Genworth Financial, Inc. Consolidated Derivative Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GENWORTH FINANCIAL, INC. )
CONSOLIDATED DERIVATIVE ) C.A. No. 11901-VCS
LITIGATION )
MEMORANDUM OPINION
Date Submitted: June 18, 2021
Date Decided: September 29, 2021
P. Bradford deLeeuw, Esquire of deLeeuw Law LLC, Wilmington, Delaware;
David R. Scott, Esquire of Scott+Scott Attorneys At Law LLP, Colchester,
Connecticut; Thomas L. Laughlin IV, Esquire and Scott Jacobsen, Esquire of
Scott+Scott Attorneys At Law LLP, New York, New York; Robert C. Schubert,
Esquire, Willem F. Jonckheer, Esquire and Dustin L. Schubert, Esquire of Schubert
Jonckheer & Kolbe LLP, San Francisco, California; Robert B. Weiser, Esquire and
James M. Ficaro, Esquire of The Weiser Law Firm P.C., Berwyn, Pennsylvania;
Brett D. Stecker, Esquire of Shuman, Glenn & Stecker, Ardmore, Pennsylvania;
Michael I. Fistel, Jr., Esquire of Johnson & Weaver, LLP, Marietta, Georgia; and
Corey D. Holzer, Esquire of Holzer & Holzer, LLC, Atlanta, Georgia, Attorneys for
Plaintiffs International Union of Operating Engineers Local No. 478 Pension Fund,
Richard L. Salberg, M.D. and David Pinkoski.
Srinivas M. Raju, Esquire of Richards, Layton & Finger, P.A., Wilmington,
Delaware and Greg A. Danilow, Esquire, Caroline Hickey Zalka, Esquire, John A.
Neuwirth, Esquire, Evert J. Christensen, Jr., Esquire and Amanda K. Pooler, Esquire
of Weil, Gotshal & Manges LLP, New York, New York, Attorney for Nominal
Defendant Genworth Financial, Inc. and Defendants Thomas J. McInerney,
William H. Bolinder, G. Kent Conrad, Melina E. Higgins, Nancy J. Karch,
Christine B. Mead, David M. Moffet, Thomas E. Moloney, James A. Parke,
James S. Riepe, Michael D. Fraizer, Martin P. Klein and Kelly L. Groh.
SLIGHTS, Vice Chancellor
In this stockholder derivative action ostensibly brought on behalf of Genworth
Financial, Inc. (“Genworth” or the “Company”), it is alleged that officers and
directors of Genworth breached their fiduciary duties owed to Genworth and its
stockholders by causing the Company to disclose materially false information to the
public regarding the fitness of its long-term care insurance business. Separately,
these same officers and directors allegedly breached their fiduciary duties by causing
the Company to manipulate data regarding the bona fides and timing of an initial
public offering relating to the Company’s Australian mortgage insurance business.
Both breaches, it is alleged, caused substantial harm to Genworth and its
stockholders. Defendants move to dismiss the derivative complaint for failure
properly to plead demand futility under Court of Chancery Rule 23.1 and failure to
state viable claims under Court of Chancery Rule 12(b)(6).
For the reasons set forth below, Defendants’ motion must be granted. While
Plaintiffs’ theory of liability has moved with the wind, it is clear upon submission of
this motion that Plaintiffs are alleging Genworth fiduciaries intentionally caused the
Company to engage in wrongdoing. As pled, this is not, as Plaintiffs variously have
maintained, a failure of oversight case under Caremark. 1 This is, instead, an attempt
1
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
1
at a bad faith claim based on intentional breaches of fiduciary duty. In Delaware,
the sustainable bad faith claim is a “rara avis.”2 When considered against the
documents properly incorporated by reference, Plaintiffs’ complaint presents
nothing approximating a “rare bird” sighting. To the extent Plaintiffs intended to
bring separate claims against the Genworth officers named as defendants in the
complaint, the serial group pleading and failure to separate any claim against officers
leaves the Court with no basis to evaluate the bona fides of officer liability here.
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Verified Second
Amended Complaint (the “Complaint”) and documents properly incorporated by
reference or integral to that pleading. 3 For purposes of the motion, I accept as true
the Complaint’s well-pled factual allegations and draw all reasonable inferences in
the Plaintiffs’ favor.4
2
In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch.
May 20, 2016).
3
Verified Second Am. S’holder Deriv. Compl. (“Compl.”) (D.I. 32); Wal-Mart Stores, Inc.
v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on a motion to dismiss,
the Court may consider documents that are “incorporated by reference” or “integral” to the
complaint).
4
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
2
A. Parties
Plaintiffs, International Union of Operating Engineers Local No. 478 Pension
Fund, Richard Salberg, M.D., David Pinkoski and Martin Cohen, currently hold and
have held common stock in Genworth throughout all times relevant to the claims
asserted in the Complaint.5
Nominal Defendant, Genworth, a Delaware company with headquarters
in Richmond, Virginia, is a large insurance provider, specializing in life insurance,
long-term care (“LTC”) insurance and mortgage insurance (“MI”).6 As of the date
of the Complaint, it was the country’s largest provider of LTC insurance.7
Genworth’s common stock trades on the New York Stock Exchange. 8
Defendant, Thomas McInerney, has served as President and CEO of
Genworth, as well as a director on Genworth’s board of directors (the “Board”),
since 2013. 9 In July 2014, upon the resignation of James Boyle, McInerney also
5
Compl. ¶¶ 10–13.
6
Compl. ¶ 14.
7
Id.8
Id.9
Compl. ¶ 15.
3
became CEO of Genworth’s U.S. Life Insurance Division and head of its
LTC insurance business.10
Defendants, William Bolinder, Gaylord Kent Conrad, Melina Higgins,
Mancy Karch, Christine Mead, David Moffett, Thomas Moloney, James Parke and
James Riepe, each served on the Board at the time this lawsuit was brought.11
Bolinder, Conrad, Higgins, Moffett and Moloney served on Genworth’s Risk
Committee, and Mead, Moloney, Parke and Riepe each served on Genworth’s Audit
Committee. 12
Defendant, Michael D. Fraizer, served as the President, CEO and Chairman
of the Board from May 2004 to May 2012. 13 Defendant, Martin Klein, served as
interim President and CEO upon Fraizer’s departure and until McInerney assumed
these roles. 14 He served as CFO from May 2011 until his departure in October
2015. 15 Defendant, Kelly Groh, has served as CFO since Klein’s departure. She
previously served as Genworth’s controller and principal accounting officer
10
Id.11
Compl. ¶¶ 16–24.
12
Id.13
Compl. ¶ 25.
14
Compl. ¶ 26.
15
Id.4
beginning in May 2012, and she has held a variety of other roles at Genworth going
back to 2004.16
B. The LTC Allegations
As noted, Plaintiffs allege Defendants intentionally breached their duty of
loyalty by knowingly causing the Company to issue materially false and misleading
information regarding the fitness of Genworth’s LTC insurance business. These
false and misleading disclosures prompted civil enforcement actions that exposed
the Company to substantial liability. The Complaint’s allegations in this regard are
summarized below.
The LTC Industry and Genworth’s Involvement
Starting in the 1970s, several insurance companies began selling LTC
insurance under a model where policyholders would pay periodic premiums over a
number of years in return for what the insurers expect will be a relatively brief period
of long-term care insurance coverage in the future. 17 LTC insurance can be applied
to stays at nursing homes, assisted-living facilities or in-home care. 18 By 2013, a
number of insurance providers stopped offering LTC policies upon discovering that
policyholders were staying “on claim” longer than underwriters anticipated and
16
Compl. ¶ 27.
17
Compl. ¶ 32.
18
Id.5
generally were not allowing their policies to lapse before the coverage became
available.19 As other carriers left the LTC insurance market, Genworth doubled-
down. 20 Indeed, on September 25, 2013, McInerney announced at an investor
conference that “[Genworth’s] core business is long-term care.” 21
LTC Reserves
Insurance carriers offering LTC insurance are subject to a unique set of
regulations. 22 One primary area of regulation relates to the maintenance of reserves
to pay future claims. 23 There are two types of reserves related to LTC insurance:
(1) a disabled life reserve (“DLR”), which is used to pay policies where
policyholders have already started making claims, and (2) an active life reserve
(“ALR”), which is used to pay future claims on existing policies where policyholders
have yet to begin making claims.24 Under GAAP rules, as reserves are increased,
19
Compl. ¶ 33.
20
Compl. ¶ 35.
21
Id.22
Compl. ¶ 39.
23
Id.24
Id.6
an expense must be recorded on the company’s income statement, which ultimately
affects overall profitability. 25
As the U.S. Department of Health & Human Services explained in a July 2013
study, “even small errors” in inputs to a company’s reserve calculations can “lead to
major changes in the product’s underlying profitability.” 26 That is why, at least in
part, GAAP, as well as corresponding SEC disclosure rules mandating conformance
with GAAP, require that “[a]n insurance entity shall regularly evaluate estimates
used and adjust the additional liability balance, with a related charge or credit to
benefit expense, if actual experience or other evidence suggests that earlier
assumptions should be revised.”27 According to Plaintiffs, this requires that
Genworth regularly update its experience data regarding the average duration of
claims and policy lapse rates.28 GAAP also requires that Genworth promptly revise
reserve inputs and increase its reserves to take into account its new experience data.29
25
Compl. ¶ 40.
26
Id.27
Compl. ¶ 42 (alteration in original); Financial Accounting Standards Board Accounting
Standards Codification 944-40-35-9.
28
Compl. ¶ 43.
29
Compl. ¶ 44.
7
Board Knowledge of LTC Decline in 2011 and 2012
In April 2011, management “held a long-term care insurance educational
session with many of the Directors.”30 The following month, at a May 18, 2011
Board meeting, the Board (which then included 9 of the 10 directors sued here)
discussed “potential key risks, ‘including earned investment rate, mortality, lapse
rate, and morbidity,’” all of which “impact[ed]” DLRs.31 Later that year, during a
December 7, 2011 Audit Committee meeting, and subsequent discussion with the
Board, then-CEO Fraizer expressed his concerns regarding “the long-term care
insurance old performance,” and he “alert[ed] the Board to the fact that the
Company’s experience data for its older LTC insurance products showed adverse
results.”32 At the same meeting, Genworth’s Chief Actuary provided the Audit
Committee, and subsequently the Board, with an actuarial update and discussed
Genworth’s LTC current experience data and the adequacy of reserves.33
30
Compl. ¶ 46.
