Articles Posted in Shareholders’ Derivative Lawsuits

Daniel Nickell filed a lawsuit against the officers and directors of Engineer Support. He claimed it had improperly diverted financial benefits by backdating stock options, which decreased the value of the corporation for its shareholders. Nickell was a shareholder of Engineer Support Systems Inc. (ESSI). ESSI merged with DRS Technologies in January 2006.

In Nickell’s lawsuit, he alleged that the officers and directors made material misrepresentations to induce the merger at a reduced price for the company in exchange for DRS assuming responsibility for the backdating scheme.

The trial judge dismissed Nickell’s lawsuit on the grounds that his claims were pleaded as a shareholder derivative claim and that he did not have standing to sue the ESSI directors and officers for his individual claims. Nickell appealed to the Supreme Court of Missouri, which affirmed the dismissal of his case.

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The Illinois Appellate Court has affirmed in part and reversed in part a case dealing with an insurer’s duty to defend an insured.

In this case, Hilco, an Illinois corporation, had four related companies. They are Hilco Trading, and its three majority-owned subsidiaries, Hilco Appraisal, Hilco Valuation and Hilco Financial LLC.

Hilco Trading purchased a professional liability insurance policy from the Liberty Surplus Insurance Corp. The insurance policy provided a limit of $10 million in excess of the $250,000 deductible and required Liberty to defend Hilco if it were sued for any wrongful act regarding its professional services. In addition, Hilco bought a similar policy from Illinois Union, providing an additional $10 million limit beyond the Liberty policy.

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TABFG is a limited liability corporation.  It brought a lawsuit against Richard Pfeil, claiming that among other things that Pfeil had tortuously interfered with a contract.  After a bench trial, the district judge entered judgment in favor of TABFG in the amount of $957,659.68, comprised of a principal of $674,121.87 plus prejudgment interest of $279,530.36 and costs of $4,007.45.  Pfeil appealed that judgment.

In April 2003, a joint venture was formed between the limited liability companies TABFG and NT Prop Trading (NT Prop).  The purpose of the joint venture was trading securities for financial gain. 

TABFG was made up of three individual members and managers whose responsibilities were all of the securities trading for the joint venture.  NT Prop was tasked with funding the joint venture and included two members who were also limited liability corporations.  The sole member, manager and owner of one of the limited liability corporations of NT Prop were Pfeil Commodity Fund, in which Richard Pfeil was known as the “money man” for the joint venture.

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This shareholder derivative lawsuit arose out of a long and unsuccessful effort by Baxter International Inc. to fix various problems with a medical device called Colleague Infusion Pump. The plaintiff in the case, Westmoreland County Employee Retirement System (Westmoreland) alleged that Baxter’s directors and officers breached their fiduciary duties by “consciously disregard(ing) their responsibility to bring Baxter into compliance with the 2006 Consent Decree and related health and safety laws.” 

The breach was alleged to have caused Baxter to lose more than $550 million after the Food and Drug Administration (FDA) mandated a recall of the Colleague Infusion Pumps in 2010. Westmoreland was a shareholder that sustained a significant stock value loss; it claimed the loss was caused by Baxter’s board’s and officers’ breach of fiduciary duty.

In the mid-1990s, Baxter was manufacturing and selling a product called the Colleague Infusion Pump (Pump), an electronic medical device used to deliver intravenous fluids to patients. The FDA closely regulates the medical device industry and required that companies comply with “current good manufacturing practices” and “quality system regulations” (see 21 C.F.R. Part 820), when manufacturing such medical devices. Between 1999 and 2005, the pumps were suffering from a range of defects, some relating to the manufacturing process and others to flaws in the machinery. The FDA discovered some of these problems during its inspections on Baxter’s facilities. The FDA sent a series of warning letters to Baxter in which it detailed Baxter’s failure to bring its manufacturing process into compliance with quality-controlled standards. In October 2005, the FDA took the drastic step of filing a complaint in federal court seeking forfeiture of all of Baxter-owned Colleague Infusion Pumps. 

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