GILBERT R. SEROTA (No. 75305) SARAH A. GOOD (No. 148742)

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INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI

GILBERT R. SEROTA (No. 75305) [email protected] SARAH A. GOOD (No. 148742) [email protected] MARC PRICE WOLF (No. 254495) [email protected] HOWARD RICE NEMEROVSKI CANADY

FALK & RABKIN A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111-4024 Telephone: 415/434-1600 Facsimile: 415/217-5910

Attorneys for Defendants JOHN G. STUMPF, HOWARD I. ATKINS, JOHN D. BAKER II, JOHN S. CHEN, LLOYD H. DEAN, SUSAN E. ENGEL, ENRIQUE HERNANDEZ, JR., DONALD M. JAMES, RICHARD D. McCORMICK, MACKEY J. McDONALD, CYNTHIA H. MILLIGAN, NICHOLAS G. MOORE, PHILIP J. QUIGLEY, JUDITH M. RUNSTAD, STEPHEN W. SANGER and SUSAN G. SWENSON

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST, Derivatively on Behalf of WELLS FARGO COMPANY,

Plaintiff,

v.

JOHN G. STUMPF, HOWARD I. ATKINS, JOHN D. BAKER II, JOHN S. CHEN, LLOYD H. DEAN, SUSAN E. ENGEL, ENRIQUE HERNANDEZ, JR., DONALD M. JAMES, RICHARD D. McCORMICK, MACKEY J. McDONALD, CYNTHIA H. MILLIGAN, NICHOLAS G. MOORE, PHILIP J. QUIGLEY, JUDITH M. RUNSTAD, STEPHEN W. SANGER and SUSAN G. SWENSON,

No. CV 11 2369 SI

Action Filed: May 13, 2011

NOTICE OF MOTION AND MOTION TO DISMISS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS

Date: January 27, 2012 Time: 9:00 a.m. Place: Courtroom 10, 19th Floor Judge: Hon. Susan Illston

Trial Date: TBD

Case3:11-cv-02369-SI Document65 Filed10/05/11 Page1 of 27

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INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI

Defendants,

and

WELLS FARGO & COMPANY, a Delaware corporation,

Nominal Defendant.


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TABLE OF CONTENTS

Page

INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -i-

NOTICE OF MOTION AND MOTION TO DISMISS 1

STATEMENT OF ISSUES 1

MEMORANDUM OF POINTS AND AUTHORITIES 1

INTRODUCTION 1

BACKGROUND FACTS 2

ARGUMENT 6

I. PLAINTIFFS LACK STANDING TO BRING THIS DERIVATIVE ACTION 6

A. Plaintiffs Have Not Alleged Facts Sufficient To Satisfy The Contemporaneous Ownership Requirement. 6

B. Plaintiffs Have Not Adequately Alleged Demand Futility. 7

C. Plaintiffs’ Allegations That the Board Faces Possible Personal Liability Does Not Excuse Demand, Especially In Light Of The Exculpatory Provision. 10

D. Plaintiffs’ Vague Allegations Regarding Participation In The Audit & Examination, and Corporate Responsibility Committees Do Not Excuse Demand. 11

E. The “Insured Versus Insured” Provision Does Not Excuse Demand. 13

F. Plaintiffs’ Vague Allegations Concerning Inadequate Internal Controls Do Not Excuse Demand. 14

G. Plaintiffs Fail To Raise A Reasonable Doubt As To Independence. 15

H. Plaintiffs Fail To Rebut The Business Judgment Rule As To The Foreclosure Process. 16

II. EACH CAUSE OF ACTION LACKS ESSENTIAL ELEMENTS 17

A. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Breach Of Fiduciary Duty. 17

B. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Abuse Of Control Or Gross Mismanagement. 18

C. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Waste Of Corporate Assets. 19


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TABLE OF CONTENTS

Page

INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -ii-

CONCLUSION 20


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TABLE OF AUTHORITIES

Page(s)

INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -iii-

Cases

Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other grounds, 746 A.2d 244 (Del. 2000) 8, 10, 17

Baca ex rel. Nominal Defendant Insight Enterprises, Inc. v. Crown, No. CV-09-1283-PHX-SRB, 2010 WL 2812712 (D. Ariz. Jul. 12, 2010) 7

Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703 (1974) 6

Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) 8, 16

Blasband v. Rales, 971 F.2d 1034 (3d Cir. 1992) 8

Brehm v. Eisner, 746 A.2d 244 (Del. 2000) 10, 19

Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993), modified, 636 A.2D 956 (Del. 1994) 17

Decker v. Clausen, Civ. A. No. 10684, 1989 WL 133617 (Del. Ch. Nov. 6, 1989) 14

Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007) 8, 9, 10

Glazer v. Zapata Corp., 658 A.2d 176 (Del. Ch. 1993) 19

Grobow v. Perot, 539 A.2d 180 (Del. 1988), overruled on other grounds, 746 A.2d 244 (Del. 2000) 9, 16

Grobow v. Perot, 526 A.2d 914 (Del. 1987), aff’d 539 A.2d 180 (Del. Ch. 1988) 13

Guttman v. Huang, 823 A.2d 492 (Decl. Ch. 2003) 11

Highland Legacy Ltd. v. Singer, No. CIV-A1566-N, 2006 WL 741939 (Del. Ch. Mar. 17, 2006) 16, 17

In re 3COM Corp. S’holders Litig., No. C.A. 16721, 1999 WL 1009210 (Del. Ch. Oct. 25, 1999) 19

In re Accuray, Inc. Shareholder Derivative Litig., 757 F. Supp. 2d 919 (N.D. Cal. 2010) 15

In re Am. Int’l. Group, Inc. Derivative Litig., 700 F. Supp. 2d 419 (S.D.N.Y. 2010) 14

In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) 14


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INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -iv-

In re Citigroup Shareholder Derivative Litigation, 964 A.2d 106 (Del. Ch. 2009) 17, 18, 19

In re Conagra Foods, Inc. Derivative Litig., No. 8:05cv342, 2006 WL 6489623 (D. Neb. Sept. 27, 2006) 12

In re Extreme Networks, Inc. S’holder Derivative Litig., 573 F. Supp. 2d 1228 (N.D. Cal. 2008) 11

In re Ferro Corp. Derivative Litig., 511 F.3d 611 (6th Cir. 2008) aff’d, 415 Fed. Appx. 285 (2d Cir. 2011) 13, 14

In re Lukens Inc. S’holders Litig., 757 A.2d 720 (Del. Ch. 1999), aff’d sub nom., 757 A.2d 1278 (Del. 2000) 18