31
Id.32
Compl. ¶ 47 (cleaned up).
33
Compl. ¶ 48; Defs.’ Opening Br. in Supp. of Mot. to Dismiss the Second Am. Compl.
(“OB”) (D.I. 37), Ex. 16 (Dec. 7, 2011 Audit Committee Minutes).
8
“This marked the last time the [Board] ever received an update on the Company’s
[LTC] current experience data.”34
In early 2012, Genworth altered its reserve methodology to reject
deteriorating claims experience evidenced during 2009–2010. 35 As a result of
certain management plans and one-time actions taken in 2011, the Board assumed
that Genworth’s future benefit claims would perform at pre-2009 levels. 36 This
decision ultimately was recommended and approved by the firm hired by the
Company to review its methodology for calculating LTC reserves,
PricewaterhouseCoopers (“PwC”)—a recommendation and decision that PwC later
said in a July 2014 report was flawed. 37 Genworth continued to use the old
experience data throughout the relevant time period leading up to the false and
misleading disclosures at issue here.
In October 2012, the Audit Committee received a 2012 LTC actuarial review,
which, in turn, was shared with the entire Board by the Chairman of the Audit
Committee, Parke. 38 The Board was told that the reserves had been calculated based
34
Compl. ¶ 48.
35
Compl. ¶ 37.
36
Id.37
Id.38
Compl. ¶ 49.
9
upon assumptions rather than actual experience data. 39 Then, during an October 29,
2012 special meeting of the Audit Committee, Genworth’s controller reported on the
“potential control failures” in the internal control evaluation involving the LTC
actuarial process. 40 The Audit Committee was told that “management and KPMG
were still reviewing the matter to determine if there was a material weakness in
internal controls.” 41
At the next regularly scheduled Audit Committee meeting, on December 5,
2012, Genworth’s controller reported “six separate control deficiencies identified in
the Company’s LTC insurance business, constituting two significant control
deficiencies.”42 These deficiencies related to the “projection process and procedure”
and the “reserve valuation processes and procedures.” 43 The Audit Committee asked
the Chief Actuary to prepare a report summarizing the LTC actuarial presentation
and to provide a timetable for when Genworth’s controller would present a report to
39
Id.40
Compl. ¶ 50.
41
Id. KPMG served as the Company’s independent auditor during the relevant time period.
Compl. ¶ 128. As discussed below, KPMG was present in Board meetings throughout the
relevant time during which the Board was advised of Company practices related to LTC
reserves.
42
Compl. ¶ 51. KPMG attended this meeting and “discussed its review process and
perspectives on the . . . LTC deficiencies.” OB Ex. 21, at 05059.
43
Compl. ¶ 51.
10
the Audit Committee regarding the status of each of the LTC actuarial projects.44
This development was reported to the full Board the following day. 45
The Board Receives Reports Regarding the LTC Deficiencies While
McInerney Provides False Assurances to Investors
On February 15, 2013, the Board held a regularly scheduled meeting and again
discussed the LTC business and reserves.46 On February 25, 2013, Genworth’s
controller reported to both the Board and Audit Committee at a joint special meeting
on “five significant deficiencies” identified in 2012 related to “long-term care
insurance actuarial valuation” and “LTC projections.”47 Then, at the March 12, 2013
Audit Committee meeting, the Audit Committee received an update where it was
reported: “Complete morbidity assumption update (not completed in 2012). Will
impact Valuation (Reduce Reserves for New Business) . . . .” 48 According to
Plaintiffs, this suggests the Audit Committee members (relevant here, Mead,
Moloney, Parke and Riepe) knew the LTC Actuarial Projections were based upon
44
Compl. ¶ 52.
45
Compl. ¶ 51.
46
Compl. ¶ 56.
47
Id. (alteration omitted). Again, the meeting minutes relied upon for this allegation reflect
KPMG’s attendance and involvement. OB Ex. 14. According to the minutes, KPMG
agreed with management’s conclusion that “no material weaknesses had been identified
during 2012.” Id. at 04877.
48
Compl. ¶ 60.
11
stale assumptions of morbidity rates that would impact the amount of reserves.49
Notwithstanding the multitude of presentations about potential reserve issues, on
May 1, 2013, McInerney told investors, “[w]e believe reserves for both GAAP and
[on a statutory basis] were adequate.” 50
On July 29, 2013, the Audit Committee met again, and KPMG reported on
“new deficiencies identified relating to the Corporation’s long term care insurance
reserves.”51 On the next day, Genworth announced its earnings results for the second
quarter of 2013.52 On August 1, McInerney again attended an investor conference
where he acknowledged that investors were focused on LTC and reported, “[w]e are
conducting an intense, very broad and deep review of all aspects of our LTC
insurance business.”53
49
Id.
50
Compl. ¶ 61 (alterations in original). McInerney reiterated this point at another investor
conference held on July 31, 2013. Id.
51
Compl. ¶ 62 (alterations omitted). Although not pled by Plaintiffs, KPMG went on to
report that “there were no material weaknesses” and that KPMG “was comfortable with
the contents of the Corporation’s Form 10-Q” for the second quarter of 2013. OB Ex. 26,
at 04913.
52
Compl. ¶ 63.
53
Id. (alteration in original).
12
During an October 9, 2013 meeting, the Board discussed certain LTC
disclosure issues with management and the chief actuary.54 Later that month,
McInerney stated at yet another investor conference that the Company had started
an intensive review of its LTC business, including the reserves.55
The November Board Meetings and McInerney’s December
Presentation
On November 21, 2013, Klein sent the Board a draft of the slides McInerney
intended to use at an investor presentation to be made on December 4, 2013
(the “December 2013 Presentation”). 56 Klein indicated that the presentation was
intended to “address key points on margins and assumptions that go into testing” and
that the Board should be prepared to review the presentation at a November 25, 2013
special Board meeting. 57
According to Plaintiffs, the slides themselves made a number of false
representations. First, the December 2013 Presentation represented that “all data”
was “as of September 30, 2013” and that Genworth revised its “actuarial
assumptions” as “circumstances warrant . . . based on our monitoring of actual
54
Compl. ¶ 65.
55
Compl. ¶ 66.
56
Compl. ¶ 69.
57
Id.
13
experience.”58 Contrary to this representation, the Board purportedly knew, based
on its prior meetings regarding reserve deficiencies, that it was using data from 2010
or earlier to calculate its loss reserves and was assuming LTC insurance claimants
would stay on claim for only 2.2 years, when it knew claimants actually stayed on
claim for 2.9 years. 59 There were a multitude of other allegedly false statements
made in the presentation, all regarding the size and adequacy of reserves and the
assumptions utilized to calculate those reserves. 60
On November 25, 2013, the Board met to discuss, among other things, the
December 2013 Presentation. A variety of officers, including McInerney and
Genworth’s Chief Actuary, explained the presentation and discussed the LTC
reserves. 61 The meeting minutes confirm that the actuarial team was involved in the
presentation and was comfortable with the numbers presented. 62 At the same
meeting, the Board discussed the recommendation of the Audit Committee and
58
Compl. ¶ 70.
59
Id.
60
Compl. ¶ 72 (alleging as false the December 2013 Presentation’s statement that “margins
remain strong in aggregate under key sensitivities”); Compl. ¶ 73 (alleging the Board knew
that Genworth’s LTC insurance claims lasted an average of three years, as evidenced by
10-Ks from 2010, 2011 and 2012).
61
Compl. ¶¶ 76–77.
62
OB Ex. 28.
14
management to proceed with a $400-450 million debt offering in early December
2013 to “satisfy GSE capital requirements.” 63
On December 4, 2013, McInerney delivered the December 2013 Presentation
during an investor call.64 He announced that Genworth had “completed the very
intensive, broad and deep review of [its] long-term care insurance business” and that
Genworth had “refined and improved [its] reserving . . . based on analyzing and
using [its] significant data on consumers, underwriting and claims.”65 McInerney
specifically referenced the slide deck throughout his presentation, giving the
impression that the reserve review was based on current claims experience data,
rather than the stale pre-2010 data.66 The following week, during the December 12–
13, 2013 Board meetings, the Board was briefed on investors’ and analysts’ positive
reactions to the December 2013 Presentation.67
63
Compl. ¶ 74.
64
Compl. ¶ 79.
65
Id.
66
Compl. ¶ 81.
67
Compl. ¶¶ 86–87.
15
The 2013 Form 10-K
On February 25, 2014, the Audit Committee and the Board held a special joint
meeting to review Genworth’s Form 10-K for the year ending December 31, 2013.68
Genworth’s controller, Groh, led the discussion regarding “management’s
assessment of internal controls over financial reporting” and, “throughout the
presentation, the Board and the Committee asked questions, to which Ms. Groh,
Mr. Klein and [KPMG] responded.” 69 The Board approved the filing of the
Form 10-K, and the entire Board signed the document.70
According to Plaintiffs, Genworth’s 2013 Form 10-K contained a number of
false statements. First, it indicated that the filing was prepared “in accordance with
U.S. GAAP” and, specifically, that “reserves for estimated future payments of
claims to our policyholders and contract holders” were set “in accordance with
U.S. GAAP and industry accounting practices.”71 Second, the filing stated that the
Company “monitor[s] actual experience and when circumstances warrant, revise[s]
[its] assumptions.” 72 And, third, it noted that Genworth’s “internal control over
68
Compl. ¶ 88.
69
Id. (alteration omitted).
70
Compl. ¶ 89.
71
Compl. ¶ 90.
72
Compl. ¶ 91.
16
financial reporting was effective as of December 13, 2013.” 73 Each of these
statements was false, according to Plaintiffs, because Genworth did not update its
reserves to reflect its current claims or experience data as required by GAAP.74 And
the Board purportedly knew these statements were false because its members knew
that Genworth was relying upon stale claims data.75
The Falsity of the Disclosures Revealed
In January 2014, Genworth hired James Boyle as CEO of its U.S. Life
Insurance Division, which included the LTC business.76 Lynne Patterson was hired
shortly thereafter as the division’s interim CFO.77 From January to June 2014, Boyle
and Patterson reviewed Genworth’s actuarial assumptions and determined that the
reserves reported in the December 2013 Presentation were understated by as much
as $1 billion. 78 On June 16, 2014, Patterson and Boyle met with Genworth’s CFO,
Klein, to discuss their concerns and report that prior assumptions, including those
73
Compl. ¶ 92.
