Académique Documents
Professionnel Documents
Culture Documents
v.
THE SPECIAL LITGATION COMMITTEE
Frank C. Stipes, et al, OF W HOLDING CO., INC.’S MOTION TO
DISMISS AND INCORPOATED
Defendants. MEMORANDUM OF LAW
_________________________________/
Pursuant to Fed. R. Civ. P. 23.1, the Special Litigation Committee (the "SLC") of
nominal defendant W Holding Company, Inc. ("WHI" or the "Company") moves to dismiss the
Complaint (the "Amended Complaint”). In support of this motion, WHI submits the below
memorandum of law.
MEMORANDUM OF LAW
I. PRELIMINARY STATEMENT
By resolution dated March 24, 2009, the Board of Directors of WHI (the "Board")
formed the SLC in response to the filing of a derivative complaint on January 11, 2008, in
federal court in Puerto Rico. On June 9, 2008, plaintiff Hunter Wylie (“Plaintiff”) filed the
Amended Complaint, which alleges claims on behalf of WHI for different forms of breach of
fiduciary duty, violations of Sarbanes-Oxley, waste, unjust enrichment, and violations of Puerto
Rico laws against 11 current and former WHI and Westernbank (the “Bank”) officers and
directors.
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The claims in the Amended Complaint arise principally as a result of WHI’s restatement
of its financial statements for the periods between October, 2005 and December, 2007. The
restatement was necessary due to a structured fraud perpetrated by a significant loan client of the
Westernbank Business Credit Division, namely Inyx, Inc (the “Inxy Fraud”). The Inyx Fraud
caused a significant loan impairment of the Bank’s financial statements, and resulted in massive
In its March 24, 2009 resolution, as permitted under Puerto Rico law, the Board
authorized the SLC to investigate the claims made in the Amended Complaint and to determine
the Company's response to those claims. The SLC conducted an extensive and independent
investigation of the facts underlying the claims made in the Amended Complaint. The purpose
of the SLC's investigation was to determine the role and relative culpability, if any, of each of the
defendants in the events that form the basis of the claims alleged in the Amended Complaint.
The SLC's investigation is now complete. The SLC has filed under seal contemporaneously
herewith a detailed written report (the "SLC Report") of the SLC's investigation, its findings, and
its determination as to whether the claims alleged in the Amended Complaint should be pursued,
In the Report, the SLC, which is comprised of two members,1 has concluded that the
Amended Complaint should be dismissed in its entirety. Accordingly, the SLC respectfully
submits that dismissal is appropriate because all of the standards set forth under Delaware law
that govern this motion have been met.2 First, the independence of the two members of the SLC,
1
The members of the SLC are Enrique Gonzalez and Alberto Baco.
2
WHI is incorporated in the State of Puerto Rico. As a result, under Puerto Rican law, the fiduciary obligations
owed by WHI’s officers and directors are analyzed under Delaware substantive law, as Puerto Rican courts seek
guidance from Delaware courts, which are the nation’s preeminent courts in analyzing and interpreting corporate
law. In the absence of controlling law in Puerto Rico, Delaware corporate law acts as the guidepost. Marquis
Theatre Corp. v Condado Mini Cinema, 846 F.2d 86 (1st Cir. 1988) (The court noted that “An examination of the
case law of Puerto Rico reveal[ed] no controlling cases. However, the law of corporations in this jurisdiction is
2
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each prominent in his respective field and who joined the Board after the Inyx Fraud had
occurred, cannot reasonably be questioned. Second, the scope and extent of the SLC's
investigation demonstrates that the SLC investigated the claims alleged in the Amended
Complaint in good faith and with due care. The SLC's investigation was thorough and
comprehensive. Among other things, the SLC and its counsel conducted approximately 39
interviews of 33 individuals and reviewed over 750,000 pages of documents. Third, the factual
record, set forth at length in the SLC Report, demonstrates that the SLC's conclusions are
The SLC seeks dismissal of the Amended Complaint in its entirety because it has
determined that, in the exercise of its business judgment under Delaware law, this course of
action is in the Company's best interests. In reaching this conclusion, as set forth in detail in the
SLC Report, the SLC has considered: (i) the factual and legal merits of each claim, including
possible defenses to those claims, and (ii) additional factors relevant to determining whether
litigation should be brought on behalf of the Company. Accordingly, the SLC respectfully
requests that the Court grant its motion to dismiss, as it is in the manifest best interests of WHI
The SLC respectfully refers this Court to the SLC Report for a full and complete
statement of the facts relating to the Inyx Fraud, and other relevant factual and legal issues, as
well as the SLC's findings and determinations. The SLC Report is incorporated herein by
reference, and the findings described in this motion are cross-referenced with the SLC Report for
3
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III. ARGUMENT
Under Delaware law, upon the filing of a derivative complaint that purports to be brought
on behalf of a Delaware corporation, the board of directors may empower a special litigation
committee of disinterested directors to determine whether pursuit of the claims is in the best
interests of the Company. Under Delaware law, it is well-settled that "an independent committee
possesses the corporate power to seek the termination of a derivative suit." Zapata Corp. v.