In re MIPS Techs., Inc. Derivative Litig., No. 06-06699, 2008 WL 3823726 (N.D. Cal. Aug. 13, 2008) 12

In re MRV Comm’ns, Inc. Deriv. Litig., No. CV 08-03800 GAF RCX, 2010 WL 5313442 (C.D. Cal. Dec. 27, 2010) 19

In re Omnivision Technologies, Inc., Nos. C-04-2297SC, C-04-2443SC, C-04-0518SC, 2004 WL 2397586 (N.D. Cal. Oct. 26, 2004) 7

In re Sagent Tech., Inc., Deriv. Litig., 278 F. Supp. 2d 1079 (N.D. Cal. 2003) 6, 11

In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999) 8

In re Verifone Holdings, Inc. S’holder Derivative Litig., No. 07-06347, 2009 WL 1458233 (N.D. Cal. May 26, 2009) 13

In re Verisign, Ins., Deriv. Litig., 531 F. Supp. 2d 1173 (N.D. Cal. 2007) 8

In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986 (N.D. Cal. 2007) 19

Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325 (D. Ariz. 2007) 13

Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) 8

Kohls v. Duthie, 765 A.2d 1274 (Del. Ch. 2000) 16

Kona Enterprises, Inc. v. Estate of Bishop, 179 F.3d 767 (9th Cir. 1999) 6

Lewis v. Chiles, 719 F.2d 1044 (9th Cir. 1983) 6

Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) 18

Malpeide v. Townson, 780 A.2d 1075 (Del. 2001) 11


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INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -v-

Metro Comm'n Corp. BVI v. Advanced Mobilecomm. Techs. Inc., 854 A.2d 121 (Del. Ch. 2004) 19

Michelson v. Duncan, 407 A.2d 211 (Del. 1979) 19

Navellier v. Sletten, 262 F.3d 923 (9th Cir. 2001) 19

Rales v. Blasband, 634 A.2d 927 (Del. 1993) 7, 8, 10

Rattner v. Bidzos, C.A. No. 19700, 2003 WL 22284323 (Del. Ch. Sept. 30, 2003) 12

Saxe v. Brady, 184 A.2d 602 (Del. Ch. 1962) 19

Sprando ex rel. Intern. Game Technology v. Hart, No. 3:10-CV-00415ECR, 2011 WL 3055242 (D. Nev. Jul. 22, 2011) 7

State of Wis. Inv. Bd. v. Bartlett, 2000 WL 238026 (Del. Ch. Feb. 24, 2000) 16

Steiner v. Meyerson, No. Civ. A. 13139, 1995 WL 441999 (Del. Ch. July 19, 1995) 19

Stone ex. rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006) 15

Wood v. Baum, 953 A.2d 136 (Del. 2008) 8, 10, 11, 12

Rules

Fed. R. Civ. P. 12(b)(6) 1

Fed. R. Civ. P. 23.1(b)(1) 6

Statutes

Del. Code Ann. tit. 8 §102(b)(7) 10, 18


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INDIVIDUAL DEFENDANTS’ MOTION TO DISMISS CV 11 2369 SI -1-

NOTICE OF MOTION AND MOTION TO DISMISS

Please take notice that on January 27, 2012 at 9:00 a.m., Individual Defendants John G.

Stumpf, Howard I. Atkins, John D. Baker II, John S. Chen, Lloyd H. Dean, Susan E. Engel,

Enrique Hernandez, Jr., Donald M. James, Richard D. McCormick, Mackey J. McDonald,

Cynthia H. Milligan, Nicholas G. Moore, Philip J. Quigley, Judith M. Runstad, Stephen W.

Sanger, Susan G. Swenson (collectively, “Individual Defendants”) will and hereby do move

for an order dismissing the Consolidated Complaint, pursuant to Federal Rule of Civil

Procedure 12(b)(6) and applicable federal and state law. The motion is based on this Notice

of Motion and Motion; the Request for Judicial Notice; the Declaration of Marc P. Wolf and

attached exhibits; the pleadings, records, and papers filed in this action; oral argument; and

any other matters properly before the Court.

Individual Defendants move to dismiss on the following grounds: (1) Plaintiffs lack

standing to assert derivative claims based on alleged wrongful acts that occurred at times

when they did not own Well Fargo stock, (2) Plaintiffs lack standing because they have not

alleged particularized facts showing that a pre-litigation demand on the Board of Directors

was excused and (3) Plaintiffs have not properly plead any claims upon which relief can be

granted.

STATEMENT OF ISSUES

1. Whether Plaintiffs have met the contemporaneous stock ownership requirement.

2. Whether Plaintiffs have alleged demand futility with sufficient particularity.

3. Whether Plaintiffs have adequately plead their state law claims.

MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION

This is a motion to dismiss all of the claims made by Plaintiffs Pirelli Armstrong Tire

Corporation Retiree Medical Benefits Trust (“Pirelli”) and City of Westland Police and Fire

Retirement System (“City of Westland”) (collectively “Plaintiffs”) against certain present and

former officers and members of the Board of Directors of Wells Fargo & Co. (“Wells Fargo”

or the “Company”). Through their Consolidated Complaint Plaintiffs seek to assert derivative


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claims on behalf of Wells Fargo on a “demand excused” theory. As we show below, they

have failed to plead facts sufficient to meet the strict pleading requirements.

A derivative action is one brought by a shareholder who seeks to commence litigation in

the name of and on behalf of the corporation. It is an extraordinary type of case because the

plaintiff seeks to usurp the power of a duly elected Board of Directors who are provided with

authority to make business decisions for the company. Because of the nature of such a case,

plaintiffs are held to very strict pre-suit requirements. A plaintiff has no standing to pursue a

derivative action unless he makes a pre-suit demand that the Board consider bringing a

lawsuit on its own against the alleged wrongdoer. Such a demand places the power to make

corporate policy and take corporate action where it belongs—with the duly elected members

of the Board—not with one or a handful of disgruntled shareholders. A pre-litigation demand

is only excused when a plaintiff can plead particularized facts showing that a majority of the

board cannot impartially consider such a demand. Because directors are presumed to act in

good faith and in the company’s best interest, only rarely can a shareholder meet this high

burden to demonstrate that demand is excused. This is not such a case.

Here, Plaintiffs’ allegations do not come close to pleading the facts necessary to excuse

demand on a Board of Directors of a Delaware corporation under applicable Delaware law.

As we show below, Plaintiffs fail to carry their burden of demand futility with respect to even

a single director, much less a majority of eight or more directors. Plaintiffs plead only

boilerplate facts about the directors—not the particularized facts that are required.