74
Compl. ¶¶ 90–92.
75
Compl. ¶¶ 6, 90.
76
Compl. ¶ 93.
77
Id.
78
Compl. ¶ 94.
17
used in the December 2013 Presentation, were based on “unfounded optimism.”79
While Boyle admitted he did not know whether Genworth’s LTC assumptions were
right or wrong, he advised Klein that he “lacked confidence” in the assumptions and
expressed his view that management needed to devise a process that would garner
confidence in Genworth’s numbers. 80 A month later, on July 16, 2014, Boyle
reported his findings to the Audit Committee and stressed that the “margin disclosure
made” in the December 2013 Presentation “may have been materially overstated.”81
Notwithstanding Boyle’s stated concerns, the Board met on July 28, 2014 to
approve Genworth’s 2Q 2014 financial statements.82 The Board acknowledged that
Patterson and Boyle had resigned, effective that same day, and recognized that since
Boyle could not (and would not) attest to the adequacy of his division’s internal
controls, the Board was forced to rely on written representations from actuaries
within Genworth’s U.S. Life Insurance Division.83 Groh also spoke about the LTC
79
Compl. ¶ 95.
80
Compl. ¶ 96.
81
Compl. ¶ 97.
82
Compl. ¶ 98.
83
Id. I note that included in the materials provided to the Audit Committee ahead of this
meeting was a July 25, 2014 report from PwC alerting the Board that it had been ignoring
adverse claims experiences for years, although the report stated that Genworth’s changes
in claims management were “reasonable” at the time implemented. Compl. ¶ 100.
Specifically, PwC reported: “Our 2012 Report stated that the 2012 DLR Refinement
assumptions were insufficient relative to the 2009-2010 level. Genworth implemented
changes in claims management that appeared to be effective in 2011 and assumed this
18
business in particular and flagged that the current DLR reserve was management’s
best estimate at the time, but further review could change some of the underlying
assumptions.84 After this meeting, and upon Boyle’s resignation, McInerney was
named CEO of the US Life Insurance Division. 85
On July 30, 2014, Klein admitted publicly that Genworth “last performed an
in-depth disabled life reserve review in the third quarter 2012—i.e., more than one
year before the December 2013 Presentation.”86 He also admitted that Genworth’s
last review, in 2012, was “really based on experience that we had up through about
2010—i.e., more than three years before the December 2013 Presentation.” 87 This
revelation caused Genworth’s stock price to plummet, falling 19.4% and eliminating
over $1.5 billion in market capitalization. 88 Ultimately, on November 5, 2014,
Genworth issued a press release announcing the results of its “comprehensive review
improvement would continue. While our report stated there is little evidence to support
this viewpoint, we also noted that it is reasonable for management to assume their actions
would be effective. Recent experience, however, has not returned to the pre-2009 level.”
Id.
84
Compl. ¶¶ 98–99; see OB Ex. 39.
85
Compl. ¶ 103.
86
Compl. ¶ 106 (alterations and internal quotation marks omitted).
87
Id. (internal quotation marks omitted).
88
Compl. ¶ 107.
19
of its long term insurance claim reserves.”89 The press release noted that the review
of its post-May 2010 experience data “resulted in a need to make changes to its
assumptions and methodologies primarily impacting claim terminations.” 90 Upon
implementing these changes, the data showed that Genworth “was materially under-
reserved and that [it] needed to increase reserves by $531 million and take an after-
tax charge of $345 million in the quarter.” 91
The Federal Securities Action Regarding the LTC Disclosures
Following the November 5, 2014 press release, certain Genworth stockholders
sued McInerney and Klein, but not the Board, in the United States District Court in
the Eastern District of Virginia, alleging that both defendants violated Sections 10(b)
and 20(a) of the Exchange Act by making materially false disclosures in connection
with the December 2013 Presentation. 92 On May 1, 2015, the court denied a motion
to dismiss, finding the complaint alleged facts that allowed the court to conclude it
was plausible McInerney and Klein had made five categories of knowingly false
statements: (1) that Genworth had engaged in a “deep review” in the fall of 2013 of
89
Compl. ¶ 116.
90
Id. (internal quotation marks omitted).
91
Id.
92
Compl. ¶¶ 3, 142; In re Genworth Fin., Inc. Sec. Litig., 103 F. Supp. 3d 759 (E.D. Va.
2015).
20
“all important aspects” of its business when, in reality, Genworth last conducted an
in-depth review in 2012; (2) that Genworth was setting reserves based on current
claims data when, in fact, it was using data from 2010 and earlier; (3) that
Genworth’s reserves were adequate notwithstanding that the 2.2-year average claim
duration number used internally was based on old data; (4) that Genworth’s financial
statements complied with GAAP when, for the reasons already stated, they did not;
and (5) that Genworth had effective internal controls notwithstanding that the
Company knowingly utilized stale data to calculate reserves. 93
On March 11, 2016, Genworth announced it had reached an agreement to
settle the Virginia federal action for $219 million, paying $69 million from the
coffers of the Company and the rest through insurers.94
C. The Australian Mortgage Insurance Business
Genworth is a leading provider of mortgage insurance products in a variety of
countries, including Australia.95 The Company sells its products primarily to lender
servicers and banks; in the event mortgage defaults go up, Genworth’s claim payouts
increase and profitability decreases. 96 On January 24, 2011, the Board was provided
93
Compl. ¶ 5.
94
Compl. ¶ 142.
95
Compl. ¶ 143.
96
Id.21
a preliminary review of Genworth’s Q4 2010 earnings and was informed the
Australian mortgage insurance (“Australian MI”) segment was down 37% year-
over-year.97 The Australian MI segment was also down 28% compared to the
estimate set forth in its 2011 operating plan. 98 In the comments section of the slide
deck used to facilitate the January 24 presentation, the Board was advised that the
lower than expected results were not caused solely by weather-related events
affecting the housing market, as some believed, but rather reflected structural
changes in the Australian MI market as well.99
On March 16 and 17, 2011, Genworth’s then-Chief Operating Officer and the
Board discussed the strategic issues facing the Australian MI market and
“how management intended to strengthen [Genworth’s] business model in
Australia.”100 Then, at a Board meeting on May 18, 2011, the Board was informed
that “Queensland’s economy was lagging, that delinquency rates in Queensland as
well as across Australia were increasing, and that the Company needed to, inter alia,
reassess its underwriting practices.”101 The Board also learned that the Australian
97
Compl. ¶¶ 145–47.
98
Compl. ¶ 147.
99
Compl. ¶ 148.
100
Compl. ¶ 149.
101
Compl. ¶ 150.
22
Prudential Regulation Authority (“APRA”) mandated that Genworth hold an
additional $360 million in capital based on concerns with “the quality and
concentration of Genworth’s internal reinsurance.”102
Meanwhile, the Board was advised that the Company’s Australia Rating was
under review by Moody’s and that management had engaged in “significant dialogue
with Moody’s . . . to ensure that the Company’s Australian unit would not be
downgraded.”103 Notwithstanding the deteriorating nature of the business, on
July 14, 2011, the Board met in executive session and unanimously agreed that
“management should continue to analyze and actively explore certain capital
raising/redeployment strategies” regarding Genworth’s Australian MI segment. 104
At a September 14, 2011 Board meeting, Fraizer briefed the Board on
alternatives for the Australian MI business and led a discussion on the “status of the
viability of a potential initial public offering” with respect to that division. 105 The
Board also was advised of the “[c]hallenging macroeconomics and market
conditions [that] impact Australia’s valuation in both M&A and IPO markets.”106
102
Compl. ¶ 151.
103
Id.104
Compl. ¶ 152.
105
Compl. ¶ 153.
106
Id.23
By October 12, 2011, the Board had instructed management to discuss the potential
for a minority IPO transaction with the APRA.107 Less than a month later,
“[o]n November 3, 2011, Genworth publicly announced that it would make a partial
sale of the Australian MI business by means of a minority (40%) IPO.”108 Analysts
viewed the prospect of Genworth’s IPO as overwhelmingly positive.109
On December 7, 2011, Genworth’s Chief Operating Officer provided an
update to the Audit Committee regarding loss reserves for the Australian
MI business. 110 At this meeting, the Audit Committee (which later informed the
Board) discovered that the Australian MI business had encountered delays in lender
processing with resulting delays in the reporting of delinquencies, leading Genworth
to underestimate its reserves. 111 It is alleged the Board knew of these delinquencies
and knew the Company was underreporting reserves.112
Notwithstanding the Board’s alleged knowledge about lender processing
delays and Genworth’s inability correctly to estimate current delinquencies,
107
Compl. ¶ 154.
108
Compl. ¶ 155.
109
Id.110
Compl. ¶ 156.
111
Id.112
Id.24
resulting in the inability to calculate its loss revenues, the Board and management
continued to assure the market of the Australian MI business’s stability. 113 In its
Q4 2011 earnings release, delivered on February 2, 2012, the Company noted
“a decrease in new delinquencies, including reductions in Queensland,” but failed to
mention its inherent inability to calculate accurately those delinquencies in the first
place. 114
At a Board meeting on March 14–15, 2012, the Board was informed that
management was “re-evaluating IPO timing given multiple considerations.”115
According to Plaintiffs, in evaluating timing considerations, the Board was informed
that APRA was requiring a supervisory levy of the Australian MI business and that
a lower valuation of the business was “expected” within the timeframe contemplated
for the IPO.116 With these facts in hand, as of March 14–15, it is alleged the Board
knew the IPO would not move forward as scheduled.117
On April 17, 2012, the Company announced in a press release that the
Australian IPO would be delayed and that the Company “expect[ed] to report
113
Compl. ¶ 164.
114
Id.115
OB Ex. 10, at 02360; see Compl. ¶¶ 190–91.
116
Compl. ¶¶ 190–91.
