IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
)
In re Mutual Funds Investment Litigation ) MDL DOCKET 1586
) No. 04-md-15863
)
This Document Relates To: )
Janus Track )
Parent Derivative Class Subtrack )
)
_________________________________________ )
__________________________________________
)
Chasen v. Whiston, et al. ) Civ. No. 04-md-00855
)
__________________________________________)
MEMORANDUM FOR THE JANUS CAPITAL DEFENDANTS
IN SUPPORT OF THEIR MOTION TO DISMISS
THE PARENT DERIVATIVE COMPLAINT
Mark A. Perry
Andrew S. Tulumello
Melanie L. Katsur
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue N.W.
Washington, D.C. 20036
(202) 955-8500
Counsel for Janus Capital Group Inc.
and Janus Capital Management LLC
[Additional counsel listed on signature page]
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TABLE OF CONTENTS
Page
TABLE OF CONTENTS................................................................................................................. i
TABLE OF AUTHORITIES .......................................................................................................... ii
INTRODUCTION ...........................................................................................................................1
THE COMPLAINT’S ALLEGATIONS .........................................................................................2
ARGUMENT...................................................................................................................................3
I. The Complaint Must Be Dismissed Because Plaintiff Failed To Make A
Pre-Suit Demand......................................................................................................3
A. The Complaint Does Not Make Legally Sufficient Allegations
That The Board Was Interested. ..................................................................5
B. The Complaint Does Not Make Legally Sufficient Allegations
That A Majority Of The Board Faces A Substantial Likelihood Of
Personal Liability. ........................................................................................6
1. The Complaint Does Not Allege That “Red Flags” Were
Brought To The Board’s Attention Or That The Board
Acted In Bad Faith. ..........................................................................6
2. The Complaint Does Not Make Legally Sufficient
Allegations That The Board “Utterly Failed” To Attempt
To Establish Internal Controls. ......................................................11
CONCLUSION..............................................................................................................................14
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TABLE OF AUTHORITIES
Page
Cases
Allison v. General Motors Corp., 604 F. Supp. 1106 (D. Del.), aff’d, 782 F.2d 1026
(3d Cir. 1985).............................................................................................................................9
Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000).................................................................................... passim
Ash v. McCall, 2000 WL 1370341 (Del. Ch. Sept. 15, 2000) .........................................................6
Beam v. Stewart, 845 A.2d 1040 (Del. 2004) ..................................................................................5
In re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) ......................... passim
Caruana v. Saligman, 1990 WL 212304 (Del. Ch. Dec. 21, 1990).................................................6
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. Ch. 1993) ..........................................10
In re Citigroup Inc. Shareholders Litig., 2003 WL 21384599 (Del. Ch. June 5, 2003),
aff’d, Rabinowitz v. Shapiro, 839 A.2d 666 (Del. 2003) .....................................................6, 10
Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984).....................................................................3
David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931 (Del. Ch.
Feb. 13, 2006) .................................................................................................................. passim
Decker v. Clausen, 1989 WL 133617 (Del. Ch. Nov. 6, 1989).......................................................6
Dellastatious v. Williams, 242 F.3d 191 (4th Cir. 2001) ...............................................................12
Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del. 1963).....................................................5
Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003)................................................................ passim
Haber v. Bell, 465 A.2d 353, 357 (Del. Ch. 1983) ........................................................................10
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991)..............................................................1, 4
Kelly v. Bell, 266 A.2d 878, 879 (Del. 1970).................................................................................10
Khanna v. McMinn, 2006 WL 13887445 (Del. Ch. May 9, 2006)..................................................5
Litt v. Wycoff, 2003 WL 1794724 (Del. Ch. March 28, 2003) ........................................................8
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TABLE OF AUTHORITIES--Cont'd
Page
iii
In re Mutual Funds Invest. Litig. (In re Janus Subtrack), 384 F. Supp. 2d 873 (D. Md.