Failing to plead demand futility is not the only defect in Plaintiffs’ complaint. Plaintiffs

also fail to allege that they were shareholders at the time of the alleged misconduct, which is a

requirement for standing to bring a derivative action. As to Plaintiffs’ causes of action, their

boilerplate allegations of breach of fiduciary duty, abuse of control, gross mismanagement

and corporate waste fail to state a claim.

BACKGROUND FACTS

The Parties. Wells Fargo, a Delaware corporation headquartered in California, is a

diversified financial services company providing banking, insurance, investments, mortgage,


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and consumer and commercial finance services across North America and internationally.

Plaintiffs purport to bring a derivative action against fourteen members and two non-

members of Wells Fargo’s Board of Directors (“Individual Defendants”).

At the time the Complaint was filed, Wells Fargo’s Board consisted of fifteen directors

only one of whom is alleged to be an inside or management director, CEO John Stumpf.

The outside non-management directors are John D. Baker II, Elaine L. Chao, John S. Chen,

Lloyd H. Dean, Susan E. Engel, Enrique Hernandez, Jr., Donald M. James, Mackey J.

McDonald, Cynthia H. Milligan, Nicholas G. Moore, Philip J. Quigley, Judith M. Runstad,

Stephen W. Sanger, and Susan G. Swenson (“Directors”).1 Verified Consolidated

Shareholder Derivative Complaint For Breach Of Fiduciary Duty, Abuse Of Control, Gross

Mismanagement And Corporate Waste (“Complaint” or “Compl.”) ¶¶33-48.

The Alleged Wrongdoing. The Complaint alleges that, beginning “at least as early as

2007,” Individual Defendants “caused” Wells Fargo to “engage in the mass processing of

loan ownership and servicing documents to facilitate home foreclosure actions against

homeowners who had become delinquent on their mortgage payments.” Id. ¶2. see also id.

¶74. Plaintiffs generally allege—without a shred of specific factual support—that somehow

these Individual Defendants were directly responsible for the use of unverified affidavits in

foreclosure proceedings and that they made misrepresentations about these practices in

public statements and filings with the SEC. Id. ¶62.

The Complaint contains no allegations directly connecting any Individual Defendant to

alleged wrongdoing by any Wells Fargo employee who may have signed affidavits in

1Defendants Howard I. Atkins and Richard D. McCormick were not Board members at

the time the Complaint was filed. Compl. ¶¶34,41. The remaining fourteen defendants were Board members at the time the Complaint was filed. Id. ¶¶33, 35-39, 41-48. Note that one Board member, Elaine L. Chao, is not a defendant. Request for Judicial Notice In Support of Individual Defendants’ Motion to Dismiss (“RJN”); Declaration of Marc P. Wolf In Support of Defendants’ Motion to Dismiss (“Wolf Decl.”) ¶2 & Ex. A (8-K filed on June 28, 2011, stating that Ms. Chao was elected to the Board on June 28, 2011). Plaintiffs mistakenly alleged that the Wells Fargo Board consisted of fourteen individuals at the time the Complaint was filed, but they failed to include Ms. Chao in their count of Board Members. Compl. ¶184.


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support of foreclosure proceedings without personally reviewing the facts attested to therein.

Instead, the Complaint is an amalgamation of public disclosure statements that Plaintiffs

have cobbled together in an attempt to create the appearance that Individual Defendants

somehow engaged in wrongdoing. See e.g., Id. ¶¶94-101, 144.

The Complaint itself shows that the Wells Fargo Board has actively addressed the

foreclosure issues at the heart of the case. Where plaintiffs claim that a “fact” suggests

wrongdoing, a close reading of the Complaint reveals that the opposite is the case: Over and

over again, the face of the Complaint actually shows positive, proactive efforts by the

Company to address the issues in a manner that is inconsistent with the underlying theory that

the Board is unwilling to address these issues. A few examples follow.

Example One: The Complaint alleges that the Individual Defendants “repeatedly,

aggressively and defiantly denied that there were any problems with the accuracy of the

Company’s foreclosure affidavits.” Id. ¶3. Yet, Plaintiffs recognize that, on October 27,

2010, the Company issued a detailed press release in which it acknowledged that “a final step

in its processes relating to the execution of the foreclosure affidavits (including a final review

of the affidavit, as well as some aspects of the notarization process) did not strictly adhere to

required procedures.” Id. ¶114 (emphasis omitted).

Example Two: Plaintiffs allege that the Board failed to review and evaluate its internal

control processes as they relate to foreclosure issues, Id. ¶¶17-20, and they complain that the

Board recommended that shareholders vote against a proposal in the proxy statement that it

conduct an internal review of the Company’s internal controls related to loan modifications,

foreclosures and securitizations. Id. ¶¶119-122, 137-139, 148-149. But, Plaintiffs go on to

allege that the Board recommended that shareholders vote against the proposal because the

Company “has already undertaken comprehensive internal self-assessments and reviews of

[its] mortgage servicing processes and practices including controls related to loan

foreclosures and securitizations.” Id. ¶149 (emphasis added). Plaintiffs fail to disclose that

shareholders agreed with the Board—more than three times as many shareholders voted


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against this proposal than voted for it.2

Example Three: Plaintiffs allege that the Board refused to cooperate with government

investigations or take action to address issues in its foreclosure methods. See e.g., Compl.

¶¶2, 3, 93(e), 165 But, Plaintiffs also allege the opposite—that the Company was and is

cooperating with the government’s independent investigations and that it voluntarily entered

into agreements with the Office of the Comptroller of the Currency and the Federal Reserve

to, among other things, ensure that all foreclosures are conducted with adequate oversight and

controls. Id. ¶¶149, 158, 161.

In sum, Plaintiffs’ allegations not only fail to offer facts connecting the Board to

wrongdoing, allegations on the face of the Complaint plainly contradict the notion that the

Board has not addressed the myriad of issues relating to the foreclosure marketplace.

The Alleged Demand Futility. Plaintiffs concede that no demand was made on Wells

Fargo’s Board. Id. ¶185. Instead, the Complaint contains allegations seeking to excuse

demand under the theory of demand futility. Id. Aside from wholly conclusory assertions,

Plaintiffs make no factual allegations that any of Wells Fargo’s Directors, let alone a majority

of them, suffered from any disabling conflicts of interest as to the foreclosures. The

Complaint does not allege that any of the inside or outside Directors had any direct

involvement with, or improperly benefited in any way from, any of the foreclosures. Instead,

the allegations state that some of the Individual Defendants serve on the Board and the

Board’s Audit and Examination Committee, and Corporate Responsibility Committee (id.