117
Id.25
elevated loss experience in Australia as lenders accelerated the processing of later-
stage delinquencies from prior years[.]”118 The following day Genworth’s stock
price declined by more than 23%. 119 The fact that this news was delivered “out of
the blue” surprised many analysts, particularly given that the Australian MI business
had “never reported an operating loss.”120
On May 2, 2012, the CFO of Genworth’s Global MI segment revealed the
details of the precise loss in Q1 2012—the Australian MI business’s loss ratio was
154%, up from 46% in the previous quarter. 121 This revelation led to a lawsuit in
the United States District Court in the Southern District of New York, where
Genworth stockholders sued Fraizer and Klein, as officers of Genworth, for
violations of Sections 10(b) and 20(a) of the Exchange Act in connection with false
statements they made regarding the financial health of the Australian MI business.122
The complaint there survived a motion to dismiss and the litigation is ongoing. 123
118
Compl. ¶ 175.
119
Compl. ¶ 177.
120
Compl. ¶¶ 178–79.
121
Compl. ¶ 180.
122
Compl. ¶ 194.
123
Id.26
D. Procedural History
Plaintiffs filed their initial complaint in this Court on January 13, 2016.124
Plaintiffs exercised their right to amend without leave on March 28, 2016. 125 When
Defendants moved to dismiss that complaint, Plaintiffs moved to amend, resulting
in the filing of their (now operative) Second Amended Complaint. 126 The operative
Complaint comprises two counts: Count I alleges Breach of Fiduciary Duty against
all Defendants related to the LTC Business and Count II alleges Breach of Fiduciary
Duty against all Defendants related to the Australian MI Business.127
Defendants promptly moved to dismiss the Complaint and
contemporaneously filed their Opening Brief in support of the motion.128 Plaintiff
responded with a Motion to Stay on the grounds that Genworth had announced it
would be acquired by merger and that the merger may eliminate Plaintiffs’ derivative
124
D.I. 1.
125
D.I. 6.
126
D.I. 28, 32.
127
Compl. ¶¶ 215–22. As discussed below, Defendants made no effort to separate claims
against the individual Defendants and, importantly, made no effort to separate claims
against the Director Defendants and the Officer Defendants.
128
D.I. 36.
27
standing. 129 Defendants opposed the requested stay and, after argument, the Court
declined to stay the action. 130
The Court heard oral argument on the motion to dismiss on February 20,
2017. 131 Shortly after the hearing, the parties requested that the Court defer deciding
the motion to dismiss while Genworth negotiated the previously announced
merger. 132 The parties repeated that request several times thereafter over the course
of more than three years.133 On April 26, 2021, the parties advised the Court that
the merger would not go forward and offered to provide supplemental submissions
regarding the motion to dismiss.134 The last of those submissions was filed on
June 18, 2021, and the matter was deemed submitted for decision that day. 135
129
D.I. 48.
130
D.I. 49, 61.
131
D.I. 70.
132
D.I. 71.
133
D.I. 73–76, 84–88, 90–98.
134
D.I. 99.
135
D.I. 107.
28
II. ANALYSIS
Plaintiffs endeavored to plead demand futility under Rales by alleging that a
majority of the Board in place at the time the Complaint was filed face a substantial
likelihood of liability for breaching their duty of loyalty by consciously allowing
management to mislead investors regarding the state of Genworth’s LTC insurance
and Australian MI businesses. 136 But Plaintiffs have incorporated by reference in
their Complaint Board-level documents that plainly contradict their demand futility
allegations. These documents bely any inference of conscious wrongdoing by
making clear that the Board properly relied upon the Company’s independent
auditor, KPMG, and the Company’s internal auditors, regarding the adequacy of the
LTC reserves and the accuracy of the public disclosures regarding those reserves.
As to the Australian MI business, the properly incorporated documents reveal the
Board did not know if the IPO would be delayed until immediately before the delay
was announced, and, as with the LTC claims, the Board properly relied upon outside
expert advice during every step of the IPO process. Thus, Plaintiffs have failed to
136
Rales v. Blasband, 634 A.2d 927 (Del. 1993). The Court notes our Supreme Court
recently modified the demand futility analysis. See United Food & Com. Workers Union
v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020), aff’d, 2021 WL 4344361 (Del. Sept. 23,
2021). As discussed below, the modification does not affect the analysis here.
29
plead particularized facts showing that demand upon the Board is excused.
Defendants’ motion to dismiss the Complaint, therefore, must be granted.
A. The Demand Futility Standard
“A cardinal precept of the General Corporation Law of the state of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
corporation.”137 Plaintiffs’ claim against all Defendants for breach of fiduciary duty
alleges harm suffered by Genworth itself, and any recovery for that harm would flow
to Genworth. Thus, the claim belongs to Genworth and the decision whether to
pursue the claim presumptively lies with the Board. 138 With that said, our law
recognizes that, “[i]n certain circumstances, stockholders may pursue litigation
derivatively on behalf of the corporation as a matter of equity to redress the conduct
of a torpid or unfaithful management . . . where those in control of the company
refuse to assert (or are unfit to consider) a claim belonging to it.” 139
137
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
138
White v. Panic, 783 A.2d 543, 550 (Del. 2001) (“In most situations, the board of
directors has sole authority to initiate or to refrain from initiating legal actions asserting
rights held by the corporation.”); Brookfield Asset Mgmt., Inc. v. Rosson, 2021
WL 4260639, at *8 (Del. Sept. 20, 2021) (confirming that, in Delaware, our courts look to
who suffered the harm and who will benefit from any recovery when assessing whether a
claim is direct or derivative).
139
In re CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL 268779, at *27
(Del. Ch. Jan. 27, 2021), as corrected (Feb. 4, 2021) (quoting Cumming v. Edens,
2018 WL 992877, at *11 (Del. Ch. Feb. 20, 2018) (internal quotation marks omitted)).
30
“Because stockholder derivative suits by [their] very nature . . . impinge on
the managerial freedom of directors, our law requires that a stockholder satisfy the
threshold demand requirements of Court of Chancery Rule 23.1 before he is
permitted to assume control of a claim belonging to the corporation.” 140 Rule 23.1,
like Rule 9(b) in the context of fraud, requires pleadings to “comply with stringent
requirements of factual particularity that differ substantially from the permissive
notice pleadings governed solely by Chancery Rule 8(a).”141 To meet the Rule 23.1
requirements, the stockholder must plead with particularity either that she made a
demand on the company’s board of directors to pursue particular claims or why any
such demand would be futile, thereby excusing the need to make a demand
altogether. 142 Where, as here, the stockholder plaintiff chooses the latter path, she
“must plead particularized facts creating a reasonable doubt concerning the Board’s
ability to consider the demand.”143 “The operative question is therefore whether
140
Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017) (cleaned up).
141
Brehm, 746 A.2d at 254; In re The Boeing Co. Deriv. Litig., 2021 WL 4059934, at *21
(Del. Ch. Sept. 7, 2021) (same).
142
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044
(Del. 2004); Wood v. Baum, 953 A.2d 136, 140 (Del. 2008); In re The Boeing Co., 2021
WL 4059934, at *21. Chancery Rule 23.1(a) reads, in part, that “[t]he complaint shall . . .
allege with particularity the efforts, if any, made by the plaintiff to obtain the action the
plaintiff desires from the directors . . . and the reasons for the plaintiff’s failure to obtain
the action or for not making the effort.” Ct. Ch. R. 23.1(a).
143
In re CBS, 2021 WL 268779, at *28.
31
‘demand is excused because the directors are incapable of making an impartial
decision regarding whether to institute such litigation.’”144
Until very recently, Delaware applied one of two tests in determining demand
futility. “The first, established in Aronson v. Lewis, ‘applie[d] to claims involving a
contested transaction i.e., where it is alleged that the directors made a conscious
business decision in breach of their fiduciary duties.’”145 The second and broader
test, established in Rales v. Blasband, applied where a majority of the members of
the board “had not participated in the challenged decision,” 146 or, more commonly,
“where the subject of a derivative suit is not a business decision.”147 Over time,
however, Delaware courts favored the broad applicability of Rales over the
inflexibility of Aronson.148 Indeed, the Wolfe & Pittenger treatise observes:
144
Zuckerberg, 250 A.3d at 877 (citing Stone v. Ritter, 911 A.2d 362, 367 (Del. 2006)).
145
In re The Boeing Co., 2021 WL 4059934, at *22; Aronson, 473 A.2d at 814. Under
Aronson, the plaintiff must plead particularized facts that create a reasonable doubt that
(i) the directors are disinterested and independent or (ii) the challenged transaction was
otherwise the product of a valid exercise of business judgment. Wood, 953 A.2d at 140.
146
Zuckerberg, 250 A.3d at 887.
147
Wood, 953 A.2d at 140; see also Horman, 2017 WL 242571, at *6 (holding that Rales
applies “when a plaintiff challenges board inaction such as when a board is alleged to have
consciously disregarded its oversight duties”).
148
E.g., Zuckerberg, 250 A.3d at 877 (“Both tests remain authoritative, but the Aronson
test has proved to be comparatively narrow and inflexible in its application, and its
formulation has not fared well in the face of subsequent judicial developments. The Rales
test, by contrast, has proved to be broad and flexible, and it encompasses the Aronson test
as a special case.”); see id. at 886 (“Delaware’s evolving jurisprudence, and particularly
32
[O]ne might argue . . . that it would be both simpler and more direct to
regard the original Aronson analysis as a subpart of the more generally
applicable and consistently relevant test set forth in Rales. Indeed,
recent decisional law seems to be trending incrementally toward a
recognition of and preference for the more efficient utility of the Rales
analysis.149
This trend has reached a denouement. In United Food and Commercial Workers v.
Zuckerberg, Vice Chancellor Laster amalgamated Aronson with Rales to form a
three-part test. 150 In doing so, he carefully identified certain analytical shortcomings
of Aronson that have limited its utility, particularly in the wake of Section 102(b)(7)
exculpation for duty of care violations, before proposing Rales as a general
framework for all demand futility claims. 151 “This decision therefore applies Rales
as the general demand futility test,” he wrote, but “[i]n doing so, this decision draws
upon Aronson-like principles.”152 Now, for each director, when conducting a
demand futility analysis, Delaware courts ask:
(i) whether the director received a material personal benefit from the
alleged misconduct that is the subject of the litigation demand;
the pleading-stage application of Section 102(b)(7) under Cornerstone, have dismantled
the logic of Aronson. Viewed on its own terms, Aronson is no longer a functional test.”).