2005) ................................................................................................................................ passim
Pogostin v. Rice, 1983 WL 17985, at * 3 (Del. Ch.), aff'd, 480 A.2d 619 (Del. 1984) .................10
Production Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004)..........5, 10
Rales v. Blasband, 634 A.2d 927 (Del. 1992) .............................................................................1, 4
Rattner v. Bidzos, 2003 WL 22284323 (Del. Ch. Oct. 7, 2003) ....................................................11
Seminaris v. Landa, 662 A.2d 1350 (Del. Ch. 1995).....................................................................10
Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990) ...............................................................................3
Stone v. Ritter, 2006 WL 302558 (Del. Ch. Jan. 26, 2006) ...........................................................10
Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001) .........................................................................9
Rules
Del. Ch. R. 23.1 ...............................................................................................................................3
Fed. R. Civ. P. 23.1..........................................................................................................................3
Other Authorities
Lawrence A. Hammermesh & A. Gilchrist Sparks III, Corporate Officers and the
Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Lawyer 865
(May, 2005)..............................................................................................................................10
David B. Shaev Profit Sharing Account, 2006 WL 391931 .................................................. passim
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INTRODUCTION
Plaintiff in this shareholder derivative action is a common stock owner of Janus Capital
Group Inc. (“JCG”) who seeks to hold JCG’s Board of Directors personally liable for failing to
oversee, detect, and prevent market timing in Janus mutual funds. This claim for failure of
oversight “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. Derivative Litig., 698 A.2d 959 (Del. Ch.
1996). And it is a claim that should be dismissed.
The Complaint readily concedes that plaintiff failed to make a pre-suit demand on JCG’s
Board of Directors. Compl. ¶ 197. That failure requires dismissal. Under Delaware law,
demand is excused only when a complaint contains particularized factual allegations sufficient to
demonstrate that the Board could not “properly exercise[] its independent judgment and
disinterested business judgment in responding to a demand.” Rales v. Blasband, 634 A.2d 927,
933-34 (Del. 1992).1 The Complaint falls far short of satisfying that substantial pleading burden
here.
This Court ruled in the Janus Fund Derivative case that the failure to make demand on the
Janus fund trustees was not excused. See In re Mutual Funds Invest. Litig. (In re Janus
Subtrack), 384 F. Supp. 2d 873, 877 (D. Md. 2005) (attached as Exhibit A). The reasons for
enforcing the pre-suit demand requirement are even stronger in this case, which seeks to impose
personal liability on the Board of Directors of JCG, the publicly traded parent company of Janus
Capital Management Group LLC (“JCM”), the investment adviser to the Janus mutual funds.
1 The law of the state under which an entity is organized governs the demand futility inquiry.
See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991). Janus is incorporated in
Delaware.
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There are no allegations that any member of the JCG Board participated in, or profited from, the
alleged wrongdoing in the Janus funds. Instead, the complaint boils down to the allegation that
the JCG Board should have done more to detect market timing in the Janus funds. But as this
Court said in the Janus Fund Derivative case: “Perhaps with the benefit of hindsight it may be
said that the [defendants] . . . should have been more vigilant in detecting . . . market timing
within the Janus funds. . . . [B]ut at most their failure to do so constituted negligence, not the
intentional conduct, recklessness, or, at the least, gross negligence, required to hold them liable
for their inactions.” Id. (citations omitted).
The principles set forth in the Court’s Fund Derivative decision apply with powerful
force here. Pre-suit demand was neither made nor excused, and the Complaint must accordingly
be dismissed.
THE COMPLAINT’S ALLEGATIONS
Plaintiff seeks to hold JCG’s Board of Directors liable for alleged breaches of their
fiduciary duties arising out of their asserted failure to identify or stop market-timing in Janus
mutual funds. Compl. ¶¶ 1, 173-88. The Complaint names JCG, JCM, and current and former
directors of JCG (the “Director Defendants”) as defendants. Compl. ¶¶ 12, 19, 22(a)-(i). JCG is
incorporated in Delaware, and JCM is a Delaware limited liability company. Compl. ¶¶ 9, 16.
The Director Defendants named in the Complaint were all members of JCG’s Board of
Directors in September 2003, when the original civil lawsuits concerning market-timing and late-
trading allegations were filed. Compl. ¶ 22(a)-(i). According to the Complaint, at the time that
this suit was filed, eight members of the Board were outside directors. Compl. ¶¶ 22(a)-(i), 199.
The Complaint does not allege that the outside directors maintained close, personal relationships
with Janus management or that they had any financial ties to Janus beyond their service on the
Board. Id. The Complaint recognizes that all of the Director Defendants are sophisticated
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business persons with distinguished backgrounds. Compl. ¶¶ 22(a)-(i), 30, 199-212. There are
no allegations that Janus’ Board of Directors participated in or profited from the alleged
wrongdoing.