Maldonado, 430 A. 2d 779, 785 (Del. 1981).3 An SLC comprised of independent members has
the authority to seek dismissal of a derivative complaint even where a majority of the board that
appointed the SLC is "tainted by self-interest." Id., 430 A.2d at 786. That is because "a
stockholder cannot be permitted… to invade the discretionary field committed to the judgment of
the directors and sue in the corporation's behalf when the managing body refuses." Id. at 783
(quotation omitted).4
In Zapata, the Delaware Supreme Court set forth the process by which an SLC may seek
dismissal of claims asserted in a derivative complaint if it determines that pursuit of those claims
would be contrary to the best interests of the corporation. The Court held:
allegations in a derivative lawsuit and to take whatever action the committee deems appropriate
in its considered business judgment, including pursuing the action, negotiating a settlement of
the action or moving to terminate the action. See 8 Del. C. § 141(c); Zapata, 430 A.2d at 786
(“The committee can properly act for the corporation to move to dismiss derivative litigation that
special litigation committee to investigate derivative claims arises from the fundamental
principle of Delaware law that directors, not stockholders, “manage the business and affairs of
the corporation”. Spiegel v. Buntrock, 571 A.2d 767, 772-73 (Del. 1990). The decision to
pursue, or not pursue, litigation on behalf of the corporation is a decision concerning the
management of corporate business and affairs that is committed to the board of directors. Id. at
773.
determination of a special litigation committee under the two-step analysis established by the
Delaware Supreme Court in Zapata. See 439 A.2d at 788-89. First, the Court must examine the
independence of the committee's members and the process by which the special litigation
committee reached its conclusion. See id. Specifically, the Court must determine whether the
special litigation committee: (i) functioned independently of the parties to the action, (ii) acted in
good faith and conducted a thorough investigation, and (iii) had reasonable bases for its
conclusions. Id. at 788, See also Kindt v. Lund, C.A. No. 17751, Chandler, C., slip op. at 2-3
5
Carlton Invs v. TLC Beatrice Intl. Holdings, Inc.,1997 WL 305829 (Del. Ch. May 30, 1997) (approving settlement
of derivative action based on report of special litigation committee); Katell v. Morgan Stanley Group, Inc., C.A. No.
12343, Chandler, V.C. slip op. at 27 (Del. Ch. June 15, 1995) (dismissing derivative action based on report of
special litigation committee); Kaplan v. Wyatt, 484 A.2d 501, 519 (Del. Ch. 1984) (same), aff'd, 499 A.2d 1184
(Del. 1985).
5
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(Del. Ch. Dec. 14, 2001). In making these determinations, the Court employs a standard “akin”
The second step in the Zapata analysis, which is discretionary, permits the Court to apply
its own independent business judgment to decide whether the motion to dismiss the action should
be granted. 430 A.2d at 789. In applying its business judgment, the Court may consider whether
the results of the special litigation committee's investigation satisfy the “spirit” of step one of the
Zapata analysis, as well as matters of law, public policy or good corporate governance. Id. The
second, discretionary step of the Zapata framework is “designed to offer protection for cases in
which, while the court could not consciously determine on the first leg of the analysis that there
was no want of independence or good faith, it nevertheless ‘felt’ that the result reached was
‘irrational' or ‘egregious' or some other such extreme word”. Carlton Invs.,1997 WL 305829 at *2.
