Hartleib Case Against Sirius XM Dismissed
The case naming Sirius XM Radio, the Board of Directors, and management of the company has had resolution. According to court documents:
“PROCEEDINGS: (IN CHAMBERS) ORDER GRANTING WITH LEAVE TO AMEND DEFENDANTS’ MOTION TO DISMISS [filed 11/17/08].
Having read and considered the papers presented by the parties, the Court finds this matter appropriate for disposition without a hearing. See FED. R. CIV. P. 78; LOCAL RULE7-15. Accordingly, the hearing set for Monday, December 8, 2008, at 1:30 p.m. is hereby vacated and off calendar.
Introduction
Defendants Sirius Satellite Radio, Inc. (“Sirius”), XM Satellite Radio Holdings, Inc. (“XM”), and Interoperable Technologies LLC, (“Interoperable”) and several officers and directors of the three companies (collectively, the “Defendants”) move to dismiss, pursuant to Federal Rules of Civil Procedure 12(b)(6), 23.1 and 12(b)(9), Plaintiff Michael Hartleib’s derivative claims for violations of the federal Racketeering and Corrupt Organizations Act (“RICO”), breach of fiduciary duty, and violations of the Sherman Act, and a direct claim for breach of fiduciary duty. For the following reasons, Defendants’ motion is GRANTED WITH LEAVE TO AMEND
Standard of Review
The issue on a motion to dismiss for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the failure to state a claim is not whether the claimant will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims asserted. Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997). When evaluating a Rule 12(b)(6) motion, the district court must accept all material allegations in the complaint as true and construe them in the light most favorable to the non-moving party. Mayo v. Gomez, 32 F.3d 1382, 1384 (9th Cir. 1994). Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires only a short and plain statement of the claim showing that the pleader is entitled to relief. FED. R. CIV. P. 8(a)(2). Dismissal of a complaint for failure to state a claim is not proper where a plaintiff has alleged “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007). In keeping with this liberal pleading standard, the district court should grant the plaintiff leave to amend if the complaint can possibly be cured by additional factual allegations. Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995). Furthermore, Federal Rule of Civil Procedure 23.1 sets out the pleading requirements for a shareholder to file a derivative action on behalf of a corporation. It requires that a derivative plaintiff state with specificity either that he made a demand on the corporate defendant before filing suit or the reasons why he did not make such a demand. FED. R. CIV. P. 23.1.claims asserted in the complaint.
Background
This case arises from the competition, cooperation, and eventual merger of the two providers of satellite radio service in the United States: XM and Sirius. (First Amended Compl. (“FAC”) ¶ 6-10.) In February 2000, Sirius and XM formed a joint venture—Interoperable—to develop a radio that could receive either XM or Sirius signals. (FAC ¶ 31.) The Federal Communication Commission (“FCC”) prohibited them from simply merging their two allotments of the spectrum, instead requiring XM and Sirius to jointly develop and market an interoperable satellite radio receiver. (FAC ¶ 22.) Mr. Hartleib alleges that XM and Sirius developed an interoperable radio. (FAC ¶ 61.) Mr. Hartleib alleges that XM and Sirius fraudulently represented that they were planning to release an interoperable radio when they had no intention of doing so while concealing their true intention to merge the two companies to shareholders’ detriment. (FAC ¶¶ 7-10.) Despite this alleged wrongdoing, the Department of Justice approved the Sirius/XM merger, which went forward in June 2008. (FAC ¶ 69.)
Mr. Hartleib filed causes of action for violations of RICO and the Sherman Act, and for breach of fiduciary duty as a derivative suit on behalf of the shareholders of Sirius. He did not file a demand with the Sirius Board of Directors prior to filing his complaint. (FAC ¶ 11.) Mr. Hartleib also filed a direct cause of action against Sirius directors for breach of fiduciary duty. (FAC ¶¶ 202-205.)
Analysis
1. Derivative Claims Mr. Hartleib has not made any demand upon the Board of Directors of Sirius to obtain the relief he seeks in this lawsuit. He has also failed to allege with sufficient specificity the reasons that issuing such a demand on Sirius would have been futile. Mr. Hartleib has filed seven of his eight claims against Sirius as as shareholder derivative actions on Sirius’ behalf.
Federal Rule of Civil Procedure 23.1 sets out the pleading requirements for derivative actions such as Mr. Hartlieb’s action. It states that a complaint must:
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort.
FED. R. CIV. PRO. 23.1. Because Sirius is incorporated in Delaware, the Court will use that state’s law to determine whether Mr. Hartleib has adequately pleaded the reasons that filing a demand with Sirius would have been futile. Kamen v. Kemper Fin. Servs., 500 U.S. 90, 108-109 (1991).