¶¶186(c), (d)); that Wells Fargo’s insurance policy contains an “insured versus insured

exclusion” (id. ¶190(f)); and that some of the Individual Defendants are substantially likely to

be held personally liable because their involvement in the foreclosures caused Wells Fargo

2Form 8-K filed with the SEC on May 6, 2011 provides the voting results of the

proposals presented at the May 3, 2011 annual meeting. RJN; Wolf Decl., ¶3 & Ex. B. Shareholder voting on the “Stockholder Proposal Regarding an Investigation and Report on Internal Controls for Mortgage Servicing Operations” was as follows: 2,889,837,716 voted against the proposal; 852,356,218 voted in favor of the proposal; 300,527,716 abstained; and 487,376,934 were broker non-votes. Id.


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losses and violated state and federal laws (see e.g., id. ¶¶186, 190(c)(e)).

The Exculpatory Clause. Wells Fargo shareholders have adopted a provision in the

Company’s Certificate of Incorporation referred to as an exculpatory provision. It encourages

service as Board members by shielding directors from liability for monetary damages where

they act in good faith and do not commit intentional wrongdoing.3 As we discuss below,

shareholders’ adoption of this provision, raises the pleading bar much higher in order to

establish potential liability of directors.

ARGUMENT

I. PLAINTIFFS LACK STANDING TO BRING THIS DERIVATIVE ACTION

A. Plaintiffs Have Not Alleged Facts Sufficient To Satisfy The Contemporaneous Ownership Requirement.

Federal Rule of Civil Procedure 23.1(b)(1) requires a derivative plaintiff to plead that he “was

a shareholder or member at the time of the transaction complained of . . . .” The Ninth Circuit has

interpreted Rule 23.1 to require that the derivative plaintiff “be a shareholder at the time of the

alleged wrongful acts” and “retain ownership of the stock for the duration of the lawsuit.” In re

Sagent Tech., Inc., Deriv. Litig., 278 F. Supp. 2d 1079 (N.D. Cal. 2003) (quoting Lewis v. Chiles,

719 F.2d 1044, 1047 (9th Cir. 1983)). This is also known as the “contemporaneous ownership

requirement.” Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703, 709 n.3 (1974).

A derivative plaintiff has no standing to sue for misconduct that occurred prior to the time he

became a shareholder of the corporation. Kona Enters., Inc. v. Estate of Bishop, 179 F.3d 767, 769

(9th Cir. 1999).

Here, the Complaint states that Plaintiffs Pirelli and City of Westland have held shares of the

3Article XIV of Wells Fargo’s Certificate of Incorporation provides: “A director of the corporation shall not be personally liable to the corporation or its

stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.” RJN; Wolf Decl. & Ex. D at 8)


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Company’s stock since January 26, 2009 and May, 2009 respectively. Compl. ¶¶30-31. However,

the Complaint repeatedly alleges that Individual Defendants are liable for acts “[b]eginning as early

as 2007.” See e.g., Id. ¶¶2, 74. Plaintiffs allege that, at this time, Individual Defendants caused

Wells Fargo “to materially engage in the mass processing of loan ownership and servicing

documents to facilitate home foreclosure actions . . . .” Id. ¶2. Because Plaintiffs failed to allege

that they own stock during the time of these “alleged wrongful acts,” they have no standing to

pursue shareholder derivative claims based on these allegations. In In re Omnivision Techs., Inc.,

Nos. C-04-2297SC, C-04-2443SC, C-04-0518SC, 2004 WL 2397586, at *2 (N.D. Cal. Oct. 26,

2004), the district court dismissed the plaintiffs derivative suit for this very reason. See also,

Sprando ex rel. Intern. Game Tech. v. Hart, No. 3:10-CV-00415ECR, 2011 WL 3055242, at *3 (D.

Nev. Jul. 22, 2011), (dismissing derivative claims because plaintiff alleged stock ownership after

alleged wrongful acts); Baca ex rel. Nominal Defendant Insight Entes., Inc. v. Crown, No. CV-09-

1283-PHX-SRB, 2010 WL 2812712, at *4 (D. Ariz. Jul. 12, 2010) (finding that plaintiff had no

standing to “challenge any actions or inactions of Insight or its board of directors before”

shareholder ownership). Thus, Plaintiff City of Westland has no standing to assert claims based on

alleged wrongful acts that occurred before May, 2009 and Plaintiff Pirelli has no standing to assert

claims based on alleged wrongful acts that occurred before January 26, 2009. For this reason, all

claims based on any wrongdoing that allegedly occurred prior to May, 2009, must be dismissed for

failure to satisfy the contemporaneous ownership requirement.

B. Plaintiffs Have Not Adequately Alleged Demand Futility.

Plaintiffs also lack standing to bring a derivative claim because they have not made a

pre-suit demand on the Board and have not adequately alleged demand futility. The pre-suit

demand requirement may be excused as futile only when it is clear from particularized facts

alleged that more than half of the board members have a personal and substantial interest in

the subject matter of the proposed lawsuit that renders them unable to exercise independent

judgment in responding to a demand.4 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).

4Delaware law controls because Wells Fargo is incorporated under the law of that state.

(continued . . . )


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Under Delaware law, directors are presumed to act in the best interests of the corporation, in a

disinterested manner and independent of other influences, unless a plaintiff pleads specific

facts showing otherwise. See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.

Stewart, 845 A.2d 1040, 1048-49 (Del. 2004); Aronson v. Lewis, 473 A.2d 805, 812 (Del.

1984), overruled on other grounds, 746 A.2d 244 (Del. 2000). Consequently, demand is

rarely excused on this basis. See Aronson, 473 A.2d at 815.

Courts use two tests to determine whether demand is futile. The “Aronson test” applies

to claims that the directors made a conscious business decision in breach of their fiduciary

duties. Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). It requires the plaintiff to “allege

particularized facts creating a reason to doubt that ‘(1) the directors are disinterested and

independent [or that] (2) the challenged transaction was otherwise the product of a valid

exercise of business judgment.’” Id. at 140 (quoting Aronson, 473 A.2d at 814). The “Rales

test” applies where the subject of the derivative suit is not a business decision of the board but

rather an alleged violation of the board’s oversight duties. The Rales test “requires that the

plaintiff allege particularized facts establishing a reason to doubt that ‘the board of directors

could have properly exercised its independent and disinterested business judgment in

responding to a demand.’” Wood, 953 A.2d at 140 (quoting Rales v. Blasband, 634 A.2d 927,

934 (Del. 1993)). The time the complaint was filed is the relevant point in time to measure

whether making a demand upon the board would have been futile. Aronson, 473 A.2d at 810;

Blasband v. Rales, 971 F.2d 1034, 1049 (3d Cir. 1992).