149
2 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in
the Delaware Court of Chancery § 11.03[c][4], 11-114–15 (2d. ed. 2020).
150
Zuckerberg, 250 A.3d at 890.
151
Id. at 877–91.
152
Id. at 890.
33
(ii) whether the director would face a substantial likelihood of liability on
any of the claims that are the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who received a
material personal benefit from the alleged misconduct that is the subject
of the litigation demand or who would face a substantial likelihood of
liability on any of the claims that are the subject of the litigation
demand. 153
Just days ago, our Supreme Court expressly adopted the Zuckerberg test in a
unanimous en banc decision. 154 The Court observed, “[s]ubsequent changes in the
law have eroded the ground upon which [Aronson’s] framework rested,” before
concluding, “it is both appropriate and necessary that the common law evolve in an
orderly fashion to incorporate those developments.”155 The purpose of the demand
futility analysis remains the same—to determine “whether the board should be
deprived of its decision-making authority because there is reason to doubt that the
directors would be able to bring their impartial business judgment to bear on a
153
Id.
154
United Food & Com. Workers Union v. Zuckerberg, 2021 WL 4344361, at *2
(Del. Sept. 23, 2021).
155
Id. at *16.
34
litigation demand.” 156 Importantly, “the refined test does not change the result of
demand-futility analysis.”157 Thus, I apply Zuckerberg but achieve the same result
as would be yielded under the traditional Rales framework.
“On a motion to dismiss pursuant to Rule 23.1, the Court considers the same
documents, similarly accepts well-pled allegations as true, and makes reasonable
inferences in favor of the plaintiff—all as it does in considering a motion to dismiss
under Rule 12(b)(6).”158 Because Rule 23.1 requires a heightened pleading standard,
however, conclusory allegations “not supported by allegations of specific fact may
not be taken as true.” 159 In this case, because the Complaint cites documents
Plaintiffs obtained through their Section 220 demand, I may consider those
documents under the incorporation-by-reference doctrine to determine whether the
Complaint has accurately referenced their contents in support of Plaintiffs’ claims
and in pleading demand futility. 160
156
Id.
157
Id. Accordingly, I am satisfied that supplemental briefing on Zuckerberg is
unnecessary.
158
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 976
(Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004) (citing White, 783 A.2d at 549).
159
Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988) (cleaned up).
160
Reiter ex rel. Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *5–6 (Del. Ch.
Oct. 18, 2016); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016).
Stockholder plaintiffs routinely, as of late, argue that when a defendant attaches a number
of documents, including Section 220 documents, to its motion to dismiss, the motion
should be converted to a motion for summary judgment. See Flannery v. Genomic Health,
35
The gravamen of this Complaint’s demand futility allegations is that a
majority of the Board is interested under prong 2 of the Rales (now Zuckerberg) test
because of its (1) complicit participation in allowing management to give false
disclosures regarding Genworth’s LTC business and (2) lackadaisical willingness to
allow the minority IPO of the Australian MI segment to move forward on false
pretenses notwithstanding its knowledge of the segment’s dire financial straits.
Plaintiffs argue these breaches of fiduciary duty by a majority of the Board that
would consider a demand were “of a nature that would expose [them] to
‘a substantial likelihood’ of personal liability,” 161 excusing demand under Rales
(and now prong 2 of Zuckerberg). To determine whether the Board is so exposed,
Inc. et al., 2021 WL 3615540, at *8 (Del. Ch. Aug. 16, 2021); Acero Cap., L.P. v. Swrve
Mobile, Inc., 2021 WL 2207197 (Del. Ch. June 1, 2021); In re CBS, 2021 WL 268779, at
*18; In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *14 (Del. Ch. Oct. 1,
2019). Here, perhaps given the lack of prevalence of this position at the time this motion
was briefed and argued, Plaintiffs have not argued for conversion, notwithstanding
Defendants’ attachment of over 50 exhibits in support of their motion. With that said, the
Court will adhere to the confines of the incorporation by reference doctrine. Incorporation
by reference “does not enable a court to weigh evidence on a motion to dismiss. [Instead,]
[i]t permits a court to review the actual documents to ensure that the plaintiff has not
misrepresented their contents and that any inference the plaintiff seeks to have drawn is a
reasonable one.” Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020).
161
Horman, 2017 WL 242571, at *6 (“Particularized facts create a reasonable doubt of the
board’s independence and disinterestedness when the demand would reveal board inaction
of a nature that would expose the board to ‘a substantial likelihood’ of personal liability.”
(quoting Rales, 634 A.2d at 936)).
36
the Court must first identify precisely what Plaintiffs allege these fiduciaries did
wrong.
B. Caremark or Something Else?
Throughout this litigation, the parties struggled to characterize Plaintiffs’
claims. Plaintiffs initially pled this case as a breach of the duty of loyalty by
fiduciaries acting in bad faith, 162 while Defendants’ motion to dismiss framed the
claims as arising under Caremark.163 In their answering brief, Plaintiffs stated that
“Defendants mischaracterize Plaintiffs’ claims regarding the Australian MI units as
so-called ‘Caremark claims,’”164 and instead maintained they were alleging
“knowing and intentional misconduct by the Board.”165 In reply, Defendants
asserted that Plaintiffs “abandoned” their Caremark claims and that their “new
theory”—that Genworth’s directors knowingly facilitated false and misleading
statements about Genworth’s LTC business and the Australian IPO—likewise fails
as a matter of law. 166
162
Compl. ¶¶ 213–22.
163
OB at 51–62.
164
Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss the Second Am. Compl. (“AB”)
(D.I. 58), at 52.
165
Id. at 53.
166
Defs.’ Reply Br. in Supp. of Mot. Dismiss the Second Am. Compl. (“RB”) (D.I. 62),
at 7–8.
37
Confusion persisted at oral argument. Defendants stated that the claims
originally appeared to them as “straightforward Caremark claims” but that
Plaintiffs’ pleading characterized them as “conscious wrongdoing” and therefore
“no longer [residing] in Caremark land.” 167 Defendants offered the view that the
“conscious wrongdoing” accusations required an even higher standard of pleading
akin to fraud. In response, Plaintiffs’ counsel allowed that “our claim is that the
board of directors consciously allowed the company to violate the law, which is a
Caremark claim,”168 only to be reminded that in their answering brief they were
equally adamant that their claims did not arise under Caremark. 169 Given the tumult
regarding the true basis for Plaintiffs’ asserted claims, I address that issue first, albeit
briefly, before turning to whether Plaintiffs have well-pled a basis to excuse demand
under any theory of liability.
167
Transcript of Oral Argument at 7:12, 11:7, 16, Genworth Fin., Inc. Consol. Deriv. Litig.
(Del. Ch. Feb. 20, 2017) (C.A. No. 11901-VCS).
168
Id. at 71:19–21.
169
Id. at 72: 19–24, 73:1–3 (“Mr. Laughlin: I think for ease of analysis, the idea that they’re
all Caremark claims is a reasonable framework, with the caveat being made that the—The
Court: Just so I can—this is page 52, and this is a quote. ‘Caremark is inapplicable,
however, because the directors there had no reason to know . . . the liability-inducing
conduct at issue.’”).
38
1. Caremark
In Caremark, Chancellor Allen held that directors could be liable for a
“sustained or systematic failure of the board to exercise oversight.” 170 As
highlighted by this court many, many times since Caremark, 171 the claim that
corporate fiduciaries have breached their duties to stockholders by failing to monitor
corporate affairs is “possibly the most difficult theory in corporation law upon which
a plaintiff might hope to win a judgment.”172 A decade after Caremark, our Supreme
Court clarified that our law will hold directors personally liable only where, in failing
to oversee the operations of the company, “the directors knew that they were not
discharging their fiduciary obligations.”173 Given that a claim grounded in
Caremark is derivative, at the pleadings stage, a plaintiff must allege particularized
facts that satisfy one of the necessary conditions for director oversight liability
articulated in Caremark: either that (1) “the directors utterly failed to implement any
170
Caremark, 698 A.2d at 971.
171
See Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *1
(Del. Ch. Aug. 24, 2020) (“It has become among the hoariest of Chancery clichés for an
opinion to note that a derivative claim against a company’s directors, on the grounds that
they have failed to comply with oversight duties under Caremark, is among the most
difficult of claims in this Court to plead successfully.”).
172
Caremark, 698 A.2d at 967; Globis P’rs, L.P. v. Plumtree Software, Inc.,
2007 WL 4292024, at *7 (Del. Ch. Nov. 30, 2007) (same); Desimone v. Barrows,
924 A.2d 908, 939 (Del. Ch. 2007) (same); Guttman v. Huang, 823 A.2d 492, 506 n.33
(Del. Ch. 2003) (same).
173
Stone, 911 A.2d at 370.
39
reporting or information system or controls”; or (2) “having implemented such a
system or controls, [the directors] consciously failed to monitor or oversee its
operations thus disabling themselves from being informed of risks or problems
requiring their attention.”174
“Delaware courts routinely reject the conclusory allegation that because
illegal behavior occurred, internal controls must have been deficient, and the board
must have known so.” 175 Rather, the plaintiff must plead with particularity
“a sufficient connection between the corporate trauma and the board.” 176 To draw
that connection, the plaintiff must well-plead facts that allow an inference that the
directors’ behavior falls within either prong one (no oversight system or controls)
or prong two (failure to oversee once controls are in place) of Caremark. 177
The Caremark standard “draws heavily upon the concept of director failure to
act in good faith.”178 As our Supreme Court explained in Disney, the “intentional
dereliction of duty” or “conscious disregard for one’s responsibilities,” which “is
174
Id.175
Desimone, 924 A.2d at 940.
176
La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d on
other grounds, 74 A.3d 612 (Del. 2013).
177
Stone, 911 A.2d at 370.
178
Id. at 369.
40
more culpable than simple inattention or failure to be informed of all facts material
to the decision,” reflects that directors have acted in bad faith and cannot, by default,
avail themselves of defenses grounded in a presumption of good faith. 179 In order
to plead a derivative claim under Caremark, therefore, a plaintiff must plead
particularized facts that allow a reasonable inference the directors acted with scienter
which, in turn, “requires [not only] proof that a director acted inconsistent[ly] with
his fiduciary duties,” but also “most importantly, that the director knew he was so
acting.”180
2. Caremark Not Pled Here
Here, Plaintiffs have not alleged that a majority of the director Defendants
violated their Caremark duties by failing to implement an oversight system under
prong one; indeed, they allege functionally the opposite—that the Board was
informed throughout regarding Genworth’s false and misleading disclosures and yet
still endorsed them.181 To state the obvious, this means there is no allegation the
Board utterly failed to implement any reporting or information system or controls.
