A district court granted UBS’ motion to dismiss on the ground that no presuit demand had been made to the boards of directors for closed-end investment funds advised by UBS Trust Company of Puerto Rico and owned by the pension plans, and plaintiffs had failed in their complaint to state with particularity the reasons such a demand would have been futile. The 1st U.S. Circuit Court of Appeals vacated the dismissal of the derivative claims and remanded the case for further proceedings.The appellate court found the district court’s analysis of whether plaintiffs had established demand futility was flawed in two significant ways. First, in analyzing each director, the district court focused too narrowly on whether plaintiffs had alleged that the individual directors received a financial benefit from the retirement systems’ bonds transaction. According to the court’s opinion, previous case law requires the trial court to more broadly analyze the facts alleged concerning the circumstances of each director to determine whether plaintiffs have created a reasonable doubt that the director could objectively evaluate demand “without regard for” inappropriate influences. “In other words, the district court should have considered whether plaintiffs had pled facts sufficient to demonstrate that each director has such significant connections to the defendants, whether personal, financial, or otherwise, that he could not ‘impartially consider [demand] without being influenced by improper considerations,’” the court wrote.
Second, the district court misconstrued the plaintiffs' burden of demonstrating that the benefits –- financial or otherwise -– the individual directors received from their place in the constellation of relationships between UBS Financial and UBS Trust were of "subjective material significance.” To demonstrate subjective materiality, plaintiffs in a shareholder derivative suit "need not [offer] conclusive evidence of the materiality," but they must "provide the court with some particulars from which it could reasonably be inferred that [the director's] objective judgment would be impaired."
In reviewing each individual director in the case, the appellate court determined plaintiffs have established a reasonable doubt that certain directors could have exercised his "independent and disinterested business judgment in responding to a demand."
The pension plans are challenging the 2008 purchase of $757 million worth of bonds underwritten by UBS Financial Services of Puerto Rico. Within one year of issuance, the bonds lost 10% of their value, dragging down the worth of the funds.
The plans allege that UBS engaged in a scheme of manipulative trading whereby they used the investment funds to manufacture the appearance of market interest in the bonds, when in fact there was very little demand for the issue.The 1st Circuit opinion is here.