The motion should be based on the best interests of the corporation. Kaplan v. Wyatt, 484
A.2d 501, 505 (Del. Ch. 1984) (“The basis of the motion is the best interests of the corporation,
as determined by the committee”). The reviewing court should not be passing on the evidentiary
Where the reviewing court finds that an SLC has shown independence, good faith and
due care in its investigation, and the reasonableness of its conclusions, the motion to dismiss
should be granted. Kaplan v. Wyatt, 499 A.2d 1184, 1191-92 (Del. 1985) (affirming dismissal of
suit on motion of SLC); St. Clair Shore Gen. Emples. Ret. Sys. v. Eibeler, 2008 WL 2941174, at
*7 (S.D.N.Y. July 30, 2008) (dismissing derivative claims where "the SLC has carried its burden
of showing the absence of a triable issue regarding the Committee's independence and good
6
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As set forth in detail in SLC Report at IV (D), SLC members Enrique Gonzalez and
Alberto Baco are disinterested in the claims alleged in the Amended Complaint and independent
of all of the defendants. Gonzalez, who joined the Board on February 25, 2008, is a partner at
Gonzalez & Roig, a certified public accounting firm. Baco, who joined the Board on March 27,
2009, is the President and Chief Executive Officer of Marvel International, Inc. and Bohio
International Corporation. Both companies are middle market manufacturing and distribution
operations, which specialize in branded products. Mr. Baco is also a venture capitalist and real
estate developer. Mr. Baco previously served as the President of Economic Development Bank
of Puerto Rico. Baco and Gonzalez are independent, non-management directors, and did not
serve on the Board during the period when the Company was involved in the Inyx fraud (the
"impartiality and objectivity" (In re Oracle Corp. Deriv. Litig., 824 A.2d 917,920 (Del. Ch.
2003), and requires a determination whether any of the members are, "for any substantial reason,
incapable of making a decision with only the best interests of the corporation in mind." Id.
its decision on “the merits of the issue rather than being governed by extraneous considerations
or influences”. Kaplan, 499 A.2d at 1189 (citing Aronson v. Lewis, 473 A.2d 805 (Del. 1985);
Katell, slip op. at 13. “[I]t is the care, attention and sense of individual responsibility to the
performance of one's duties that touch on [the] independence” of a special litigation committee.
Kaplan, 499 A.2d at 1189. At bottom, the question of independence turns on whether a director
is, for any substantial reason, incapable of making a decision with only the best interests of the
7
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corporation in mind. That is, the Supreme Court cases ultimately focus on impartiality and
objectivity. Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1232 (Del. Ch.
2001) (footnotes omitted) (emphasis in original), rev'd in part on other grounds, 817 A.2d 149
(Del. 2002), cert. denied, 538 U.S. 1032, 123 S. Ct. 2076, 155 L.Ed.2d 1061 (2003).
Here, there can be no genuine dispute that Mr. Baco and Mr. Gonzalez are independent:
1. The SLC members were appointed to the Board after: (i) the alleged wrongdoing;
(ii) and the commencement of the Derivative Action.
2. Neither of the SLC members has worked for or with any of the individual
defendants in the past, with the exception of Mr. Gonzalez’ limited relationship
with Mr. Tamboer and Del Rio, as described further below.
3. Neither of the SLC members is dependent upon any of the defendants for
employment, or other pecuniary gain, except as indicated in the case of Mr.
González’s limited relationship with Mr. Del Rio and Mr. Tamboer.
4. Neither of the SLC members has served on corporate, charitable, or other boards
of directors (except for WHI) with any of the defendants.
5. Neither of the SLC members has been involved with charitable or educational
institutions to which any of the defendants contribute funds of which they are
aware.
6. Neither of the SLC members has a prior personal or social relationship with any
of the defendants.
7. Neither of the SLC members made any prior judgments regarding the merits of
the Derivative Action.
For these reasons, both Messrs. Baco and Gonzalez, in consultation with counsel, have
concluded that they are independent and financially disinterested from the defendants named in
the Derivative Action, and their conclusions are the product of an unbiased review of the facts
and circumstances alleged in the Derivative Complaint. The SLC members: (i) have no personal
financial stake in the disposition of those claims and (ii) face no personal liability as a result of
those claims because they were not on the Board at the time of the conduct at issue.
8
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As set forth in detail in the SLC Report IV(D), the members of the SLC are independent.
Before beginning its investigation, the SLC and its counsel considered any and all factors that
would "weigh on the mind of a reasonable special litigation committee member ... in “a way that
generates an unacceptable risk of bias." Oracle, 824 A.2d at 947; id. at 938-39 ("[A] director
'may be compromised if he is beholden to an interested person. Beholden in this sense does not
mean just owing in the financial sense, it can also flow out of ‘personal or other relationships' to
the interested party"); Katell, 1995 WL 376952, at *8 (“When a special committee's members
have no personal interest in the disputed transactions, this Court scrutinizes the members'
relationship with the interested directors"). No such matters exist here. The SLC members had
no relationship or personal contacts with the defendants prior to joining the Board, and the
The SLC and its counsel have identified only two ties, both commercial, between the
named defendants and the SLC members, as follow (and as outlined in the SLC Report at IV(D):
1. Enrique Gonzalez: Among other clients, Mr. González’s firm provides audit and
tax services to Prota Construction, and Tamrio, Inc. These two companies were
owned and operated by Cornelius Tamboer and Hector del Rio, respectively, who
are both independent members of the WHI Board of Directors and are defendants
in the derivative lawsuit. Presently, Tamrio, Inc. is no longer affiliated with Mr.