To meet either one of these strict tests, a derivative plaintiff must plead particularized

“facts specific to each director, demonstrating that at least half of them could not have

exercised disinterested business judgment in responding to a demand.” Desimone v. Barrows,

924 A.2d 908, 943 (Del. Ch. 2007). In Desimone, the Delaware Court of Chancery dismissed

( . . . continued) See Compl. ¶32; see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108-09 (1991) (“[Court] must apply the demand futility exception as it is defined by the law of the State of incorporation”); In re Verisign, Ins., Deriv. Litig., 531 F. Supp. 2d 1173, 1188 (N.D. Cal. 2007); In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 990 (9th Cir. 1999) (Delaware law applied to shareholder derivative action involving Delaware corporation).


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derivative claims based on demand futility for failing to satisfy this exact reason. Id. Here

too, Plaintiffs fail to satisfy this requirement.

At the time of filing, there were fifteen Wells Fargo Directors, only one of whom was an

“inside” or management director.5 Therefore, Plaintiffs must allege demand futility with

factual specificity as to at least eight of these Directors. The Complaint plainly fails to do so.

It relies on nothing but boilerplate allegations that the Board was not independent. The

Complaint fails to make separate demand futility allegations for any of the fifteen Defendant

Board members. Compl. ¶¶186-190. The only Individual Defendants even mentioned by

name in the “Derivative and Demand Futility Allegations” section of the Complaint—Stumpf,

Hernandez, Milligan, Quigley, Chen and Swenson—are only mentioned in terms of their

unrelated business or familial relationships. See Id. ¶¶ 186(a), 190(d). The remaining nine

Directors—Baker, Choi, Dean, Engel, James, McDonald, Moore, Runstad and Sanger—are

not even individually identified in the Complaint’s “Derivative and Demand Futility

Allegations” section. See Compl. ¶¶183-190. Nowhere is there a single particularized fact

about how any Director was involved in the use of affidavits in foreclosures, how he or she

personally benefited from them, or why he or she could not independently evaluate a demand.

Plaintiffs cannot meet the requirement to plead “facts specific to each director” by

repeating the same sentences with respect to some Directors, simply alleging that groups of

other Directors were members of certain Board committees, and failing to make any

individualized allegations whatsoever for the remaining Board members. If they could, the

strict pleading requirements to excuse pre-suit demand would be completely eviscerated.

Moreover, as shown in the subsections below, each conclusory allegation, even if true, does

not establish demand futility under well-established Delaware law.

5Because only one of the fifteen Directors are alleged to be inside Directors, Mr. Stumpf, the

others may be presumed to be—and in fact are—independent, non-employee, non-management directors. See Grobow v. Perot, 539 A.2d 180, 184 n.1 (Del. 1988) (where plaintiff does not allege that particular directors are management, “we will presume that they were outside directors” with the term “outside director” defined to mean “nonemployee, non-management directors”), overruled on other grounds, 746 A.2d 244 (Del. 2000).


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C. Plaintiffs’ Allegations That the Board Faces Possible Personal Liability Does Not Excuse Demand, Especially In Light Of The Exculpatory Provision.

Plaintiffs allege that Individual Defendants lack independence due to their potential

liability for breaches of fiduciary duty in connection with the matters at issue. Compl.

¶190(c). This is insufficient. The Delaware Supreme Court has rejected the assertion that

such conclusory allegations will excuse pre-suit demand. See Aronson, 473 A.2d at 818

(reversing a denial of a motion to dismiss because, in part, bare allegations that “directors

would otherwise sue themselves” do not excuse demand); Brehm v. Eisner, 746 A.2d 244,

257 n.34 (Del. 2000) (affirming dismissal for failure to plead demand futility and noting, “It is

no answer to say that demand is necessarily futile because . . . the directors ‘would have to

sue themselves’”).

Where a plaintiff alleges that a director is not disinterested because the director faces

potential liability, the complaint must set forth particularized facts establishing that the

“potential for [the directors’] liability is not ‘a mere threat’ but instead may rise to ‘a

substantial likelihood.’” Rales, 634 A.2d at 936 (emphasis added) (quoting Aronson, 473

A.2d at 815); see also Wood, 953 A.2d at 141 n.11. A derivative plaintiff does not satisfy this

requirement simply by naming the directors as defendants and making conclusory allegations

that they may be liable for wrongdoing. Id. at 141-42. Delaware courts demand that plaintiffs

plead specific facts because “cursory contentions of wrongdoing [do not] substitute for the

pleading of particularized facts.” Desimone, 924 A.2d at 928.

Here, Plaintiffs allege no facts supporting their conclusory claims that at least eight

Directors face potential liability for the alleged representations made about, or the failure to

adequately oversee, the foreclosure process. This omission is particularly glaring because

Plaintiffs’ burden of showing a substantial likelihood of Director liability is especially heavy

given the exculpatory provision in Wells Fargo’s Certificate of Incorporation.6 Wells Fargo

shareholders proactively decided to limit its directors’ liability to actions that are made in bad

6See text accompanying note 4, supra; Del. Code Ann. tit. 8 §102(b)(7) (providing authority for shareholders to adopt exculpatory provision).


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faith or constitute intentional misconduct. Such exculpatory provisions provide “a layer of

protection for directors by allowing stockholders to dramatically reduce the type of situations

in which a director’s personal wealth is ‘put on the line.’” Malpeide v. Townson, 780 A.2d

1075, 1095 n.68 (Del. 2001) (quoting citation omitted). See Guttman v. Huang, 823 A.2d

492, 501 (Decl. Ch. 2003) (dismissing derivative claims for failure to plead demand futility

and concluding, “[I]n the event that the charter insulates the directors from liability for

breaches of the duty of care, then a serious threat of liability may only be found to exist if the

plaintiff pleads a non-exculpated claim against the directors based on particularized facts”); In

re Sagent Tech., Inc. Derivative Litig., 278 F. Supp. 2d 1079, 1095 n.9 (N.D. Cal. 2003)

(claim which alleges negligent breach of duty precluded by corporation’s exculpatory

provision).

Given the adoption of the exculpatory clause, Plaintiffs cannot show a substantial

likelihood of Director liability without alleging particularized facts demonstrating that the

Directors “acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their

conduct was legally improper.” In re Extreme Networks, Inc. S’holder Derivative Litig., 573

F. Supp. 2d 1228, 1239 (N.D. Cal. 2008) (citation omitted). In Extreme Networks, the Court

relied on a similar exculpatory provision when dismissing the complaint for failing to

adequately plead demand futility. Id.; see also Wood v. Baum, 953 A.2d at 141-44 (affirming

lower court dismissal of derivative claims by relying on similar exculpatory provision);

Guttman, 823 A.2d at 501 (same).