The Complaint asserts two claims: (1) a derivative claim against the Director Defendants
for breach of fiduciary duty and (2) a derivative claim against Mark Whiston in his individual
capacity as the CEO and President of Janus during the relevant period. Compl. ¶¶ 26, 222-37.
Plaintiff concedes that he did not make a demand upon the Board of Directors before filing his
Complaint. Compl. ¶ 197.
ARGUMENT
I. The Complaint Must Be Dismissed Because Plaintiff Failed To Make A Pre-
Suit Demand.
It is “[a] cardinal precept of the General Corporation Law of the State of Delaware . . .
that directors, rather than shareholders, manage the business and affairs of the corporation.”
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000). Thus, a shareholder who wishes to cause a corporation to
pursue a lawsuit must either (1) make a pre-suit demand by presenting the allegations to the
corporation’s directors and requesting that they commence litigation, or (2) plead particularized
facts that show a pre-suit demand would be futile. Spiegel v. Buntrock, 571 A.2d 767, 773 (Del.
1990); Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984); Fed. R. Civ. P. 23.1; Del. Ch. R.
23.1. Because the directors’ right to manage the business and affairs of the corporation
necessarily encompasses the right to decide whether to “bring a lawsuit or refrain from litigating
a claim on behalf of a corporation” (Spiegel, 571 A.2d at 773), failure to make a demand will,
absent extraordinary circumstances, result in the automatic dismissal of a derivative action. See,
e.g., Guttman v. Huang, 823 A.2d 492, 500 (Del. Ch. 2003).
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Whether a demand on a board of directors should be excused on the ground of futility is a
question of the law of the state under which the entity is organized. See Kamen v. Kemper Fin.
Servs., Inc., 500 U.S. 90, 96 (1991). Janus is incorporated in Delaware and, as this Court has
noted, Delaware takes a very narrow view of when demand may be excused. See In re Mutual
Funds Invest. Litig. (In re Janus Subtrack), 384 F. Supp. 2d 873, 877 (D. Md. 2005) (citing
Guttman, 823 A.2d at 500).
The Delaware Supreme Court has articulated the standards for determining when demand
would be futile. Aronson, 473 A.2d at 812, 814; Rales v. Blasband, 634 A.2d 927, 933-34 (Del.
1992). When a derivative plaintiff challenges an affirmative business decision by the directors,
the plaintiff must allege with particularity facts creating a reasonable doubt that “(1) the directors
are disinterested and independent” or “(2) the challenged transaction was otherwise the product
of a valid exercise of business judgment.” Id. at 814; see also In re Mutual Funds Invest. Litig.
(In re Janus Subtrack), 384 F. Supp. 2d at 878 n.8.
Where, as here, a derivative plaintiff is challenging the directors’ alleged failure of
oversight, demand is excused only if the complaint makes “particularized factual allegations . . .
[that] create a reasonable doubt that, as of the time the complaint is filed, the board of directors
could have properly exercised its independent judgment and disinterested business judgment in
responding to a demand.” Rales, 634 A.2d at 934; see also David B. Shaev Profit Sharing
Account v. Armstrong, 2006 WL 391931, at *4 (Del. Ch. Feb. 13, 2006) (“the Rales test, in
reality, folds the two-pronged Aronson test into one broader examination”).
The burden of pleading a failure of oversight claim under Delaware law is “demanding,”
“most difficult,” and “quite high.” Guttman, 823 A.2d at 506; David B. Shaev Profit Sharing
Account, 2006 WL 391931, at *5 (pleading failure of oversight is “a difficult task”). Indeed, it
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“is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win
a judgment.” In re Caremark, 698 A.2d at 967. Directors cannot be held liable on a failure of
oversight claim unless they “ignored either willfully or through inattention obvious danger signs
of employee wrongdoing.” Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963).
And “[o]nly a sustained or systematic failure of the board to exercise oversight—such as an utter
failure to attempt to assure a reasonable information and reporting system exists—will establish
the lack of good faith that is a necessary condition to liability.” Id. at 971; see also Production
Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772, 798 n.80 (Del. Ch. 2004) (“the
plaintiff must plead facts supporting an inference of subjective bad faith”).