Tamboer, as he sold all of his remaining shares in Tamrio Inc., to Mr. del Rio.
2. Alberto Baco: Mr. Bacó has a 40% ownership interest in Desarrollos Car y Al
2004, Inc. (“Desarrollos”) and is its President and Secretary. Mr. Bacó and
Desarrollos are customers of, and have had transactions with, the Bank, in the
ordinary course of the Bank’s business and the Bank expects to have banking
transactions with each in the future. These transactions include a line of credit of
$6,655,000 extended by the Bank to Desarrollos. Since the beginning of the
Company’s 2008 fiscal year, the largest aggregate amount of principal
outstanding at any time on the line of credit was $6,451,238. As of December 31,
2008 and September 30, 2009, $2,962,818 and $2,350,052, respectively, was
outstanding on this line of credit. Desarrollos paid $3,614,481 and $292,271 in
principal and interest payments, respectively, during the Company’s 2008 fiscal
year, and $697,918 and $96,569 in principal and interest payments, respectively,
since the beginning of 2009 fiscal year. The interest rate payable on monies
borrowed under the line of credit is 5.50%. All loans and commitments to lend
9
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pursuant to the aforementioned line of credit were made in the ordinary course of
business and on substantially the same terms, including interest rates, collateral
and repayment schedules, as those prevailing for comparable transactions with
other persons of similar creditworthiness and did not involve more than a normal
risk of collectability nor contain terms unfavorable to the Bank.
defendants will not automatically disqualify special litigation members as lacking independence.
In Katell v. Morgan Stanley Group, Inc., 1995 WL 376952 (Del. Ch. June 15, 1995), Morgan
Stanley and Cigna Corporation had created a limited partnership to identify and invest in
business opportunities. After the partnership soured and litigation commenced, CIGNA LCF, a
wholly owned subsidiary of CIGNA and a general partner in the venture (and named defendant),
was named the sole member of the special litigation committee. Id. at *5. As the special
committee, CIGNA LCF investigated plaintiffs’ claims and determined that they should be
dismissed. Id. Plaintiffs challenged the independence of CIGNA LCF principally on grounds
that CIGNA, its parent, had long-standing business ties to Morgan Stanley, also a named
defendant. Id. at *7. In analyzing independence, the Delaware court concluded that the business
relationship between CIGNA and Morgan Stanley consisted of arms-length trading relationships.
Id. at *8. In a lengthy factual analysis of that relationship, the court concluded that the special
committee had provided “sufficient evidence of CIGNA LCF’s independence” and that the
“procedure created in Zapata [was] very fact specific. Id. The court ultimately held that,
notwithstanding their long business relationships, CIGNA LCF was indeed independent and
could serve on the special committee. Id. at *8-9. See also Kaplan v. Wyatt, 484 A.2d 501 (Del.
Ch. 1984).
To render a credible decision about the shareholder litigation, however, the Committee
must meet rigorous independence criteria in both appearance and fact. After discussions with
10
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recuse himself from any question regarding the appearance of his independence in order not to
compromise the Committee’s important work with respect to Mr. Tamboer and Mr. Del Rio.
However, Mr. González is clearly independent with respect to all other defendants, and will
continue to provide his services to the SLC with respect to evaluating claims on all other named
defendants. The other SLC member, Mr. Baco, who is clearly independent with respect to the
named defendants in their entirety, will evaluate all claims with respect to Mr. del Rio and Mr.
It is clear from the applicable case law, that what is needed is more than mere conjecture,
but sufficient, competent evidence of the inability of the WHI Special Committee’s members to
independently serve on the committee. Both Mr. Baco’s relationship with Westernbank and Mr.
Gonzalez’ audit relationship with companies owned by named Defendants are completely arms-
length and non-personal in nature. The record is devoid of any facts suggesting otherwise.
Because none of the SLC members have, or had, any personal, professional or other relationship
to any interested party that would compromise their independence, there can be no credible
Under Delaware law, the SLC must also demonstrate that (1) its members were
independent; (2) that they acted in good faith; and (3) that they had reasonable bases for their
recommendations. In re Oracle Corp. Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003)
citing Zapata, 430 A.2d at 788-89; Katell v. Morgan Stanley Group, 1995 WL 376952, at *5
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Delaware’s test for good faith and reasonableness of the Investigation is clearly
[W]hat the committee did or did not do, and the actual existence of
the documents and persons purportedly examined by it, should
constitute the factual record on which the decision as to the
independence and good faith of the Committee, and the adequacy
of its investigation in light of the derivative charges, must be
based…[I]t is the conduct and activity of the Special Litigation
Committee in making its evaluation of the factual allegations and
contentions contained in the plaintiff’s complaint which provide
the measure for the Committee’s independence, good faith, and
investigatory thoroughness. This is because it is the Special
Litigation Committee which is under examination at this first-step
stage of the proceedings, and not the merits of the plaintiff’s cause
of action.