In sum, the Complaint in this case lacks any factual allegations indicating that an act

taken by any Director as to the foreclosures at issue was in bad faith or involved intentional

misconduct. It therefore fails to allege a basis to excuse demand based on potential personal

liability of the Wells Fargo Directors.

D. Plaintiffs’ Vague Allegations Regarding Participation In The Audit & Examination, and Corporate Responsibility Committees Do Not Excuse Demand.

Plaintiffs allege that demand would be futile as to members of the Audit & Examination

Committee because each member of that committee failed their duties under that Committee’s


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charter, which were to assist “The Board of Directors in fulfilling its responsibilities to

oversee Company policies and management activities related to . . . internal controls, . . .

operational risks and legal and regulatory compliance . . . .” Compl. ¶186(c). Plaintiffs allege

that demand would be futile as to members of the Corporate Responsibility Committee

because they all “face a substantial likelihood of liability.” Id. ¶186(d). Under this

Committee’s Charter, each member was responsible for overseeing “the Company’s policies,

programs and strategies regarding social responsibility matters of significance” and

monitoring “the Company’s reputation and relationships with external stakeholders regarding

significant social responsibility matters, and advis[ing] the Board and management on

strategies that affect the Company’s role and reputation as a socially responsible

organization . . . .” Id. Plaintiffs also vaguely assert that Defendants’ mere membership in

these committees “renders [them] hostile to the instant action.” See e.g., id. ¶¶44, 48. These

allegations are unavailing.

Demand futility may not be established simply by alleging that members of a board

committee allegedly approved the conduct which Plaintiffs now claim is wrongful and then

naming as defendants all members of that board committee. In Wood v. Baum, the Delaware

Supreme Court affirmed the lower court’s dismissal of derivative claims where the plaintiff

contended that board committee membership implied wrongdoing sufficient to render demand

futile. See 953 A.2d at 142 (The assertion that membership in a committee is a sufficient

basis to infer scienter is “contrary to well-settled Delaware law”); In re MIPS Techs., Inc.

Derivative Litig., No. 06-06699, 2008 WL 3823726, at *5 (N.D. Cal. Aug. 13, 2008)

(dismissing derivative complaint for failing to plead demand excused where plaintiff relied on

defendants’ committee membership); Rattner v. Bidzos, C.A. No. 19700, 2003 WL 22284323,

at *11 (Del. Ch. Sept. 30, 2003) (declining to find directors interested where the complaint

alleged “general knowledge in a conclusory fashion on behalf of the Director Defendants,

explained solely by virtue of their service in their various capacities”); In re Conagra Foods,

Inc. Derivative Litig., No. 8:05cv342, 2006 WL 6489623, at *4 (D. Neb. Sept. 27, 2006)

(“For a majority of the board, the only allegations of interestedness are based upon the


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individual board members service as members of either the audit or human resources

committees. Membership on these committees, without more, does not support an assertion

that these members are unable to impartially consider a demand”). Instead, to establish the

substantial likelihood of liability required to show a lack of independence, Plaintiffs must

allege specific facts indicating that one or more members of the Audit & Examination, or

Corporate Responsibility Committees knew that the Company’s statements were materially

misstated prior to their issuance or that the oversight of the use of affidavits in foreclosures

was conducted in bad faith. See In re Verifone Holdings, Inc. S’holder Derivative Litig., No.

07-06347, 2009 WL 1458233, at *8 (N.D. Cal. May 26, 2009) (dismissing derivative

complaint for failing to make a demand and stating plaintiffs hard pressed to establish

substantial likelihood of liability for false SEC filings where no particularized facts about

what directors knew about filings when they were issued). The Complaint alleges no such

facts as to any Audit & Examination, or Corporate Responsibility Committee member.

Allegations that “a majority of directors approved, participated, or acquiesced in a challenged

transaction will not, in and of itself, establish demand futility.” Grobow v. Perot, 526 A.2d

914, 924 (Del. 1987), aff’d 539 A.2d 180 (Del. Ch. 1988).

E. The “Insured Versus Insured” Provision Does Not Excuse Demand.

Plaintiffs claim that demand is excused because the directors’ and officers’ insurance

policies contain an “insured-versus-insured exclusion,” and that “if these directors were to sue

themselves, no insurance protection would be provided for the derivative claims.” Compl.

¶190(f). Courts consistently have rejected such a theory. See, e.g., Jones ex rel. CSK Auto

Corp. v. Jenkins, 503 F. Supp. 2d 1325, 1341 (D. Ariz. 2007) (dismissing derivative claims

for failure to plead demand futility and noting that courts “have routinely rejected” the

argument that an “insured versus insured exclusion” demonstrates directors inability to

independently consider a demand); In re Ferro Corp. Derivative Litig., 511 F.3d 611, 622

(6th Cir. 2008) aff’d, 415 Fed. Appx. 285 (2d Cir. 2011) (affirming lower court dismissal of

derivative claims; “Delaware courts have rejected claims that an ‘insured vs. insured’

exclusion in the directors’ and officers’ insurance policy . . . is sufficient to establish demand


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futility.”) (citations omitted); In re Am. Int’l. Group, Inc. Derivative Litig., 700 F. Supp. 2d

419, 433 (S.D.N.Y. 2010) (“insured vs. insured” exclusion argument “has been rejected

repeatedly under Delaware law”) (citation omitted); Decker v. Clausen, Civ. A. No. 10684,

1989 WL 133617, at *2 (Del. Ch. Nov. 6, 1989) (rejecting “insured v. insured” argument as

nothing more than a “variation[] on the ‘directors suing themselves’ and ‘participating in the

wrongs’ refrain”).

F. Plaintiffs’ Vague Allegations Concerning Inadequate Internal Controls Do Not Excuse Demand.

Plaintiffs allege that Individual Defendants “refused . . . to put into place adequate

internal controls and adequate means of supervision to stop the wrongful conduct alleged

herein.” Compl. ¶190(g). Such a “failure to monitor” claim is “possibly the most difficult

theory in corporation law upon which a plaintiff might hope to win a judgment.” In re

Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996). Missing from the

Complaint is any explanation of the specific information that each Director purportedly

knew and ignored.