Moreover, plaintiffs are required to plead facts in support of demand futility with
particularity and may not rely on conclusory allegations. See Guttman, 833 A.2d at 501-03
(notice pleading inadequate); Aronson, 473 A.2d at 815; Rales, 634 A.2d at 933. “Conclusory
allegations are not considered as expressly pleaded facts or factual inferences.” Beam v. Stewart,
845 A.2d 1040, 1048 (Del. 2004); Khanna v. McMinn, 2006 WL 1388744, at *12, 15 (Del. Ch.
May 9, 2006).
A. The Complaint Does Not Make Legally Sufficient Allegations That
The Board Was Interested.
The Complaint’s demand futility allegations appear at ¶¶ 196-221. With respect to
director interest, the Complaint alleges only that demand should be excused because the
directors’ liability insurance coverage, which is maintained by Janus and is alleged to be the
primary source of recovery, “would be rendered void if the Company commenced proceedings
against the Director Defendants.” Compl. ¶ 221. But these insurance allegations are plainly
insufficient to excuse demand under Delaware law. The Delaware Chancery Court has
repeatedly held that directors do not become “interested” simply because the plaintiff alleges that
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the directors’ liability insurance would not cover the director defendants if the company
commenced proceedings against them. See Decker v. Clausen, 1989 WL 133617, at *2 (Del. Ch.
Nov. 6, 1989); Caruana v. Saligman, 1990 WL 212304, at *4 (Del. Ch. Dec. 21, 1990). As that
is the only allegation in the Complaint relating to director interest, the demand requirement
cannot be excused on that basis.
B. The Complaint Does Not Make Legally Sufficient Allegations That A
Majority Of The Board Faces A Substantial Likelihood Of Personal
Liability.
Plaintiff alleges that demand was excused because “at least a majority of the Board of
Directors face a substantial likelihood of liability.” See Compl. ¶ 198. For demand to be
excused under the second prong of the Aronson/Rales test, the complaint must allege with
particularity that the board of directors is compromised by a “substantial likelihood of director
liability.” Aronson, 473 A.2d at 815 (emphasis added). A “mere threat of personal liability” is
not enough. Id.; Ash v. McCall, 2000 WL 1370341, at *10 (Del. Ch. Sept. 15, 2000). To satisfy
this pleading obligation, the complaint must allege, with particularity, that the Board ignored
“red flags,” acted in bad faith, or grossly failed to require the existence of basic reporting and
oversight systems. See generally David B. Shaev Profit Sharing Account, 2006 WL 391931, at
*5.
1. The Complaint Does Not Allege That “Red Flags” Were
Brought To The Board’s Attention Or That The Board Acted
In Bad Faith.
“Red flags” that were never brought to the board’s attention cannot establish the bad faith
necessary to excuse demand. In re Citigroup Inc. Shareholders Litig., 2003 WL 21384599 (Del.
Ch. June 5, 2003), aff’d, Rabinowitz v. Shapiro, 839 A.2d 666 (Del. 2003), at *2 (“‘red flags’ are
only useful when they are wa[v]ed in one’s face or displayed so that they are visible to the
careful observer”). The red flags cited by the Complaint are the very same red flags that this
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Court concluded were inadequate to establish bad faith in the Fund Derivative case. In re
Mutual Funds Invest. Litig. (In re Janus Subtrack), 384 F. Supp. 2d at 878 (concluding that
plaintiffs “have not alleged sufficient facts raising a reasonable doubt that the trustees do face a
substantial likelihood of liability”). The Fund Derivative plaintiffs alleged that the trustees
violated their fiduciary duties because they failed to “detect[] and prevent[] late trading and
market timing activities,” and that the trustees “were on notice that the activities might be
occurring in the Janus funds” because market timing and late trading were “endemic in the
mutual fund industry” and because there was “‘copious coverage’ of the problem in books and
articles.” Id. at 879. The Fund Derivative plaintiffs also alleged that the “directors—at least
those on the funds audit committees—were aware of high turnover ratios in the Janus funds.” Id.
This Court concluded that these allegations were not sufficient to excuse demand in the Fund
Derivative case. See In re Mutual Funds Invest. Litig., 384 F. Supp. 2d at 878. The same
conclusion should follow here.
Here, as in the Fund Derivative case, the Complaint contains numerous citations to
“regulatory, academic, and general press red flags” (Compl. ¶ 203) that purportedly put the
Director Defendants on notice of late trading and market timing. The Complaint cites general
publications and academic articles concerning market-timing (Compl. ¶¶ 109-115), and alleges
that knowledge about market timing was pervasive in the industry (Compl. ¶¶ 115-16, 129-33).
