The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs, three shareholders of Huron Consulting Group, Inc., have brought a derivative suit against certain of Huron's directors and current or former officers alleging violations of Section 14(a) of the 1934 Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment.*fn1 The directors and officers have each filed a motion to dismiss plaintiffs' amended consolidated complaint. For the reasons set forth below, both motions are granted.
This action is related to a direct shareholder suit captioned Hughes v. Huron et. al., 09 C 0734, also before me, which is based on substantially the same events, and which alleges securities fraud by Huron and by the corporate officers named in this case.*fn2
At the heart of both actions is Huron's July 31, 2009, press release and concurrent SEC filing stating that the company was restating its financial statements for fiscal years 2006 through 2008 and for the first quarter of 2009. As a result of the restatement, Huron's net income for the relevant time period was reduced by $57 million. The restatement explained that the company had failed to account for the redistribution of certain payments Huron made in the course of acquiring other companies in a manner consistent with Generally Accepted Accounting Principles ("GAAP").
In their amended consolidated complaint, plaintiffs allege that certain acquisition-related payments made by Huron were redistributed among the selling shareholders in amounts disproportionate to those shareholders' interests in the acquired business, or were made to Huron employees who were not selling shareholders at all. Plaintiffs further state that these payments were "earn-out" payments, which means that they were contingent upon continuing employment at Huron. Under GAAP, plaintiffs allege, Huron was required to (but did not, we must infer) account for these payments as non-cash compensation expenses and charge them against the company's earnings.*fn3 Defendants do not dispute these allegations, which mirror Huron's own public explanations of its accounting error.
Plaintiffs' prolix complaint is dominated by extensive excerpts from various corporate documents. First, under the heading, "Duties of the D&O Defendants,"*fn4 the complaint quotes from the company's "Code of Business Conduct and Ethics," the "Corporate Governance Guidelines," and the "Charter of the Audit Committee." These excerpts comprise nearly ten pages of text. Then, after a two-paragraph segue captioned "Background," in which they describe Huron as a consulting company founded by former Arthur Andersen employees that specializes in consulting for bankruptcy, litigation, health care, and education, and state that the "vast majority" of defendants hold themselves out as financial and accounting experts,*fn5 plaintiffs proceed to the next section of the complaint, captioned "Defendants' False and Misleading Misstatements." This section exceeds fifty pages in length, nearly all of which is devoted to quotations from all, or nearly all, of the quarterly and year-end reports Huron filed during the period covered by the restatement, as well as from company press releases stating the company's financial results. In this section, plaintiffs also allege 1) that defendants Burge and Holdren signed Sarbanes-Oxley certifications stating that they had reviewed the company's financial reports and that they were accurate and consistent with GAAP principles, and further stating that the company had in place internal procedures and controls to ensure the reliability of its financial reporting;*fn6 and 2) that in each of 2007, 2008, and 2009, Huron issued a Form 14-A proxy statement soliciting shareholder approval of PricewaterhouseCoopers ("PwC") as the company's independent auditor, but "failed to disclose...that PwC gave Huron's...financial statements a 'clean' audit opinion even though PwC knew that the financial statements were false and misleading."
The next section of the complaint is titled, "The Truth is Revealed" and again quotes portions of Huron's July 31, 2009, press release and Form 8-K, as well as from a Wall Street Journal article dated August 5, 2009, which reported on Huron's accounting "snafu." In the remaining sections, plaintiffs allege that defendants knowingly caused Huron to violate GAAP; that they were unjustly enriched because their compensation was based on the value of Huron's stock as it was artificially inflated due to false and misleading financial statements; and that several of the defendants engaged in unlawful insider trading.
Throughout the complaint, plaintiffs allege that defendants' wrongful acts were "knowing." Specifically, the complaint alleges that defendants knowingly caused Huron to publish false and misleading financial statements, that they knowingly violated GAAP by improperly accounting for the acquisition-related payments (and either knowingly establishing procedures to achieve this end, see ¶ 12, or knowingly failing to institute and maintain proper internal controls to avoid it, see ¶ 118), and finally, that they sold Huron stock to their unfair advantage based on their knowledge that the value of the company was inflated as a result of their own (knowing) misstatements.
Plaintiffs conclude their allegations by stating that a demand on the board of directors to investigate their claims would be futile because Huron's board of directors cannot exercise disinterested and independent judgment in assessing the merits of their claims due to their own personal and financial interest in the issues raised.
A motion to dismiss tests the sufficiency of the complaint, not its merits. See, e.g., Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). To state a claim under the ordinary notice pleading standards of Rule 8, a complaint must set forth sufficient factual material, taken as true, to raise the plaintiff's right to relief "above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Claims sounding in fraud, however, are subject to the heightened pleading standards of Rule 9(b), regardless of whether the word "fraud" appears in the complaint. Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007); Kennedy v. Venrock Associates, 348 F.3d 584, 594 (7th Cir. 2003). Whether Rule 9(b) applies depends on the factual allegations of the complaint. Borsellino, 477 F.3d at 507. Pursuant to Fed. R. Civ. P. 23.1, before bringing a derivative action in federal court to enforce a corporate right, a shareholder must either make a demand on the corporation's board of directors or state with particularity why demand is excused. Starrels v. First Nat. Bank of Chicago, 870 F.2d 1168, 1170 (7th Cir. 1989).
The first ground defendants assert for dismissal is that plaintiffs, who do not claim to have made a demand on the board, have not met their burden of pleading demand futility. I agree that they have not; but because the complaint suffers from more fundamental substantive defects, I address these first before returning to the demand futility issue.
First, plaintiffs' claim under section 14(a) plainly fails to state a viable claim, and their assertion that I held otherwise in my decision of April 7, 2010, is wrong. At that time, I was confronted not with the question of whether plaintiffs' section 14(a) claim could survive a 12(b)(6) motion to dismiss, but rather whether the claim was so patently frivolous that I should disregard it altogether when considering whether to abstain from exercising jurisdiction over the case under the Colorado River doctrine. See Oakland County Employees' Retirement System v. Massaro,---F. Supp. 2d---, 2010 WL 1378562 (N.D. Ill. Apr. 7, 2010). I expressly observed that these two inquiries are distinct, id. at *8, fn. 2, and held merely ...