Plaintiffs acknowledge that Wells Fargo repeatedly announced that it was undertaking

efforts to review and improve the Company’s internal controls related to foreclosures. See

e.g., Compl. ¶107 (October 12, 2010: “As always, as a standard business practice, we

continually review and reinforce our policies and procedures. This includes conducting

additional reviews before loans go to foreclosure sale”); id. ¶114 (October 27, 2010: “As

part of the company’s review of its foreclosure affidavit procedures, the company has

identified instances where a final step in its processes relating to the execution of the

foreclosure affidavits . . . did not strictly adhere to the required procedures”); RJN; Wolf

Decl. ¶4 & Ex. C at 112 (Company’s position in 2011 Proxy Statement in response to

shareholder request for a review of the Company’s internal controls related to foreclosures:

“In light of these concerns and as a mater of sound corporate practice, the Company’s

internal audit team and operational risk group initiated comprehensive examinations and

testing relating to the internal controls and processes for the Company’s mortgage servicing


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operations, including our processes for generating foreclosures affidavits and documentation

for both foreclosures and mortgage securitizations”).7 Such efforts contradict any suggestion

that the Directors ignored known deficiencies. In In re Accuray, Inc. Shareholder Derivative

Litig., 757 F. Supp. 2d 919, 928-29 (N.D. Cal. 2010), the court found similar allegations

related to internal controls unpersuasive when dismissing the shareholder derivative

complaint. In sum, demand is not excused where, as here, Plaintiffs fail to plead facts

showing either that “the directors utterly failed to implement” any controls or “having

implemented such . . . controls, consciously failed to monitor or oversee [their]

operation[] . . . .” Stone ex. rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.

2006).

G. Plaintiffs Fail To Raise A Reasonable Doubt As To Independence.

Plaintiffs allege that several Directors have “engaged in or permitted the other

defendants to engage in related-party transactions” with Wells Fargo which prevents them

from exercising independent business judgment to determine whether to bring this derivative

action. Compl. ¶186(a). Plaintiffs claim that the following relationships sacrifice

independence: (1) Director Defendant Hernandez is on the Board of Directors of Inter-Con

Security Systems, Inc, of which he owns a 26% interest, and Wells Fargo has entered into

multi-million dollar contracts with Inter-Con for guard services; (2) Director Defendant

Milligan’s brother is employed by Wells Fargo as a private client advisor; (3) Director

Defendant Quigley’s son is employed by Wells Fargo’s Wholesale Banking group; (4) Wells

Fargo makes charitable donations to organizations that have unnamed Defendants as

officers; and (5) Wells Fargo buys software from companies where Defendants Chen and

Swenson serve as CEOs. Id. ¶¶ 186(a)(i)-(iii); 190(d). These allegations do not come

7Curiously, when quoting the section of the Proxy Statement that states the Company’s

position in response to the shareholder proposal for a further internal review, Plaintiffs’ Complaint omitted this relevant statement, which immediately followed the portion of the Proxy Statement Plaintiffs quoted in the Complaint. See Compl. ¶149. The entirety of the Company’s response includes important information the Company provided to shareholders concerning its multi-faceted efforts in addressing internal monitoring of the foreclosure process. See RJN; Wolf Decl. Ex C.


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remotely close to establishing a lack of independence for any of these directors concerning

the foreclosures at issue here.

Under Delaware law, directors do not suffer a disabling interest unless they establish

facts showing that they are dominated or controlled by a person who has a disabling personal

interest concerning the transaction at issue. Grobow, 539 A.2d at 189. “[T]o render a

director unable to consider demand, a relationship must be of a bias-producing nature.

Allegations of . . . a mere outside business relationship, standing alone, are insufficient to

raise a reasonable doubt about a director’s independence.” Beam, 845 A.2d at 1050; see also

Highland Legacy Ltd. v. Singer, No. CIV-A1566-N, 2006 WL 741939, at *5 (Del. Ch.

Mar. 17, 2006) (conclusory allegations that two directors “served together on a few boards

of unaffiliated companies” insufficient to overcome “presumption of a director’s

independence”) (citations omitted); Kohls v. Duthie, 765 A.2d 1274, 1284 (Del. Ch. 2000)

(“‘[E]vidence of personal and/or business relationships does not raise an inference of self

interest.’”) (quoting State of Wis. Inv. Bd. v. Bartlett, No. C.A. 17727, 2000 WL 238026, at

*6 (Del. Ch. Feb. 24, 2000), aff’d, 808 A.2d 1205 (Del. 2002)).

As explained above, Plaintiffs fail to show that any of the current directors has a

disabling personal interest. In any event, that a Director’s relative works for Wells Fargo in

some capacity, or that the Company does business with a Company for which a Director

works, or that a Director serves on the Board of a company that provides private security to

Wells Fargo does not establish dependence even if these Directors all lacked

disinterestedness. Moreover, and perhaps most importantly, the relationships Plaintiffs

allege have nothing to do with the foreclosures at issue in the Complaint.

H. Plaintiffs Fail To Rebut The Business Judgment Rule As To The Foreclosure Process.

Although Plaintiffs fail to allege a reasonable doubt that at least eight Directors are

disinterested and independent, their Complaint also fails because they have not plead facts

raising a reasonable doubt that the Board’s decisions regarding the use of affidavits in

foreclosure proceedings (not that Plaintiffs even made any such specific allegations in the first


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place) were not valid exercises of business judgment. See Aronson, 473 A.2d at 814. A

plaintiff “faces a substantial burden, as . . . [this] test is directed to extreme cases in which

despite the appearance of independence and disinterest a decision is so extreme or curious as

to itself raise a legitimate ground to justify . . . judicial review.” Highland Legacy Ltd., 2006

WL 741939, at *7 (internal citation and quotation marks omitted). Plaintiffs have not met this

burden.

Here, Plaintiffs have not alleged any specific facts to demonstrate that any actions taken

by any Directors were “so extreme or curious” that they could not have been the result of

proper business judgment. They have not pleaded any specific facts showing that a majority

of Directors had any personal role at all in the foreclosures, or that they had any knowledge or

awareness that the Company’s foreclosure practices would give rise to alleged improper

statements. Moreover, Plaintiffs have not alleged that any of the Directors acted in bad faith

with their role in the foreclosures. In In re Citigroup S’holder Derivative Litigation, 964 A.2d

106, 130 (Del. Ch. 2009), the court found that similar allegations lacking in bad faith were

insufficient to excuse demand. Id. (“That there were signs in the market that reflected

worsening conditions and suggested that conditions may deteriorate even further is not an

invitation for this Court to disregard the presumptions of the business judgment rule and

conclude that the directors are liable because they did not properly evaluate business risk”).

Thus, Plaintiffs’ complaint fails to rebut the business judgment rule.

II. EACH CAUSE OF ACTION LACKS ESSENTIAL ELEMENTS

A. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Breach Of Fiduciary Duty.