But as in the Fund Derivative case, the Complaint does not allege that any articles specifically
addressed Janus, much less that the Director Defendants knew of or discussed the articles or
actual market timing occurring in the Janus funds.
Similarly, the Complaint alleges—in conclusory terms—that the Director Defendants,
by virtue of their positions and experience, should have known of the alleged misconduct.
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Compl. ¶¶ 199-215. Indeed, the Complaint places near total weight on the general expertise and
experience of the Director Defendants to establish that they should have known and detected
market-timing in Janus funds. Compl. ¶ 201 (Rowland “had long experience in senior executive
management of mutual fund management and investment advisory businesses”); ¶ 206 (“Craig
was an experienced investment advisor”); ¶ 207 (Scheid, Cox and Balser “have extensive
experience in and specialized knowledge of the mutual fund industry and/or securities brokerage
industry”); ¶ 210 (“Possessing such specialized knowledge and expertise, these Director
Defendants were therefore duty bound to utilize it”); ¶ 213 (“As a result of the special
knowledge, skill, and experience . . . the[] defendants had specific knowledge and understanding
that rigorous attention to fiduciary compliance . . . was essential”); ¶ 214 (“by virtue of their
personal experience, knowledge and expertise . . . the Director Defendants . . . were aware of
and/or consciously disregarded [general information about the mutual fund industry]”). But as in
the Fund Derivative case, “noticeably absent” are any allegations that the Director Defendants
were actually confronted with “an extensive paper trail” showing “unmistakable signs that
improper practices were being employed throughout the corporation.” In re Mutual Funds
Invest. Litig., 384 F. Supp. 2d at 878 (citations omitted).
Indeed, the Complaint purports to make specific allegations about only two members of
the Board of Directors. First, the complaint makes conclusory allegations about Hayes’
purported knowledge of ostensible “red flags.” Compl. ¶¶ 149-52; 204-05. It alleges that, based
solely on her management position, “[i]t is not credible that market timing arrangements of the
size and scope rampant at Janus . . . occurred within her funds without her knowledge or, at a
minimum, acquiescence.” Compl. ¶ 150. This, of course, is not a particularized allegation. Litt
v. Wycoff, 2003 WL 1794724, at *6 (Del. Ch. March 28, 2003) (noting that allegations that
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actions were not taken in good faith must be pleaded with particularity); Allison v. General
Motors Corp., 604 F. Supp. 1106, 1114 (D. Del.), aff’d, 782 F.2d 1026 (3d Cir. 1985) (noting
that demand futility based on bad faith requires pleading of particularized allegations).
Plaintiff’s conjecture that “it is not credible” that Hayes was unaware of market timing in the
Janus funds is precisely the type of conclusory allegation deemed insufficient to excuse demand.
This pleading failure is all the more significant given that plaintiff brought suit well after Janus
settled with the SEC and the NYAG; despite all the publicly available information about what
occurred at Janus, it is telling that plaintiff can no more than speculate as to what Hayes (and
other board members) might have known.
Second, the Complaint alleges that Mr. Whiston commissioned a report that
demonstrated that Janus had arrangements with “approved timers.” Compl. ¶ 203. But the
Complaint nowhere alleges that other members of the Board of Directors were aware of the
contents of the report; it alleges only that certain individuals in management had knowledge of
the report. Compl. ¶¶ 144-48, 203, 215. The Fund Derivative complaint—which this Court
dismissed—made the identical allegation. See Fund Derivative Compl. at ¶¶ 280-82 (alleging
that “the Report summarized the problem at Janus and identified several adverse impacts that
market timing had on mutual funds and their investors”). Without having any knowledge of the
alleged misconduct, the Director Defendants cannot be held liable for a failure to correct it. See
Ash, 2000 WL 1370341, at *15. Moreover, even if some of the directors knew of the alleged
market timing activities (a fact which is not alleged), demand would not be excused because the
demand requirement is meant to provide directors with “an opportunity to consider, or
reconsider, the issue in dispute.” Werbowsky v. Collomb, 766 A.2d 123, 144 (Md. 2001);
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Aronson, 472 A.2d at 809 (the demand requirement is “designed to give a corporation the
opportunity to rectify an alleged wrong without litigation”).2
Plaintiff was required to plead with particularity reasons the Director Defendants face a
substantial likelihood of liability, including allegations of subjective bad faith. See Production
Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772, 798 n.80 (Del. Ch. 2004) (“the
plaintiff must plead facts supporting an inference of subjective bad faith”). That standard has not
been met. As in the Fund Derivative case, at most the Complaint sets out a theory, informed by
20/20 hindsight, that the Board of Directors could have or should have done more to guard
against wrongdoing. But the Delaware courts have consistently dismissed complaints making
similar allegations.3 As this Court said in the Fund Derivative case, although it may be said