The Delaware Supreme Court’s ruling in Rales v. Blasband provides the standard for determining whether a plaintiff has satisfied the requirements of pleading that it would have been futile for the plaintiff to issue his demands to a corporation. Rales applies when, as in the present case, “a business decision was made by the board of a company, but a majority of the directors making the decision have been replaced.” Rales v. Blasband, 634 A.2d 927, 933-944 (Del. 1993). In this case, the actions at issue began in 2002 and culminated in June 2008, when Sirius and XM merged. (FAC ¶¶ 25, 68.) However, seven of Sirius’ twelve board members were seated in August 2008. (Def.’s Brf. at 4; Def.’s Req. for Judicial Notice Ex. A.) Therefore, Rales provides the correct rule to use:
[It] is appropriate in these situations to examine whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properlyexercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile.
Rales, 634 A.2d at 934. To show futility, the plaintiff must meet a higher burden than he must on a typical motion to dismiss under Rule 12(b)(6). “Mere notice pleading is insufficient to meet the plaintiff’s burden to show demand excusal in a derivative case.” Guttman v. Huang, 823 A.2d 492, 499 (Del. Ch. 2003.)
Mr. Harteib marshals several arguments in an attempt to create reasonable doubt about the current board’s ability to exercise independent judgment in this case: (1) Sirius’ non-responsiveness to his shareholder activism before the merger took place shows that making a formal demand to the current, post-merger board would have been futile; (2) all of Sirius’ board members knew of, benefitted from, and participated in efforts to conceal the alleged racketeering activity associated with Sirius, XM and Interoperable and, therefore, breached their fiduciary duties, making them subject to criminal and civil liability if their misdeeds came to light; (3) each board member authorized or permitted false statements to be disseminated on their behalfs; (4) each board member would be forced to sue him or herself if he or she allowed this action to go forward; (5) Mel Karmazin, board member and chief operating officer of Sirius, received and continues to receive substantial monetary compensation and other benefits from Sirius, making him biased; (6) Sirius board member Gary Parsons was board chairman and chief executive officer of XM before the merger, so he cannot possess disinterested business judgment about the merger; (7) board members Joan Amble, Eddy Hartenstein, James Holden, and James Moone are members of Sirius’ audit committee and, therefore have a conflict of interest; and (8) current board members have failed to take the necessary actions to rectify the harm allegedly inflicted on the shareholders by the wrongdoing asserted in this case. (FAC ¶¶ 108-158.) These arguments do not create a reasonable doubt that a majority of the current board of directors would not be able to respond disinterestedly to a demand from Mr. Hartleib.
The majority of Mr. Hartleib’s arguments to show the futility of making a demand on the current Sirius board are based on generalized, not specific allegations. Although the complaint identifies alleged fraud and wrongdoing committed by Defendants, it does not state how each specific Sirius director was responsible for those actions. For instance, it would be helpful if Mr. Hartleib could show how a majority of the current directors, as individuals, approved of an allegedly fraudulent statement or action or committed some wrongdoing that would make them unable to exercise independent judgment in this case. Generalized statements alleging that “each board member” knew of some wrongdoing will not suffice to meet the heightened standards of Rule 23.1. See Guttman v. Huang, 823 A.2d 492, 503 (Del. Ch. 2003) (finding that “particularized allegations of fact detailing the precise roles that these directors played at the company, the information that would have come to their attention in those roles, and any indication as to why they would have perceived the accounting irregularities” would help support a finding of futility). Such generalized allegations are even more ineffective in situations, like this one, where the majority of the board was not empanelled at the time of the alleged wrongdoing. The changeover in board membership further undermines the relevance of Mr. Hartleib’s argument that Sirius’s lukewarm response to his shareholder activism before the merger shows that its current board cannot be trusted to exercise independent judgment. The Court also fails to see the relevance of directors’ membership on the audit committee. Furthermore, Mr. Hartleib cannot escape the demand requirement simply by asserting that the a majority of the board bears liability in the action because a majority of board members are named as defendants in his suit.11
Because Mr. Hartleib has not sufficiently pleaded that making a demand upon the Sirius board would be futile, it is unnecessary for the Court to rule on whether Mr. Hartleibs’ pleadings otherwise state claims upon which relief could be granted. However, Mr. Hartleib should not construe this as the Court’s tacit approval of the sufficiency of the pleadings. Mr. Hartleib would be well advised to further review his pleadings, taking Defendants’ arguments into account, if he chooses to amend and re-file his claims.