179
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 66 (Del. 2006).
180
In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011).
181
Compl. ¶¶ 46–48, 56, 65, 69, 74–77, 87–89, 97–98, 101–02, 114–15, 124, 132 (each
detailing distinct Board meetings where the Board was kept informed about the Company’s
LTC-related problems).
41
“To state a ‘prong two’ Caremark claim, Plaintiff must ‘plead [particularized
facts] that the board knew of evidence of corporate misconduct—the proverbial
‘red flag’—yet acted in bad faith by consciously disregarding its duty to address that
misconduct.’”182 Here again, that is not what Plaintiffs have alleged. Indeed, the
substance of Plaintiffs’ claim is not that the Board missed red flags, as to either the
LTC or Australian MI business, but rather that the Board had direct knowledge of
the contemporaneous wrongdoing and participated in it by endorsing the false and
misleading disclosures and allowing them to stand uncorrected. This is not a
Caremark claim.
To be sure, the claim as pled here is Caremark-like, and some of our
decisions—including my own—have glossed over this distinction and analyzed
similar claims under prong two of Caremark.183 This is understandable given that
182
Chou, 2020 WL 5028065, at *17 (quoting Reiter, 2016 WL 6081823, at *8) (alterations
in original).
183
See, e.g., Clovis Oncology, 2019 WL 4850188, at *13–14 (holding that plaintiffs well-
pled a claim under Caremark prong 2 when the board allegedly knew management was
incorrectly and illegally reporting material information to the market and regulators);
In re Am. Int’l Gp., Inc., 965 A.2d 763, 799 (Del. Ch. 2009) aff’d sub nom. Teachers’ Ret.
Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011) (stating that the
plaintiffs well-pled a breach of the duty loyalty based on a failure to “monitor or oversee”
when AIG’s inner circle ran a “criminal organization”); Chou, 2020 WL 5028065, at *1–
2, 7 (holding in part that the plaintiffs well-pled a Caremark prong 2 claim when the illegal
business model was allegedly “known to and approved at the highest levels” of the
company); South v. Baker, 62 A.3d 1, 6 (Del. Ch. 2012) (“[D]irectors can be held liable
under [Caremark] for knowingly causing or consciously permitting the corporation to
violate positive law, or for failing utterly to attempt to establish a reporting system or other
42
the scienter element of an oversight claim looks very much like the bad faith that
undergirds an allegation that a fiduciary has knowingly participated in a violation of
law.
But the prong two Caremark claim alleges that the fiduciary “consciously
disregarded” a red flag that warned of corporate malfeasance. That is very different
from what Plaintiffs have alleged here. According to Plaintiffs, Genworth’s
fiduciaries engaged in conduct even more pernicious; they picked up the proverbial
red flag and led the charge as the Company knowingly violated federal disclosure
laws.184 This is not Caremark; it is, instead, a far less nuanced claim that Defendants
oversight mechanism . . . a plaintiff asserting a Caremark claim must plead facts sufficient
to establish board involvement in conscious wrongdoing . . .”) (emphasis added).
184
As Plaintiffs themselves summarized, “[we], therefore, do not allege a Caremark . . .
claim; rather, [we] allege knowing and intentional misconduct by the Board.” AB at 53
(emphasis added); see id. at 57 (“Rather than missing ‘red flags’ . . . , Plaintiffs allege that
the Board knew the status of the Australian MI unit, knew its information regarding
delinquencies in Australia was unreliable, and yet, failed to act to prevent the Company
from consistently issuing false and misleading statements regarding the health of the
Company’s Australian business.”) (emphasis in original); id. at 34–35 (“[T]he [Complaint]
alleges that Defendants consciously allowed Genworth and McInerney to make numerous
false and misleading statements about the Company’s LTC business in violation of the
federal securities laws.”); Compl. ¶ 217 (“Defendants breached their fiduciary duties by
willfully and/or recklessly: knowingly permitting a breakdown of Genworth’s internal
controls . . . ; authorizing Genworth’s public announcements and SEC filings which they
knew or recklessly disregarded understated [sic] the Company’s reserves to the investing
public, in violation of GAAP and the federal securities laws and regulations; and prompting
its executives to knowingly and repeatedly make false assurance to the investing public
regarding the adequacy of the Company’s LTC reserves and reserving processes.”).
Plaintiffs make a nearly identical allegation concerning the Australian MI business.
Compl. ¶ 221.
43
acted in bad faith in breach of their duty of loyalty by causing the Company to
engage in fraud in violation of positive law. 185
Having clarified what claim Plaintiffs have alleged, and what claim they have
not alleged, I turn next to whether they have well-pled that a majority of the demand
Board face a substantial likelihood of liability under Zuckerberg such that demand
upon the Board is excused.186
185
See 1 Robert S. Saunders et al., Folk on the Delaware General Corporation Law
§ 141.02[A][3][a], 4-41 (7th ed. 2021) (“The fiduciary duty of loyalty includes a
requirement to act in good faith, which is ‘a subsidiary element, i.e., a condition, of the
fundamental duty of loyalty.’”) (citing Stone, 911 A.2d at 370)); In re Orchard Enters.,
Inc. S’holder Litig., 88 A.3d 1, 33 (Del. Ch. 2014) (“A plaintiff can call into question a
director’s loyalty by showing that the director . . . [intentionally] failed to pursue the best
interests of the corporation and its stockholders and therefore failed to act in good faith.”);
In re AIG, 965 A.2d at 798 (finding a breach of the duty of loyalty when one is “being
directly complicitous in various fraudulent schemes”); Disney, 906 A.2d at 67 (bad faith
includes “act[ing] with the intent to violate applicable positive law”) (citing In re Walt
Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del. Ch. 2005) (Chandler, C.)); In re Massey
Energy, 2011 WL 2176479, at *20 (holding “a fiduciary of a Delaware corporation cannot
be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the
law”); Guttman, 823 A.2d at 506 n.34 (“[O]ne cannot act loyally as a corporate director by
causing the corporation to violate the positive laws it is obliged to obey.”); Leo E. Strine, Jr.
et al., Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law,
98 Geo. L. J. 629, 650–51 (2010) (“No agent can act loyally toward a principal by
undertaking . . . consciously unlawful activity in the name of the principal.”).
186
Before Zuckerberg, there was conflicting authority on whether purposeful inaction by a
Board was analyzed under the Aronson or Rales framework. See, e.g., In re China
Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *23 (Del. Ch. May 21, 2013)
(applying Aronson because “[t]he conscious decision not to take action was itself a
decision.”); In re Dow Chem. Co. Deriv. Litig., 2010 WL 66769, at *6 (Del. Ch. Jan. 11,
2010) (“For conscious board decisions—whether to act or not—the two-pronged Aronson
test applies. A board’s failure to act absent a conscious decision to refrain from acting, such
as a failure to supervise, is analyzed under Rales.”) (footnotes omitted). But see In re Duke
Energy Corp. Deriv. Litig., 2016 WL 4543788, at *15 (Del. Ch. Aug. 31, 2016) (applying
Rales instead of Aronson to directors’ failure to correct inaccurate disclosures and noting
44
C. The LTC Claims
As relates to Genworth’s LTC business, Plaintiffs point to three areas where
they allege the Board knew of bad acts and nevertheless endorsed them. First,
Plaintiffs allege the Board should have prevented or corrected McInerney’s
statement to investors on December 4, 2013, that the Company had recently
completed a “very intensive, broad and deep review” of its LTC reserves. Second,
Plaintiffs allege the Board consciously allowed McInerney falsely to disclose to the
market that Genworth’s reserves were calculated using current claims data and that
Genworth’s LTC reserves were adequate. Finally, Plaintiffs allege the Board
consciously allowed SEC filings, with their signatures, to be false with respect to
Genworth’s compliance with GAAP and the adequacy of its internal controls.
I address each in turn.
McInerney’s “Deep Review” Comment
At the December 4, 2013 meeting with investors, McInerney declared that
Genworth had “completed the very intensive, broad and deep review of [its] long-
term care insurance business.”187 This statement followed earlier statements from
the struggle in picking between the two and “the folly of regarding those two analyses as
the components of a binary choice”); In re Intel Corp. Deriv. Litig., 621 F. Supp. 2d 165,
173 (D. Del. 2009) (applying Rales in a case of “conscious inaction” by the board). The
implementation of a single test for demand futility, like Zuckerberg, solves this problem.
187
Compl. ¶ 79 (alteration in original).
45
McInerney, including on October 30, 2013, to the effect that Genworth had “beg[u]n
an intensive, very broad and deep review of all aspects of [our] long-term care
business about 4 months ago.”188 I assume for the sake of analysis that Plaintiffs
have well-pled the statements were false.189 But they have failed to well-plead that
the Board had any reason to believe the statements were false or, for that matter,
knew that McInerney would make or had made those statements.
It is true, as Plaintiffs allege, that Riepe admitted in the federal action that the
2013 LTC review “was not a deep dive.”190 And one might reasonably infer that the
other members of the Board appreciated that there was a distinction between a “deep
dive” and a more cursory management review of a business unit. 191 Indeed, at the
188
Compl. ¶ 66 (alteration in original).
189
I note that in the federal action pending in Virginia, Judge Spencer found, on an arguably
more rigorous pleading standard than is applicable here, that McInerney’s statements
during investor calls and in SEC filings, as pled, were false. In re Genworth Fin. Inc. Sec.
Litig., 103 F. Supp. 3d 759, 773–74, 785–86 (E.D. Va. 2015). This includes comments
regarding the recency of claims data and that Genworth performed a deep review of the
LTC business in 2013. Judge Spencer did not address, however, whether the plaintiffs
there had well-pled that members of the Board knowingly participated or acquiesced in the
false statements.
190
Compl. ¶ 6. Plaintiffs’ suggestion that Riepe’s acknowledgement that the 2013 LTC
review “was not a deep dive” somehow suggests that the entire Board shared that
understanding ignores our law that a plaintiff must plead facts “specific to each director”
because “Delaware law does not permit the wholesale imputation of one director’s
knowledge to every other for demand excusal purposes.” Desimone, 924 A.2d at 943(emphasis in original).