Here, the SLC's investigation far exceeds the standard set forth by Delaware. With the
assistance of counsel, the SLC conducted a detailed and thorough factual and legal investigation
to determine whether it is in the best interests of the Company to pursue the claims asserted in
The SLC and its counsel reviewed over 750,000 pages of documents and conducted 39
interviews of 33 witnesses, including interviews of (i) every named defendant except Jose
Biaggi, (ii) other current and former WHI and Westernbank officers and employees; and (iii)
other interested parties. Nor do any other factors that have been found to disable SLCs, such as
prejudgment of the issue, exist here. See, e.g., Biondi v. Scrushy, 820 A.2d 1148, 1166 (Del. Ch.
2003) (rejecting independence where the HealthSouth: SLC Chairman "publicly and prematurely
issued statements exculpating one of the key company insiders whose conduct [was] supposed to
be impartially investigated by the SLC"), aff'd, 847 A.2d 1121 (Del. 2004);
Even though it is perfectly appropriate for the SLC members to rely on counsel to lead
the investigation, the SLC members (i) personally participated in many interviews of current and
former Westernbank and WHI directors, officers, employees, and advisors, (ii) reviewed key
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deliberations concerning the claims, and (iv) reviewed and revised the more than 230, mostly
single-spaced pages of the SLC Report. Carlton Invs v. TLC Beatrice Intl. Holdings, Inc., 1997
WL 305829, at *12 (Del. Ch. May 30, 1997) ("While the directors bear ultimate responsibility
for making informed judgments, good faith reliance by a SLC on independent, competent
counsel to assist thee SLC in investigating claims is legally acceptable, practical and often
necessary"). The SLC members directed the scope and depth of the investigation in all respects.
The SLC investigated every claim set forth in the Amended Complaint and directed the
interviews of all available witnesses that it concluded were appropriate.6 The good faith of the
SLC is further demonstrated by the thoroughness of its investigation, which explored facts and
claims far beyond those alleged in the Amended Complaint, and by the SLC Report itself. 7
Finally, during the course of its investigation, the SLC made a good faith effort to consult
with Lead Counsel. SLC counsel and an SLC member, Enrique Gonzalez, met with Lead
Counsel on one occasion, an all-day conference on Miami, Florida on September 16, 2009.
Additionally, the SLC held numerous telephone conferences with Lead Counsel throughout the
6
See Kindt, 2003 WL 21453879 at *3 (good faith and thorough investigation found on the basis of five month
investigation by SLC during which "twenty-six persons were interviewed and 50,000 pages of documents were
reviewed”); St. Clair, 2008, WL 2941174, at *14-15 (finding good faith where SLC conducted "extensive interviews
of key witnesses" and "thoroughly evaluate[d] [plaintiffs] substantive claims"); Strougo v. Bassini, 112 F. Supp. 2d
355, 366 (S.D.N.Y. 2000) (finding "SLC pursued its investigation in a thorough and diligent manner. From June
through December 1998, the SLC interviewed 11 witnesses and conducted a comprehensive review of
approximately 36,000 pages of documents").
7
See Kaplan, 484 A.2d at 519-20 (finding that the SLC "acted in good faith" where "report of the Committee
appears to be comprehensive and well documented and gives indication of a reasonable and thorough investigation
of plaintiffs allegations"), aff’d, 499 A.2d 1184 (Del. 1985); Kindt, 2003 WL 21453879, at *4 (good faith
demonstrated where SLC's investigation was "thoughtful and thorough" and "rooted out additional facts not even
alleged by plaintiff'); Kaplan, 499 A.2d at 1191 ("a detailed report which was over 150 pages in length" and
"examined all of the allegations set forth in [the derivative] complaint" constituted an ample basis to grant the
motion to dismiss).
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investigation and SLC members also met directly with Lead Counsel. The SLC sought Lead
Counsel's views on the scope of the inquiry conducted by the SLC at both the in-person meeting
and at the telephonic conferences. The wide-ranging and thorough investigation conducted by
the SLC is more than reasonable under Delaware law. See PSE&G, 801 A.2d at 316-318
(affirming dismissal in demand refused case where law firm employed by Board reviewed "over
43,000 pages of documentation" and "interviewed dozens of witnesses"). Accordingly, there can
be no credible challenge to the scope, depth, and reasonableness of the SLC's investigation.