As in his first complaint, Mr. Hartleib’s claim directly against the officers and directors fails because he has not alleged harm to himself outside of the injuries suffered by all shareholders. See Feldman v. Cutaia, 951 A.2d 727 (Del. 2008) (holding that a claim that the plaintiff is harmed in the same way that all other shareholders are harmed is a derivative, not a direct, claim). Those actions alleged in ¶¶ 87-94 of the FAC—that Defendants delayed the deployment of an interoperable radio and trading on that information—are not actions aimed at or suffered by Mr. Hartleib as an individual, rather, they are actions suffered identically by all shareholders. (FAC ¶¶ 87-94.) The only damages Mr. Hartleib points to as result of these actions are Mr. Hartlieb’s loss of value in his Sirius stock. This is identical to the loss suffered by all other shareholders. Because Feldman requires that a plaintiff in a direct suit show that he has “suffered someindividualized harm not suffered by all of the stockholders at large,” and Mr. Hartleib has failed to show that he has suffered special losses beyond a reduction in the value of his stock, Mr. Hartleib’s direct claim fails. Feldman, 951 A.2d at 733.
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss Mr. Hartleib’s claims is GRANTED WITH LEAVE TO AMEND. Mr. Hartleib has twenty days leave to amend its complaint consistent with this order. Defendants have twenty days thereafter to file a responsive pleading.
Now I have never been to the “save sirius” site but what kind of half ass lies/truths is Micheal Hartleib posting there. He has this little tid bit, He has already misqouted Mel at least 2 different times that I know of about what he said about wanting to be able to sell the company. Mel did say that he needs the company to be profitable first and that would not happen til at least the end of 2009.
some clarity….
1. Sirius000 is not Michael Hartleib.
2. The only way you get wiped out with a reverse split is if the stock price continues down after it happens. If the company is performing well, there is not theoretical reason for this to happen.
3. Dilution would impact shareholders. Having the shares authorized would not. It is only if they are added to the float that there is a material impact
4. The Red hat suit was brought about by RuF Law. RUF Law has a history of practicing law in bringing forth class action suits. Many of their suits have plaintiffs that have been plaintiffs in many class action suits. RUF Law brought forward the case against Sirius. The Plaintiff in that case had a history of other class action suits. The Red Hat judge never mentioned SIRI as the case did not exist at that point.
5. There is no indication whatsoever that Sirius or XM hired RUF law to find a plaintiff and bring the suit.
6. It could be argued that Sirius XM did not mind the suit because the settlement of such a suit would bring indemnifications with regard to the decision to merge. However, there is no proof of this either.
7. Michael H. has his concerns. I encourage people to understand his concerns. I also encourage people to get as much information as they can prior to arriving at a conclusion.
8. People also need to know what the facts are vs. what are opinions and/or allegations.
9. The annual meeting can be extended in order to facilitate getting the votes needed for an item. Thus, if the votes for the reverse split and authorized shares are not enough on the 18th, the company can simply elect to keep the meeting open, drum up support for their position, and close the meeting only when there is resolution.
10. Institutions have about 40% of the stock. In all liklihood that is already 40% of the shares in favor of the measures. The first side (for or against the measures) to 50.1% wins. The company and Board have the advantage of knowing who the shareholders are, and how to contact them. Which side do you think will reach 50.1% first. I have my opinion… The measures will all pass. Whether you are foir or against these measures, you should be prepared for the odds which favor passage.
Tyler, My point is that both sirius000 and markbmark both brought up, this SIRI sued itself. The difference between them is markbmark also added that, the law firm was bared from practicing in that state for 5 years, also in that case he said the judge also said SIRI sued themselves. It was very obvious where he was getting his information from because he stated it. Now my question is what the hell is he putting up over there. It looks like he is taking parts of one case and adding them to parts of another, to mislead people.
Tyler my point is the CEO of Sirius knows everything about the stock, and who ownes it including the shorts. He cut the deals that directed the stock price where it is today.
The question is WHY ?
GS…..
Sorry to tell you this, but the CEO does not know all of the shorts.
If you called E-Trade to short Sirius today, Mel does not get a memo on it. He would have no way to know that you shorted the stock
Tyler I’m referring to big money shorting, he knows, don’t kid yourself. He has a gang of people looking out for him, how do you think he got to where he is, good looks ?
I believe big money is still trying to scare retail in to selling…
Sirius XM Radio From the Analyst Report: “Sirius XM’s crushing debt burden, slowing subscriber growth, and looming debt maturities are such that we think shareholders are at risk of total loss.”
Did Mel buy any shares recently at .15 to average down ?
Of course he knows some of the big players that short. It is part of the business. However, hedge funds, etc. are all doing this. The short position is extensive. There is simply no way to do anything material about it.
Mel has millions of shares already. Why is it that everyone expects him to buy and buy and buy. He has paid out every dollar he has ever made in Sirius into the stock, and somehow that is not good enough.
Most insiders already have a bigger chunk of their portfolio in Sirius than they would likely have if they did not work for the company.
The thought that these people should buy and buy and buy when they get shares as part of theior compensation is afould of any rational thinking.
Sorry, but I do not begrudge anyone for not buying now. Further, they are in the midst of renegotiating debt. There are very strict regulations as to when the can and can not buy.