2 The complaint pleads a claim against Mark Whiston “in his capacity as CEO.” Compl.¶ 3.
Whiston was a member of the Board at all relevant times, and the core theory of the
complaint is that the Board failed in its duty, as the Board, to detect and prevent market
timing activity. To the extent Plaintiff alleges that Whiston is not entitled to the protections
of the business judgment rule in his capacity as an officer, that theory fails as a matter of law.
See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. Ch. 1993); Kelly v. Bell,
266 A.2d 878, 879 (Del. 1970); Pogostin v. Rice, 1983 WL 17985, at * 3 (Del. Ch.), aff'd,
480 A.2d 619 (Del. 1984); Haber v. Bell, 465 A.2d 353, 357 (Del. Ch. 1983); see generally,
Lawrence A. Hammermesh & A. Gilchrist Sparks III, Corporate Officers and the Business
Judgment Rule: A Reply to Professor Johnson, 60 Bus. Lawyer 865, 868-69 (May, 2005)
(“Since we wrote on the subject in 1992, in fact, no court has stated that the business
judgment rule does not apply to officers, and quite of number of opinions have held that it
does”); see also id. at 869-73 (explaining policy reasons for applying business judgment rule
to officers).
3 See David B. Shaev Profit Sharing Account, 2006 WL 391931 (dismissing failure of
oversight claim because plaintiff failed to plead particularized facts to establish a substantial
likelihood of liability); Stone v. Ritter, 2006 WL 302558 (Del. Ch. Jan. 26, 2006) (dismissing
failure of oversight claim because plaintiff failed to plead particularized facts to tie
defendants to alleged wrongdoing); Seminaris v. Landa, 662 A.2d 1350, 1354-55 (Del. Ch.
1995) (dismissing failure of oversight claim because plaintiff failed to plead particularized
facts to establish threat of liability); In re Citigroup Inc. Shareholders Litig., 2003 WL
21384599 at *2 (holding demand not excused because no particularized allegations to
[Footnote continued on next page]
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“with the benefit of hindsight . . . that the [defendants] . . . should have been more vigilant in
detecting late trading and market timing activities occurring within the Janus funds, at most their
failure to do so constituted negligence, not the intentional conduct, recklessness, or, at the least,
gross negligence, required to hold them liable for their inactions.” In re Mutual Funds Invest.
Litig. (In re Janus Subtrack), 384 F. Supp. 2d at 878 (citations omitted).
2. The Complaint Does Not Make Legally Sufficient Allegations
That The Board “Utterly Failed” To Attempt To Establish
Internal Controls.
Nor can demand be excused on the ground that that the Director Defendants were guilty
of a “sustained or systemic failure . . . to exercise oversight.” In re Caremark, 698 A.2d at 971.
The complaint must allege an “utter failure” by the board to attempt to establish internal controls,
including but not limited to particular “facts that show the company entirely lacked an audit
committee or other important supervisory structures, or that a formally constituted audit
committee failed to meet.” David B. Shaev Profit Sharing Account, 2006 WL 391931, at *5.
Plaintiff’s own allegations belie any suggestion that the company lacked the appropriate
supervisory structures. To the contrary, according to the Complaint, Janus had a robust
compliance system. Compl. ¶¶ 60-70. To take just a few examples, Janus’ compliance and
oversight systems included the following:
• an Audit Committee that was charged with “monitor[ing] the integrity of the
Company’s financial reporting process and systems of internal controls regarding
[Footnote continued from previous page]
establish defendants’ knowledge of misconduct); Guttman, 823 A.2d at 496 (holding demand
not excused because no particularized allegations that the directors had “clear notice” of
misconduct); Rattner v. Bidzos, 2003 WL 22284323 (Del. Ch. Oct. 7, 2003) (holding demand
not excused because no particularized allegations of directors’ involvement in the
misconduct).