Finally, the SLC must demonstrate that its conclusions are reasonable, and Delaware law
Other courts have noted that an SLC must demonstrate that its conclusions are
reasonable, taking into account “all relevant justifications for…[the] determination, including the
seriousness and weight of the plaintiff[s]’ allegations.” In re PSE&G Shareholder Litig., 801
A.2d 295, 318 (N.J. 2002). Those justifications include not only the relative factual and legal
merits of the claims asserted, but also whether pursuing litigation is in the best interests of the
Company, taking into account, among other things, "the possible financial burden on the
corporation compared with the litigation costs ... the extent to which dismissal will permit the
defendants to retain improper benefits and . . . the effect continuing the litigation will have on the
corporation's business reputation and good will." In re PSE & G Shareholder Litig., 718 A.2d
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254, 258 (N.J. Super. Ct. Ch. Div. 1998) (quoting Lewis v. Boyd, 838 S.W.2d 215, 224 (Tenn.
Ct. App. 1992) and citing Houle v. Low, 556 N.E.2d 51, 58 (Mass. 1990). 8 The SLC respectfully
Overview of Claims: As described at length in the SLC Report, the claims alleged in the
Amended Complaint arise principally as a result of WHI’s restatement of its financial statements
for the periods between October 2005 and December 2007. The restatement was necessary due
to a structured fraud perpetrated by a significant loan client of the Westernbank Business Credit
division, namely Inyx, Inc. The restatement, caused by a massive structured fraud perpetrated
by Inyx, caused a significant impairment of the loan, requiring the restatement of the Bank’s
financials, starting from the fourth quarter of 2005 through December 31, 2007.
At its core, the Amended Complaint alleges that the defendants breached their fiduciary
duties of loyalty and care by failing to properly oversee and monitor the Inyx loan. In addition,
the Amended Complaint sets forth several ancillary claims, which allege that the defendants
violated Sarbanes Oxley, committed waste of corporate assets, were unjustly enriched and
violated Puerto Rico law regarding the publication of false financial statements. See Am. Compl.
¶¶ 88-111.
As discussed above, the SLC vigorously and exhaustively investigated these claims.
Because there is no adequate way, in this Memorandum, to convey the range of conduct it
examined, the SLC respectfully refers the Court to the factual findings and analysis found in its
Report (see SLC Report IV-VIII). However, the SLC provides here a brief overview of the most
salient facts and conclusions supporting the SLC's determination, in the exercise of its business
Breach of Fiduciary Duty: The SLC concluded that the Defendants did not breach their
fiduciary duties of care, loyalty, reasonable inquiry, oversight, good faith and supervision by
approving and disbursing asset-based loans to Inyx. In support of this claim (Count II), the
Amended Complaint alleges that the Defendants ignored numerous red flags that indicated the
lack of oversight at WHI and that this failure caused serious damage to the Company.
However, Plaintiff does not identify any of the “red flags” in spite of allegations that the Board
and its officers knew of these flags. Plaintiff further asserts – again without any supporting
factual allegations – that the Director Defendants and officers failed to have in place sufficient
internal controls and procedures to monitor WBC’s practices. As is discussed below, the SLC
has determined that the Board of Directors and officers of WHI exercised legally sufficient
oversight, and as such, did not breach their duty under Delaware law during the periods in
question.
To establish a failure of oversight, a plaintiff must show “either (1) that the directors
knew or (2) should have known that violations of law were occurring and, in either event, (3)
that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4)
that such failure proximately resulted in the losses complained of.” Caremark, 698 A.2d at 971
(emphasis added); see also Saito v. McCall, 2004 WL 3029876, at *6 (Del. Ch. Dec. 20, 2004).
This test can be satisfied by showing either that: (i) “the directors utterly failed to
system or controls, consciously failed to monitor or oversee its operations thus disabling
themselves from being informed of risks or problems requiring their attention”; or (ii) that the
directors “had notice of serious misconduct and simply failed to investigate,” i.e., intentionally
ignored “red flags.” Stone II, 911 A.2d at 370; Shaev, 2006 WL 391931, at *5 (“a Caremark
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plaintiff can plead that ‘the directors were conscious of the fact that they were not doing their
jobs,’ and that they ignored ‘red flags’ indicating misconduct in defiance of their duties”).