Tyler,
It’s fairly simple to do something about the shorts. You can cancel existing shares and reissue under a new trading symbol. This will require an accounting of shares, including shorts.
The reason this isn’t done very often is that the shares are probably only worth .15 each to begin with. It would be too big of an undertaking for a gain of what, possibly pennies. Not worth it.
Tyler – You make informative posts that are substantiated by verifiable information most of the time and I appreciate that but for you to assume that all of the institutional owners of SiriusXM stock are in support of the R/S and added dilution is a little too much for me to agree with. I’m sorry but I disagree.
How many R/S have you experienced as an investor/trader?
Getitstraight……
Most institutions will vote for the measures IMO. It is how these things work. You can disagree, but again, I think you should prepare yourself for the eventuality that both of these measures will pass.
I have experienced many reverse splits over the years. For a period of time I dedicated a small part of my portfolio to companies in trouble, and reverse splits often happened.
Can you give me an honest answer to how many of those made you money after the R/S by being invested prior to the R/S?
Thanks.
In these economic times all investors are going to try and save their butts, any stock requesting a vote for RS and dilution will get a big fat NO…
IR at Sirius said they would not do the RS unless they needed it later in 2009 if the stock price was under $1, IR said the 4 billion shares was a seperate issue.
If Mel announces new loans for feb, May and dec 09, whats to stop the price from rising above a buck ?
GS….
They are seeking authorization for the reverse split, and will not use it unless they have to for delisting purposes.
Again, if I were you I would be prepared for it to happen.
Tyler,
you are constantly saying “be prepared for it to happen”…
Would you elaborate on what one should do to “prepare”
Thanks
Tyler why would so many Institutional and Mutual Fund Holders keep Siri stock ?
http://data.cnbc.com/quotes/SI.....RI/tab/8
Do they hold short positions ?
Are they going to get hammered by the RS and dilution ?
Tyler – that’s what I thought.
Why rush a Vote for RS and dilution on Dec 18, when an emergency vote could be done in the middle of next year if even needed ? (and cost is not an issue)
THE CONFERENCE CALL TODAY SHOULD BE VERY INTERESTING SINCE I KNOW NOTHING ABOUT IT……..
Yesterday – at approx. 4:00 pm PST – I received a telephone call from a reporter asking about the Derivative Suit being dismissed as they see all the headlines saying the suit was thrown out.
The suit was NOT thrown out – the suit was DISMISSED WITH LEAVE TO AMEND, meaning the problems with the complaint can be fixed and the complaint resubmitted. No new case number.
No new case. Same case.
This is the second time this has happened as we are fighting very deep pockets that will use every trick to protect themselves INCLUDING TAKING OVER A WEBSITE AND POSTING A CONFERENCE
CALL THAT I HAVE ABSOLUTELY NO KNOWLEDGE OF.
Kenny the web master has been of help. I was concerned in allowing someone to have control of the website but took a chance as I own the domain and was assured I could take it back at any time which
is exactly what I did. If you’ll notice, SaveSirius.org is now down. I have no idea who Kenny is but despite repeated e-mails and calls, the site was not being properly updated. Then, via e-mail a message
was sent and posted on the website that someone in his family had a heart attack. Then, a day ago, I received the e-mail below which is poorly written and states that Kenny was the one that had
the heart attack and says that he has allowed access to the site for someone else to update. First of all, the e-mail is very strange as Kenny has always written well.
The reporter that contacted me yesterday asked me about the upcoming conference call on a class action. I said “I don’t know anything about it, where did you get the information?” She informed me
it was on SaveSirius.org. I placed several calls to Kenny, did not get a response, and then immediately shut down the website.
Some members of the group have received e-mails where someone has impersonated me to lead you to believe that I am behind this scheduled conference call and class action suit. Those of you that
received the call in number, I suggest you call in as I am interested to hear what is said. If any of you wonder how badly somebody wants to hamper the efforts of our group, I guess this shows they
are quite concerned and will stop at nothing to deter our efforts. If any of you have any questions, please call me direct at (714) 927-5898.
Tyler use your influence and push this around, or is this going too much against the grain ?
We at SaveSirius are going to do everything in our power to prevent management from having the authority to enact the reverse split as well as to prevent them from further diluting to an uncomprehenable fully diluted float of 8 billion shares. We are also going to propose a shareholder based funding initiative where shareholders will contribute $1000 or more to a fund to raise the necessary $211million dollars due for the February 09 convertibles. These funds will be loaned to the company on an interest free basis in exchange for certain shareholder guarantees and will be repaid back only when the company is on more stable financial footing. We are actually attempting to reach the bond holders directly to propose this scenario. Any other questions, please feel free to contact me, or I will be happy to give you names of other individuals at [email protected] and savesirius.org Thanks for your interest! 714-927-5898
Sincerely,
Michael Hartleib