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financial, accounting and legal compliance, . . . [and] monitor[ing] compliance
with legal and regulatory requirements and to review areas of potential significant
financial risk to the Company.” Compl. ¶ 61; see also Compl. ¶¶ 65, 211-12;
• a Nominating and Corporate Governance Committee that was charged with
“responsibility for promoting the best interests of the Company and its
shareholders through the implementation of sound corporate governance
principles and practices, to monitor compliance with legal and regulatory
requirements, and to review areas of potential significant financial risk to the
Company.” Compl. ¶ 211; and
• a Code of Business Conduct and Ethics requiring that Janus’ business “be
conducted in accordance with the highest ethical and legal standards.” Compl.
¶ 65;
Perfection is not required of a board of directors, and it has been recognized that mistakes
by the board do not constitute an “utter failure” of oversight. See Dellastatious v. Williams, 242
F.3d 191, 196 (4th Cir. 2001) (noting that “mishaps within a corporation do not alone entitle a
plaintiff to bring suit against directors in their personal capacities.”). Caremark states that a
board has a “duty to attempt in good faith to assure that a corporate information and reporting
system . . . exists,” but recognizes that it is impossible that any system will remove every
“possibility that the corporation will violate laws or regulations.” Id. at 970. As a result, the
nature of corporate reporting and oversight systems is “a question of business judgment,” where
much of the analysis turns on whether the board acted in good faith—which it did do here. In re
Caremark, 69 A.2d at 970-71. Directors simply do not bear liability “where a concededly well-
Case 1:04-md-15863-JFM Document 2113 Filed 07/14/06 Page 16 of 19
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constituted oversight mechanism, having received no specific indications of misconduct, failed
to discover fraud.” David B. Shaev Profit Sharing Account, 2006 WL 391931, at *5.
The Complaint does not set forth particularized facts to establish that the Director
Defendants face a “substantial likelihood of liability” based on an “utter failure” to attempt to
implement an information, compliance and oversight system. Indeed, the Fund Derivative
complaint similarly alleged that the Janus defendants “should have put procedures and processes
in place that would have provided them with relevant information about whether widespread late
trades and market timed transactions were being conducted,” but this Court dismissed that
complaint due to the absence of particularized allegations of bad faith. In re Mutual Funds
Invest. Litig. (In re Janus Subtrack), 384 F. Supp. 2d at 878. The same result should follow here.
The Complaint should be dismissed with prejudice.4
4 Plaintiff’s state-law claims against the Director Defendants for breach of fiduciary duty also
fail on the merits. The Janus defendants reserve the right to move to dismiss such claims on
the schedule to be determined by the Court in the event that the Complaint is not dismissed
for failure to make pre-suit demand.
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CONCLUSION
For the foregoing reasons, the Complaint should be dismissed with prejudice.
Respectfully submitted,
Dated: July 14, 2006
__/s/__________________________
Mark A. Perry
Andrew S. Tulumello
Melanie L. Katsur
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue N.W.
Washington, D.C. 20036
Telephone: (202) 955-8500
Facsimile: (202) 467-0539
Counsel for Janus Capital Group Inc. and Janus
Capital Management LLC
Robert C. Myers
DEWEY BALLANTINE LLP
1301 Avenue of the Americas
New York, NY 10019
Telephone: (212) 259-8000
Facsimile: (212) 259-6333
Counsel for Paul F. Balser, Robert N. Burt, G.
Andrew Cox, James P. Craig, Landon H.
Rowland, Steven L. Scheid, Robert Skidelsky
David C. Mahaffey
SULLIVAN & WORCESTER LLP
1666 K Street, N.W.
Washington, D.C. 20006
Telephone: (202) 775-1200
Facsimile: (202) 293-2275
Counsel for Helen Y. Hayes
Case 1:04-md-15863-JFM Document 2113 Filed 07/14/06 Page 18 of 19
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Peter W. Devereaux
Ethan J. Brown
LATHAM & WATKINS LLP
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Telephone: (213) 485-1234
Facsimile: (213) 891-8763
Counsel for Mark B. Whiston
Case 1:04-md-15863-JFM Document 2113 Filed 07/14/06 Page 19 of 19