The duty of oversight does not require directors and officers to possess detailed
information about all operational aspects of a business. See Caremark, 698 A.2d at 971. Rather,
directors must “attempt in good faith to assure that corporate information and reporting system,
which the board concludes is adequate, exists, and that failure to do so under some circumstances
may, in theory at least, render a director liable for losses caused by non-compliance with
applicable legal standards.” Id. at 970; see also Shaev, 2006 WL 391931, at *5. However, “only
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.” Caremark, 698 A.2d at 971 (emphasis
added); see also Halpert, 2007 WL 486561, at *5 (citation omitted); Stone II, 911 A.2d at 369
As noted above, to render directors and officers liable for a failure to implement
adequate information systems and controls, the directors’ failure must amount to bad faith,
meaning that the failure to act was intentional. See Stone II, 911 A.2d at 370 (“a showing of bad
faith conduct, in the sense described in Disney and Caremark, is essential to establish director
oversight liability”); Disney IV, 907 A.2d at 755 (“Upon long and careful consideration, I am of
the opinion that the concept of intentional dereliction of duty, a conscious disregard for one’s
responsibilities, is an appropriate (although not the only) standard for determining whether
fiduciaries have acted in good faith”) (emphasis in original). There is no legal formula
prescribing the steps directors must take to ensure that a company has in place reasonable
Whether the reporting systems actually worked is not the test. Indeed, in a recent
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decision, the Delaware Supreme Court explicitly rejected an attempt to “equate a bad outcome
with bad faith” in the oversight context. Stone II, 911 A.2d at 373. In that case, certain
required under federal law, in connection with a customer’s establishment of custodial accounts
that were then used by the customer in a criminal scheme. See id. at 365. AmSouth ultimately
became the subject of a federal criminal investigation because of the failure of its employees to
file SARs. See id. at 366. In addition, the Federal Reserve and Alabama Banking Department
issued an order requiring AmSouth to, among other things, engage an independent consultant to
review its compliance programs and make recommendations “for new policies and procedures to
To determine whether adequate internal controls (and oversight) existed related to WBC,
the SLC reviewed: a) whether internal control procedures related to the issuance of new loans at
WBC existed, b) whether internal controls related to loan impairment and monitoring at WHI
and WBC existed, and c) whether committee approval of loans and overall board review at both
WHI and WBC existed. The SLC has determined that such controls did exist, but were
subverted and undermined through collusion and organized fraud from the members of the WBC
division, namely, its President, Mr. Mike Vazquez. See SLC Report at IX (2).
The SLC also found that WHI Audit Committee approval of loans and Board Review
existed. The WHI Board established a duly-constituted Audit Committee, which met at regular
intervals throughout the fiscal year. In preparation for such meetings, WHI management
typically provided the Audit Committee members with written materials regarding WHI’s
financial results. Specifically, the WHI Audit Committee held 5 meetings in 2005, 6 in 2007,
and 11 in 2007.
The Audit Committee consisted of 4 Directors: Hector Del Rio, Cornelius Tamboer,
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Cesar Ruiz and Juan Carlos Frontera. At its meetings, the Audit Committee met independently
with WHI’s outside auditors, without the presence of management. The Audit Committee also
received and reviewed annual management letters from WHI’s outside auditors presenting the
results of their audit for each year. The head of Internal Audit attended each Audit Committee
meeting and reported to the Audit Committee on the scope and results of its work. In connection
with its receipt of management letters from its auditors, the Audit Committee received the
credentials of, and a description of audit responsibilities for, each of the employees who worked
In addition, there were information and reporting systems in place to ensure that the
entire Board received an appropriate level of information. Specifically, the Board held the 12
In preparation for such meetings, WHI management typically provided Board members
with written materials, on a monthly and quarterly basis, regarding WHI’s financial results. The
Board also received memoranda from Mr. Aurelio Emanuelli, WHI’s General Counsel,
informing the Board of, or updating the Board on, certain material legal events at the Company.
The Board often reviewed additional materials, such as PowerPoint presentations regarding
WHI’s quarterly results and draft press releases announcing those results. Generally, WHI’s
CFO, General Counsel, and outside corporate counsel attended these meetings in order to present
Because WHI’s Board had these reporting mechanisms in place, to both the Audit
Committee and full Board, the SLC has concluded that the Director Defendants exercised legally
sufficient oversight at WHI, and, as such, did not breach their duty of oversight9 under Delaware
9
The SLC concluded that the SCC and Board did not have correct and timely information regarding the status of the
Inyx loans when they approved additional advances, and, therefore, these approvals, based on the information
reasonably known or available to the officers and directors, are protected by the Business Judgment Rule. See
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law10. An “unintended adverse outcome” is not a sufficient basis for a claim (Shaev, 2006 WL
391931, at *5), and, therefore, the SLC seeks to dismiss this claim.
The SLC found that the Inyx loan failure was a direct result of WBC’s executives’ and
officers’ subversion of the internal controls and processes. Mr. Vazquez directed the subversion
of these controls at virtually every turn, and was able to exercise complete authority over WBC,
even after the Inyx loans had been exposed to senior WHI officers and directors.