Plaintiffs cannot maintain their breach of fiduciary duty claim against Individual

Defendants. Under Delaware law, directors and officers of a Delaware corporation are

presumed to have acted on an informed basis (i.e., with due care), in good faith and in the

honest belief that their actions were in the company’s best interests. See Cede & Co. v.

Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993), modified, 636 A.2D 956 (Del. 1994). To

state a claim for breach of fiduciary duty, Plaintiffs must overcome this presumption by


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alleging well-plead facts showing that the directors and officers did not act in accordance with

their duties of due care, good faith and loyalty. Id. “[T]he burden required for a plaintiff to

rebut the presumption of the business judgment rule by showing gross negligence is a difficult

one, and the burden to show bad faith is even higher.” In re Citigroup, Inc., 964 A.2d at 125.

The Complaint fails to approach this level. It contains no facts, let alone particularized

facts, supporting the claim that Defendants deliberately caused the use of unverified affidavits

in foreclosure proceedings or that their oversight of the foreclosure process was reckless.

Moreover, as noted in Section I.C., supra, Delaware law allows corporations to eliminate their

directors’ personal liability for acts amounting to negligence or recklessness, so long as the

acts do not constitute a breach of their duty of loyalty, intentional misconduct or a knowing

violation of law. See Del. Code Ann. tit. 8 §102(b)(7). Where a company adopts such an

exculpatory provision in its corporate governance documents, its directors may not be held

liable for money damages for non-intentional breaches of their fiduciary duties. See Lyondell

Chem. Co. v. Ryan, 970 A.2d 235, 243-44 (Del. 2009) (holding that directors breach duty of

loyalty only if they “knowingly and completely failed to undertake their responsibilities”).

Wells Fargo has adopted such an exculpatory provision in its Articles of Incorporation.

See RJN; Wolf Decl. & Ex. D at 8. Thus, to plead a basis for liability, Plaintiffs must allege

well-plead facts showing that Defendants breached their duty of loyalty, acted in bad faith, or

committed intentional misconduct. See, e.g., In re Lukens Inc. S’holders Litig., 757 A.2d 720,

732-33 (Del. Ch. 1999), aff’d sub nom., 757 A.2d 1278 (Del. 2000). As discussed above,

Plaintiffs’ boilerplate allegations fall far short of this standard.

B. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Abuse Of Control Or Gross Mismanagement.

Plaintiffs have also brought state law claims for gross mismanagement and abuse of

control along with their breach of fiduciary duty claim. Compl. ¶¶ 197-205. Delaware law,

however, “does not recognize an independent cause of action against corporate directors and

officers for reckless and gross mismanagement; such claims are treated as claims for breach

of fiduciary duty.” In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d at 115 n.6


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(citing Metro Comm'n Corp. BVI v. Advanced Mobilecomm. Techs. Inc., 854 A.2d 121, 155-

57 (Del. Ch. 2004)); In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1019 (N.D.

Cal. 2007) (holding that abuse of control is “a repackaging of claims for breach of fiduciary

dut[y] instead of being a separate tort”). Accordingly, the court should grant the motion to

dismiss these claims without leave to amend. See In re MRV Comm’ns, Inc. Deriv. Litig.,

No. CV 08-03800 GAF RCX, 2010 WL 5313442, at *14 (C.D. Cal. Dec. 27, 2010)

(dismissing same claims without leave to amend).

C. Plaintiffs Have Not Plead Facts Sufficient To Sustain Claims For Waste Of Corporate Assets.

Plaintiffs vaguely and tersely allege that all of Individual Defendants alleged acts

amount to a waste of “valuable corporate assets.” Compl. ¶205. A claim for waste, however,

requires pleading of particularized facts demonstrating that defendants caused the Company

to bestow an asset on another in exchange for something that no person of ordinary, sound

business judgment would deem worth that which was paid. See Michelson v. Duncan, 407

A.2d 211, 217 (Del. 1979) (essence of claim for waste is “the diversion of corporate assets for

improper or unnecessary purposes”); Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962).

Under Delaware law, it is well settled that the “standard for a waste claim is high and

the test is ‘extreme . . . very rarely satisfied by a shareholder plaintiff.’” In re 3COM Corp.

S’holders Litig., No. C.A. 16721, 1999 WL 1009210, at *4 (Del. Ch. Oct. 25, 1999) (quoting

Steiner v. Meyerson, No. Civ. A. 13139, 1995 WL 441999, at *1 (Del. Ch. July 19, 1995)).

The Delaware Supreme Court stated that “[m]ost often the claim is associated with a transfer

of corporate assets that serves no corporate purpose; or for which no consideration at all is

received.” Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000); see also Navellier v. Sletten, 262

F.3d 923, 937 (9th Cir. 2001) (holding that under Delaware law, “the legal test for waste is

‘severe. Directors are guilty of corporate waste, only when they authorize an exchange that is

so one sided that no business person of ordinary, sound judgment could conclude that the

corporation has received adequate consideration.’” (quoting Glazer v. Zapata Corp., 658 A.2d

176, 183 (Del. Ch. 1993)).


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It is unclear from the Complaint which specific allegations constitute Plaintiffs’

corporate waste claim. Plaintiffs have not identified a transfer or diversion of any corporate

assets as required under Delaware law. Instead, Plaintiffs claim that “the foregoing

misconduct” alleged in the previous one-hundred pages of the complaint “caused Wells Fargo

to waste valuable corporate assets.” Compl. ¶205. Plaintiffs here fail to plead particularized

facts demonstrating that Individual Defendants caused Wells Fargo to engage in an exchange

that no person of ordinary, sound business judgment would conclude that the Company

received adequate consideration.

CONCLUSION

For the foregoing reasons, the Court should grant Individual Defendants’ Motion and

issue an order dismissing Plaintiffs’ Complaint with prejudice.

October 5, 2011.

Respectfully,

GILBERT R. SEROTA SARAH A. GOOD MARC PRICE WOLF HOWARD RICE NEMEROVSKI CANADY

FALK & RABKIN A Professional Corporation

By: /s/ Gilbert R. Serota GILBERT R. SEROTA

Attorneys for Defendants JOHN G. STUMPF, HOWARD I. ATKINS, JOHN D. BAKER II, JOHN S. CHEN, LLOYD H. DEAN, SUSAN E. ENGEL, ENRIQUE HERNANDEZ, JR., DONALD M. JAMES, RICHARD D. McCORMICK, MACKEY J. McDONALD, CYNTHIA H. MILLIGAN, NICHOLAS G. MOORE, PHILIP J. QUIGLEY, JUDITH M. RUNSTAD, STEPHEN W. SANGER and SUSAN G. SWENSON


Documents

GILBERT R. SEROTA (No. 75305) SARAH A. GOOD (No. 148742)