191
Compl. ¶ 37.
46
Board meeting on March 14–15, 2012, the Board received a presentation regarding
PwC’s “long term care deep dive.”192 Even so, contrary to Plaintiffs’ allegations,
the minutes reflect that management advised the Board near the culmination of the
review in October 2013 that it had performed an “extensive review” before
discussing their conclusions with the Board (including regarding LTC reserves)
at length.193 There is simply no well-pled fact that would allow an inference the
Board had any reason to doubt that representation.194
192
OB Ex. 10, at 02346. I note the succeeding page of the slide deck further illustrated an
in-depth review of the process, suggesting the Board understood what a “deep dive” was.
193
OB Ex. 27, at 07171 (Oct. 9–10, 2013 Board Minutes) (cited in Compl. ¶ 65).
194
Plaintiffs attempt to invoke the “core operations” doctrine as a means to justify an
inference that the Board “must have known” McInerney was pushing false information to
the market regarding the LTC business because of the “significance of the LTC reserves”
to Genworth’s business. See AB at 41; Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010)
(recognizing that in certain limited circumstances corporate fiduciaries can be charged with
knowledge of matters related to the corporation’s “core operations”). That argument falls
short. Pfieffer expressly recognized that it is not reasonable to charge non-management
directors with knowledge of highly complex or technical matters that require special skill
or knowledge to understand. Id. at 693. The setting of insurance loss reserves certainly
falls into that category. As disclosed in the Company’s Form 10-Ks, Genworth’s reserves
“reflect estimates and actuarial assumptions with regard to [Genworth’s] future
experience,” which “involve the exercise of significant judgment” because Genworth’s
“actual future experience” may not be “consistent with the assumptions” relied upon by
management. OB, Ex. 1, at 61 (Mar. 3, 2014 Form 10-K); OB, Ex. 2, at 63 (Feb. 28, 2013
Form 10-K) (same); OB, Ex. 3, at 62 (Feb. 27, 2012 Form 10-K) (same). PCAOB Auditing
Standards reflect this complexity by acknowledging that outside auditors “may encounter
complex or subjective matters” that “require special skill or knowledge” and require “using
the work of a specialist to obtain appropriate evidential matter,” including the
“[d]etermination of amounts derived by using specialized techniques or methods
(for example . . . determinations for insurance loss reserves).” PCAOB Auditing Standards
AU § 336.07, Using the Work of a Specialist (1994).
47
Moreover, Plaintiffs fail to well-plead that a single Board member other than
McInerney, much less a majority of the Board, knew McInerney would or did make
the “deep review” statement to investors, even when the pled facts are viewed in a
light most favorable to Plaintiffs. According to the Complaint, the Board received
the slides for the December 2013 Presentation on November 21, 195 but there is no
allegation those slides gave notice of McInerney’s intent to tell investors that
Genworth had engaged in a deep review of its LTC business. At the November 25
meeting, ahead of the December 2013 Presentation, the Board discussed the
proposed debt offering and the draft slides, but again, there was no mention that
McInerney planned to tell investors the Company had engaged in a “deep review.”196
Then, on December 12–13, the Board was briefed on the reception of the
December 2013 Presentation, including the “positive reaction from analysts” and
that the presentation “solidified management assertions on reserve adequacy and
raised credibility.” 197 There is no indication, however, that any aspect of the
discussions revealed to the Board that McInerney had misrepresented to investors
the extent to which the Company had studied the state of its LTC business.
195
Compl. ¶ 69.
196
Compl. ¶¶ 74–77.
197
Compl. ¶¶ 86–87.
48
“[A] director cannot be put on ‘inquiry notice by something he or she never saw or
heard.’”198
McInerney’s Comments Regarding “Current” Claims Experience
Data and the Adequacy of LTC Reserves
In advance of the December 2013 Presentation, the Board was provided a
copy of the slide deck that McInerney intended to review with investors. This slide
deck contained numerous statements Plaintiffs allege are false: (1) that “all data”
was current “as of September 30, 2013,” (2) that the company revised its “actuarial
assumptions” as “circumstances warranted . . . based on [its] monitoring of actual
experience,” and (3) that “margins remain strong in the aggregate under key
sensitivities.”199 Each statement was false, say Plaintiffs, because the claims data
was not current, was not updated, and deeply affected the margins.
I again assume for the sake of analysis that Plaintiffs have well-pled these
statements were false. The question remains, however, whether Plaintiffs have well-
pled the Board knew of the falsity and nevertheless allowed McInerney to make
fraudulent statements to investors.
198
Horman, 2017 WL 242571, at *27 n.61 (citing In re Citigroup Inc. S’holders Litig.,
2003 WL 21384599, at *2 (Del. Ch. June 5, 2003)).
199
Compl. ¶¶ 70, 72.
49
To answer the question, the Court must address two issues. First, are there
particularized allegations regarding the Board’s independent knowledge of
Genworth’s failure to update its claims data? Second, even if the Board had some
sense of this failure, does the fact that KPMG gave “clean,” unqualified audit
opinions year-after-year, including with respect to Genworth’s Consolidated
Balance Sheets and Consolidated Statements of Cash Flows, which included LTC
reserves, coupled with management’s constant assurances to the Board that LTC
reserves were being adequately addressed, absolve the Board of liability under
8 Del. C. § 141(e) as a matter of law? 200
As to the Board’s knowledge, Plaintiffs allege the Board knew LTC claims
lasted an average of approximately three years (2.9 years to be exact), as disclosed
in the Company’s SEC filings for 2010–2012.201 Yet, for the 2009 10-K, the Board,
then consisting of Defendants Karch, Mead, Moloney, Parke and Riepe, approved
language disclosing the average claim duration was approximately two years
200
I note that the failure to update claims data is the foundation of Plaintiffs’ assertion that
any statement regarding the adequacy of reserves was also false. “To the extent that an
LTC insurance company’s experience data is inconsistent with its original inputs, the
company must change its estimates assumptions and, where necessary, increase its
reserves.” Compl. ¶ 44. For that reason, I focus on the claims (experience) data only.
201
Compl. ¶ 73 (noting how the Board “documented this fact in their annual reports filed
with the SEC for 2010, 2011, and 2012, as well as various other filings with the SEC”).
50
(2.2 years to be exact). 202 Moreover, say Plaintiffs, a 2014 PwC report reveals that,
in 2012, PwC informed the Board that Genworth’s “DLR Refinement assumptions
were insufficient relative to the 2009-2010 level.”203
What Plaintiffs leave out, however, is that same 2014 PwC report also noted
there was “no evidence that management did not look at all the evidence available
in reaching their judgments or that management ignored relevant data [in 2012],”
and emphasized that the 2012 reserve assumptions “were based on reasonable,
supportable and explicit management assumptions regarding trends and expected
results from their business plan.” 204 Contrary to the inferences Plaintiffs would have
me draw, none of their pled facts allow a reasonable inference that the Board had
any reason to doubt management’s assurances or otherwise know that Genworth
continued to use stale data up to the point of either the December 2013 Presentation
or the release of the 2013 Form 10-K.
But even if one could draw an inference that the Board was aware of a concern
that management was relying upon some stale data in setting reserves, KPMG and
202
Id. Defendants offer credible arguments, based on properly incorporated documents,
that Genworth did not set DLR reserves based on “average claim duration” but, instead,
relied upon “termination rates.” OB at 49–50. I need not address those arguments,
however, as the claim fails on other grounds.
203
Compl. ¶¶ 37, 73.
204
OB Ex. 40, at 06324. And, of course, it is hard to miss that the 2014 PwC report was
created the year after the December 2013 presentation.
51
management were in the room and contributed mightily to the Board’s
understanding of these issues. Neither sounded alarm bells. While Plaintiffs
understandably seek to plead KPMG and management’s involvement out of the
Board minutes, those minutes do not allow those allegations to stand as well-pled.
“[D]irectors of Delaware corporations are fully protected in relying in good faith on
the reports of officers and experts.”205 More specifically, “independent directors are
entitled to rely in good faith on advice from the auditors that corporate books and
records are accurate and GAAP-compliant and that corporate internal controls are
adequate.”206
Plaintiffs do not contend that the setting of insurance loss reserves is a simple
task, and for good reason—the task is complicated and requires extensive input from
actuaries, accountants and other experts to get it right.207 The chief actuary of the
205
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 132 (Del. Ch. 2009); 8 Del. C.
§ 141(e) (“A member of the board of directors, or a member of any committee designated
by the board of directors, shall, in the performance of such member’s duties, be fully
protected in relying in good faith upon the records of the corporation and upon such
information, opinions, reports or statements presented to the corporation by any of the
corporation’s officers or employees, or committees of the board of directors, or by any
other person as to matters the member reasonably believes are within such other person’s
professional or expert competence and who has been selected with reasonable care by or
on behalf of the corporation.”).
206
In re AIG, 965 A.2d at 828 n.246.
207
See OB Ex. 1, at 61 (Mar. 3, 2014 Form 10-K); OB Ex. 2, at 63 (Feb. 28, 2013 Form
10-K); OB Ex. 3, at 62 (Feb. 27, 2012 Form 10-K); PCAOB Auditing Standards AU
§ 336.07, Using the Work of a Specialist (1994).
52
LTC business, John Nigh, confirmed to the Board at the November 25, 2013
meeting, as explained by the meeting minutes (on which Plaintiffs substantially
rely), 208 that the actuarial team had participated in developing the December 2013
Presentation and was comfortable with the LTC numbers presented.209 While
Plaintiffs argue the Board should have been “on suspicion that something [was]
wrong” with the claims data prior to this point, the facts from properly incorporated
documents simply do not bear that out.210
KPMG had certified Genworth’s financial statements and internal controls in
2012 and 2013, providing the Board further solace that nothing nefarious was
afoot.211 Going back further, on December 7, 2011, the date of an Audit Committee
meeting during which Plaintiffs claim the Audit Committee was briefed on the
problems regarding Genworth’s current LTC experience data, the Audit Committee
was also alerted by Genworth’s Chief Actuary that the LTC reserving process was
“at an advanced level,” a sentiment shared by PwC.212 Throughout 2012, the Board
208
Compl. ¶¶ 69, 74–78, 81.
