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Simons v. Ditto Trade, Inc.

United States District Court, N.D. Illinois, Eastern Division

April 28, 2015

PAUL SIMONS, Plaintiff,



Before the Court is Plaintiff Paul Simons' Motion to Dismiss Defendants' Amended Counterclaims pursuant to FED. R. CIV. P. 12(b)(6), and to Strike Portions of the Counterclaims pursuant to FED. R. CIV. P. 12(f) [ECF No. 60]. For the reasons stated herein, the Motion to Dismiss is granted in part and denied in part, and the Motion to Strike is granted.


Simons is the former CEO of Ditto Trade, Inc. ("DT") and a former Director and Executive Vice President of Ditto Holdings, Inc. ("DH"), a subsidiary of DT (collectively, "Ditto"). This action arose when Simons was terminated from his positions with DT and DH after expressing concerns that DH's CEO, Joseph Fox ("Fox"), had engaged in fraud and improper stock transactions.

The allegations of Defendants' Amended Counterclaims are briefly summarized below. According to Defendants, Simons' whistleblowing efforts were not motivated by ethical considerations - to the contrary, "Simons embarked upon a reckless and destructive path" to undermine Ditto when he learned that his employment was about to be terminated. (Defs.' Am. Counterclaims, ECF No. 54, ¶ 26.) Defendants state that Simons was not qualified to carry out his duties as CEO because he never took his Series 24 exam (which qualifies an individual as a general securities principal), as Defendants claim he was required to do under the terms of his Employment Agreement.

Defendants state that although Simons was unable to work collegially with most of Ditto's management, he developed an "extraordinarily close" relationship with Ditto's interim CFO, Jeremy Mann ("Mann"). (Id. ¶ 17.) The two quickly became "full-fledged confederates in their plan to benefit themselves at the expense of [DH] and its shareholders." (Id. ¶ 19.) On September 9, 2013, after learning of his forthcoming termination from Mann, Simons sent a letter to DH's senior officers demanding an independent investigation of Fox's alleged wrongful conduct (the "Board Demand Letter") and listing certain expenditures and transactions "that may have personally benefitted Joe Fox." (Ex. C to Defs.' Am. Counterclaims, ECF No. 54-1.) Hours later, Simons directed his attorney, Paul Huey-Burns ("Huey-Burns"), to report Fox's conduct to the Securities and Exchange Commission (the "SEC"). Huey-Burns sent an email to SEC attorneys that same day (the "Huey-Burns E-Mail"), attaching the Board Demand Letter to it. On September 10, 2013, Simons was terminated from his position with DT. The following day, Simons sent a letter to Ditto's investors and shareholders announcing his suspicions (the "Shareholder Letter"). (Id. ¶ 35.) The Shareholder Letter closed with the following statement: "To be clear, I have not asserted, nor am I asserting through this notification, any allegations of conclusive wrongdoing; the facts and circumstances of which I became aware, with credible documentation, were of a nature serious to request an independent examination and presentation of findings." (Ex. E to Defs.' Am. Counterclaims, ECF No. 54-1.)

Simons filed his fourteen-count Complaint against Defendants on January 16, 2014 [ECF No. 1]. Defendants counterclaimed for breach of fiduciary duty, breach of confidentiality agreement, breach of employment agreement, tortious interference with prospective economic advantage, and defamation [ECF No. 12.] On August 8, 2014, the Court dismissed five of Simons' claims and all but the tortious interference counterclaim [ECF. No 37]. On January 15, 2015, Defendants filed Amended Counterclaims [ECF No. 54] again for breach of fiduciary duty (Count I), breach of employment agreement (Count II), tortious interference with prospective economic advantage (Count III), and defamation (Count IV).


A. Motion to Dismiss

Simons seeks to dismiss Counts I, II, and IV of the Amended Counterclaims pursuant to Rule 12(b)(6). A motion to dismiss for failure to state a claim under Rule 12(b)(6) challenges the legal sufficiency of a complaint, Hallinan v. Fraternal Order of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009), or counterclaim, AEL Fin. LLC v. Tri-City Auto Salvage, Inc., No. 08-CV-4384, 2009 WL 3011211, at *6 (N.D. Ill. Aug. 31, 2009). To survive a Rule 12(b)(6) motion to dismiss, a complaint or counterclaim must contain "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). In assessing a counterclaim, a court must accept all well pleaded facts as true, and view them in the light most favorable to the counterclaimant. See, Active Disposal, Inc. v. City of Darien, 635 F.3d 883, 886 (7th Cir. 2011). However, a court need not accept as true "legal conclusions, or threadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)) (internal quotations and alterations omitted).

1. Count I - Breach of Fiduciary Duty

In Count I, Defendants allege that Simons breached his fiduciary duties of care, loyalty, and good faith when he (1) disseminated the Shareholder Letter, and (2) authorized the Huey-Burns E-Mail. The Court first turns its attention to the dissemination of the Shareholder Letter. Relying on the Delaware Supreme Court case of Malone v. Brincat, Simons argues that Defendants have failed to allege a breach of fiduciary duty claim because "only directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty.'" (Pl.'s Mem., ECF No. 62, at 5 (quoting Malone, 722 A.2d 5, 9 (Del. 1998).)

Malone and its progeny deal with a situation identical to the one at hand - a director's disclosure of information to shareholders unconnected "to a specific request for the stockholders to make a discretionary voting or tendering decision." Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 157 (Del. Ch. 2004). In this context, violation of a director's fiduciary duties requires the knowing dissemination of false information. See, id. at 157-58 (citing Malone, 722 A.2d at 9); see also, Kolber v. Body Cent. Corp., 967 F.Supp.2d 1061, 1068 (D. Del. 2013), ("[T]he Delaware Supreme Court held that a corporate fiduciary may only be held liable for breach of a fiduciary duty for an omission or misleading disclosure in such instance if the corporate fiduciary knowingly disseminate[s] false information.'") (quoting Malone, 722 A.2d at 9).

Although Defendants argue that the Shareholder Letter constitutes a "false and misleading disclosure, " (Defs.' Opp., ECF No. 70, at 6), it suffers from the same defect the Court identified in its previous order: "The problem with Count I is that the communication to the shareholders contains no false information, willful or not. It merely states as a director Simons uncovered questionable information and requested an independent audit. This is hardly a violation of fiduciary duty." (ECF No. 37, at 9.) To reiterate this point, the Court notes the following language from the letter: "Recently I became aware of information and circumstances which raised serious questions and concerns, " "I [requested]... an independent audit and investigation in order to determine whether or not this information evidenced any impropriety, " "I have not asserted, nor am I asserting through this notification, any allegations of conclusive wrongdoing." (Ex. E to Defs.' Am. ...

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