular
investor’s mind or, as the Supreme Court has put it, require
the resolution of "many rather hazy issues of historical fact
the proof of which depended almost entirely on oral testi-
mony." Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723, 743 (1975). The ascertainment of damages would prove
as difficult as the question of liability. Not only would we
have to take our best guess at when Rivers would have sold
his stock based on information that he did not receive, but
"analysis would be required with regard to what would the
stock price set by the market have been at the time of Plain-
tiffs’ proposed sale if accurate information had been pub-
lished." Harris, 2011 NCBC 3 ¶ 79.
Equally problematic, the theory of "lost profit opportunity"
articulates an incoherent theory of harm, as "the deceit is not
coupled with the injury." Kagan, 907 F.2d at 692. Rivers
claims he was injured by the misrepresentations of the defen-
dants. But the defendants’ alleged misrepresentations caused
RIVERS v. WACHOVIA CORPORATION 13
the artificial inflation of the share price and not the depression
in value for which Rivers seeks to recover. In Arent, the
Eighth Circuit observed that the plaintiffs’ claim "fails as a
matter of law because any injury to plaintiffs was not caused
by [the corporation’s misrepresentations]. Plaintiffs were not
harmed because they were unable to realize the true value of
their stock—they were harmed because the true value of their
stock was zero." Arent, 975 F.2d at 1374.
Likewise, Rivers accuses the defendants of concealing
Wachovia’s true financial condition. Ironically, therefore, the
opportunity for profit which Rivers claims he lost existed only
due to the alleged misrepresentations that artificially inflated
Wachovia’s share price. The opportunity for profit was thus
not a casualty of the alleged misrepresentation, but a creation
of it. As in Arent, "if everyone had known this adverse fact
[that Rivers alleges defendants concealed], then the stock’s
value would have reflected the adversity." Id. at 1374; see
also Crocker, 826 F.2d at 351 (same). After all, the drop in
Wachovia’s share price and concomitant collapse of the mar-
ket resulted from the disclosure of material financial informa-
tion, not its concealment.
In sum, Rivers’s claim of a "lost profit opportunity" rests
on a "troublesome paradox": "on the one hand, [plaintiffs]
claim the defendants’ scheme caused their injury; yet on the
other hand, without the scheme, the [plaintiffs] could never
have realized the artificially high profit that they claim to
have unjustly lost." Id. at 352. The failure to sufficiently capi-
talize on the effects of an alleged fraudulent scheme is not an
injury we are prepared to credit.
IV.
In the end, Rivers has failed to articulate principled limits
on the claims he seeks to press. Limiting individual suits to
those who intended to sell is no limit at all; virtually every
shareholder considers selling his shares at various points in
14 RIVERS v. WACHOVIA CORPORATION
time and every investor who suffers substantial monetary
losses will be tempted to recall a prior intent to sell. Rivers
claims his injury is unique but the number of people who may
step forward with a similar tale of inducement not to sell is
nigh infinite. Decisions to buy, sell, or hold shares inevitably
involve a degree of risk and uncertainty. It is all too common
to look back and wish one had invested differently. Invest-
ment presupposes risk—it is not the role of courts to reverse
the consequences of infelicitous decisions after the fact or to
allow one investor to recover losses at the expense of fellow
shareholders. To the extent a shareholder wishes to litigate
this sort of monetary loss due to the misrepresentations of cor-
porate executives, his remedy lies within the framework of the
derivative suit on behalf of the corporation. Because Rivers
pursued a very different route, his suit was properly dis-
missed, and the judgment is affirmed.
AFFIRMED