209
OB Ex. 28.
210
In re Baxter Int’l, Inc. S’holders Litig., 654 A.2d 1268, 1270 (Del. Ch. 1995) (citing
Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. Super. 1963)).
211
OB Ex. 2–3.
212
OB Ex. 17, at 01932.
53
was constantly alerted by management, with KPMG present and in agreement, of
potential control issues and how the Company was addressing them. 213 This
continued into 2013 when, during a February 25, 2013 Board meeting to review the
2012 10-K, Genworth’s controller and KPMG advised the Board that there were no
material weaknesses and the financial statements and controls of the Company were
consistent with GAAP and SOX. 214 These assurances were repeated again in 2014
with regard to the 2013 10-K.215
In short, despite Plaintiffs’ claims that Defendants knew the claims data was
stale and, nevertheless, consciously allowed McInerney to mislead investors by
referring to it, those allegations find no support in well-pled facts. Instead, the facts
reveal the Board did not know the data was stale, and even if it had some suspicion,
reassurances from those closer to and with more knowledge of the matter reasonably
would have quelled any concerns.
SEC Filings Regarding the Adequacy of Reserves and Compliance
with GAAP
The next set of allegations is more of the same, but they relate to Genworth’s
2013 Form 10-K. Here, Plaintiffs allege that the document falsely disclosed that it
213
Compl. ¶ 37 (noting Board discussions in early 2012), ¶¶ 50–51 (noting Board
discussions on October 29 and December 5, 2012); OB Ex. 19–21.
214
Compl. ¶ 56; OB Ex. 14.
215
OB Ex. 13, at 07248; Compl. ¶ 88.
54
was prepared “in accordance with GAAP” and that the Company “calculated and
maintained reserves for estimated future payments of claims to our policyholders
and contract holders in accordance with U.S. GAAP and industry accounting
principles.”216 Plaintiffs also take issue with the 10-K’s statement that Genworth
“monitored actual experience, and when circumstances warrant, revised [its]
assumptions.”217 Finally, Plaintiffs point to the SOX Certification declaring that
Genworth’s internal controls were effective and functioning properly. 218
Here again (and likely more so), the fact that KPMG approved of the 10-K
through an audit, both as to financials and controls, scuttles any reasonable inference
that the director Defendants acted in bad faith when approving the 2013 10-K.
KPMG made clear in its audit findings that “no material weaknesses had been
identified during 2012” and again, regarding the second quarter of 2013, “there were
no material weaknesses” such that KPMG was “comfortable with the contents of the
Corporation’s Form 10-Q.”219 Delaware law requires directors to be informed, but
it does not demand that informed directors reject their auditor’s repeated assurances
216
Compl. ¶ 90.
217
Compl. ¶ 91.
218
Id.219
OB Ex. 26, at 04913.
55
regarding complicated aspects of a Company’s public filings, such as reserve levels
and GAAP compliance. 220
D. The Australian MI Claims
Plaintiffs allege Board members breached their duty of loyalty by waiting to
announce a delay of the minority IPO until the last minute and by allowing the
Company to mislead the market regarding the true state of its reserves and how they
would affect the upcoming IPO. These claims, too, must be dismissed. 221
Put simply, the dispositive question here is whether the Board knew Genworth
planned to delay the IPO prior to its announcement on April 17, 2012. Plaintiffs’
claim in this regard turns on information relayed to the Board at its March 14–15,
2012 meeting, where the Board purportedly was informed by management that the
IPO would be delayed. 222 Importantly, the minutes from that meeting, properly
incorporated by reference, reflect that there was no definitive discussion or
220
See, e.g., 8 Del. C. § 141(e); In re Citigroup, 964 A.2d at 132.
221
Notwithstanding Plaintiffs’ improper group pleading, I note that Conrad, McInerney,
Moffet and Higgins did not join the Board until after the events that are the gravamen of
Plaintiffs’ allegations with respect to the Australian MI business. Compl. ¶¶ 199, 203,
205–06, 209.
222
Compl. ¶¶ 190–91 (citing the CEO & CFO report presented to the Board during the
meeting).
56
suggestion by either management or Genworth’s financial advisor, Goldman Sachs,
that the IPO would have to be delayed. 223
The Complaint references the CEO & CFO report delivered to the Board at
the meeting, but that report, once again, does not support the inference Plaintiffs
would have me draw. 224 According to Plaintiffs, the report reflects: potential
problems with performing an IPO in Q2 2012, namely that APRA was requiring a
supervisory levy; that management knew an expected lower value would reduce
redeployment opportunities, forgo value and signal weakness; and that management
was no longer briefing or providing draft prospectus to syndicate analysts in early
March.225 When read in the only reasonable context, however, these comments in
the CEO & CFO Report simply flags the “cons” in a comprehensive “pros and cons”
analysis with respect to the launch of an IPO in Q2 2012. On the very same slide
where these comments appear, the CEO & CFO Report also highlights several
223
OB Ex. 9, at 00204 (“Mr. Pehota then provided an update on the proposed minority
initial public offering of the Corporation’s Australia mortgage insurance subsidiary.
At this juncture, the representatives from Goldman Sachs also joined the meeting by
teleconference. Mr. Lopez-Balboa then reviewed the key valuation and timing
considerations for the Australia IPO. Mr. Fraizer then noted certain other potential
alternatives for continued portfolio re-positioning. The Board engaged in discussion
regarding the Australian IPO and asked questions, to which management and the
representatives from Goldman responded.”) (emphasis added).
224
Id.225
Compl. ¶ 191.
57
“pros” to keeping the IPO on schedule for Q2 2012.226 Nothing about this “pros and
cons” analysis supports a reasonable inference that the Company had definitively
resolved to delay its IPO when the Board was apprised of the issue. Accordingly, it
is not reasonable to infer the Board should have required management to make a
public statement regarding a delayed IPO following the March 2012 Board
meeting.227
The only reasonable inference to draw from well-pled facts is that the Board
was advised for the first time regarding the need for delay at its April 17, 2012
meeting, where management reported that the “recent emergence of adverse trends
on number of paid claims [and] claim severity” justified a decision to put off the
IPO.228 At that same meeting, management advised the Board that management
“viewed [the] transaction as executable based on everything [management]
know[s]—but not before business trends confirm what [Genworth] experienced in
the first quarter is a concentrated transitional event.”229 The Company announced
226
OB Ex. 10, at 02364.
227
See Red Oak Fund, L.P. v. Digirad Corp., 2013 WL 5740103, at *17 (Del. Ch. Oct. 23,
2013) (“A possible decision that might be reached several weeks away is far too speculative
for the Court to require disclosure, even during a proxy contest.”).
228
Compl. ¶ 172 (emphasis added).
229
OB Ex. 11, at 02514 (emphasis added).
58
that the IPO would be delayed the next day.230 Nothing about this sequence permits
an inference of bad faith.
While the timing issues were the focus of the Complaint and Plaintiffs’
arguments in opposition to the motion to dismiss, I note that Plaintiffs seek to hold
the Board accountable for more than the timing of the IPO as relates to the Australian
MI Business. They allege the health of that business segment, particularly with
respect to the adequacy of reserves, had been misstated publicly, both by executives
and in securities filings, and the Board knew this and was complicit in the failure to
correct the false information.231 These allegations fail for the same reason as earlier
claims; management gave repeated assurances to the Board that it was employing
“a disciplined approach to updating [Genworth’s] quarterly reported loss
reserves,”232 all while Goldman Sachs was in the room and KPMG confirmed the
adequacy of Genworth’s financials and controls as reflected in the 2012 10-K.233
230
OB Ex. 12 (Apr. 17, 2012 Genworth Form 8-K).
231
Compl. ¶¶ 156, 160–62, 164–65, 180–83.
232
OB Ex. 7, at 01936 (Dec. 7, 2011 Australia & [Redacted] Mortgage Insurance Reserves
Update); see also id. at 01937 (reflecting the Company’s CFO’s assurances that any
“reporting lag” in the then-existing data “has been consistently applied and should not
materially impact [Genworth’s] loss reserves in normal environments”).
233
E.g., OB Ex. 3 (Genworth 2012 10-K), Ex. 9 (Mar. 14–15, 2012 Board Minutes).
59
The pleadings do not point to facts that would allow a reasonable inference the Board
should have questioned the Company’s experts’ opinions and recommendations.234
E. The Complaint Makes No Discernable Claims Against the Officers
Plaintiffs named several officers as Defendants and went so far as to define
them collectively as “Executive Defendants.”235 Beyond using the definition to
describe an individual, the Complaint makes no further mention of “Executive
Defendant(s).” Indeed, there are no specific allegations directed against the Officers
and there are no separate claims asserted against them either.
A plaintiff must adequately plead a breach of fiduciary duty claim “against
each individual director or officer; so-called ‘group pleading’ will not suffice.”236
Plaintiffs have resorted to group pleading throughout their Complaint. While that
was not the primary problem with their claims against the so-called Director
Defendants, it is the problem with their claims, to the extent they intended to bring
234
See Wood, 953 A.2d at 142 (“The Board’s execution of . . . financial reports, without
more, is insufficient to create an inference that the directors had actual or constructive
notice of any illegality.”). A complaint must “plead with particularity the specific conduct
in which each defendant ‘knowingly’ engaged, or that the defendants knew that such
conduct was illegal.” Id.235
Compl. ¶¶ 25–27.
236
Raj & Sonal Abhyanker Fam. Tr. ex rel. UpCounsel, Inc. v. Blake, 2021 WL 2477025,
at *4 (Del. Ch. June 17, 2021) (citing In re USG Corp. S’holder Litig., 2020 WL 5126671,
at *23 (Del. Ch. Aug. 31, 2020)).
60
them, against the “Executive Defendants.” Given the blunt nature of the pleading,
it is not surprising the parties’ briefs barely mention the Executive Defendants and
do not join issue on whether the Complaint states viable claims against them. Since
the Officers are named as defendants, they are entitled to a clear finding that the
claims against them, if there are any, are likewise dismissed under Chancery
Rule 12(b)(6).
III. CONCLUSION
Because Plaintiffs have not pled with particularity that Defendants face a
substantial likelihood of liability, demand is not excused. Defendants’ motion to
dismiss, therefore, must be GRANTED.
IT IS SO ORDERED.
61