The first element of Stone II’s director oversight test is whether “the directors utterly
such a system or controls, consciously failed to monitor or oversee its operations thus disabling
themselves from being informed of risks or problems requiring their attention”. Stone II, 911
A.2d at 370. The First Circuit has, notably, already provided guidance regarding this element in
In re Sonus Networks, Inc., 499 F.3d 47 (1st CA 2007) to which this Court has cited to in its
Opinion on Defendant’s Motion to Dismiss. The legal test is not whether the controls worked. In
The SLC believes that the conclusions reached in In Re Sonus Networks, Inc., regarding
director and officer oversight apply equally to this case. The SLC has concluded that extensive
internal controls existed over: 1) loan initiation and monitoring at WBC; 2) loan impairment and
valuation at both WBC and WHI; 3) and board, committee and officer supervision of WBC. As
demonstrated above, the Inyx loan failures were caused by a structured and sophisticated fraud
Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000) (“in making business decisions, directors must consider all material
information reasonably available”); Aronson, 473 A.2d at 812 (“directors have a duty to inform themselves, prior to
making a business decision, of all material information reasonably available to them”).
10
See Shaev, 2006 WL 391931, at *5 (dismissing a Caremark claim where there is merely a “bald allegation that
directors bear liability where a concededly well constituted oversight mechanism, having received no specific
indications of misconduct, failed to discover fraud”); Guttman, 823 A.2d at 498 (dismissing complaint where it
failed to address “whether the company had an audit committee during [the contested period], how often and how
long it met, who advised the committee, and whether the committee discussed and approved any of the allegedly
improper accounting practices”).
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perpetrated by high-level officers of Inyx, and subversion of WHI’s and WBC’s internal controls
by Mike Vazquez, an officer of WBC. The SLC, therefore, believes that officer and director
For a “failure to investigate” claim to succeed, there must be “specific red-or even
yellow-flags” that put the Board on notice of potential misconduct. See Guttman, 823 A.2d at
507. As the Delaware courts have observed, such flags “are only useful when they are either
waved in one’s face or displayed so that they are visible to the careful observer.” In re Citigroup
Inc. Shareholders Litig., 2003 WL 21384599, at *2 (Del. Ch. June 5, 2003); see also Guttman,
823 A.2d at 507 (“the complaint does not plead a single fact suggesting specific red or even
yellow flags were waved at the outside directors”); Rattner, 2003 WL 22284323 at *13 (same).
Under Delaware law, “absent grounds to suspect deception, neither corporate boards nor
senior officers can be charged with wrongdoing simply for assuming the integrity of employees
and the honesty of their dealings on the company’s behalf.” Caremark, 698 A.2d at 969.
Further, once a red flag is “waved” to the Board, for the Board to be liable, the Board must
willfully and intentionally ignore that flag. See Stone I, 2006 WL 302558 at *2 (“[n]or do
plaintiffs point to facts suggesting a conscious decision to take no action in response to red flags.
Without these well-pled allegations, there is no possibility the defendants faced a substantial
likelihood of liability”).
For example, in Stone II, discussed above, the Delaware Supreme Court defined “red
flags” as “facts showing that the board was aware that AmSouth’s internal controls were
inadequate, [and] that these inadequacies would result in illegal activity.” 911 A.2d at 370
(emphasis added). The SLC has concluded that none of the internal control failures highlighted
above were red flags to the Defendants because the officers and board members had no
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Although the SLC has concluded that one flag may have been overlooked (See SLC
Report at IX(3)(c)), under Delaware law, “absent grounds to suspect deception, neither corporate
boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of
employees and the honesty of their dealings on the company’s behalf.” Caremark, 698 A.2d at
969. Further, once a red flag is “waved” to the Board, for the Board to be liable, the Board must
willfully and intentionally ignore that flag. See Stone I, 2006 WL 302558 at *2 (“[n]or do
plaintiffs point to facts suggesting a conscious decision to take no action in response to red flags.
Without these well-pled allegations, there is no possibility the defendants faced a substantial
likelihood of liability”). Given that there was no purposeful disregard of any red flag, the SLC’s
analysis of the additional warnings remains the same: Delaware law requires dismissal of this
claim.
Corporate Waste: Count III of the Amended Complaint alleges that the Defendants are
liable to WHI for corporate waste (i) “by failing to properly consider the interests of the
Company and its public shareholders”; (ii) “by failing to conduct proper supervision, the
Individual Defendants wasted corporate assets by recklessly loaning funds which were not
adequately secured by collateral”, and (iii) “by paying bonuses to certain of its executive officers
and incurring potentially billions of dollars of legal liability and/or legal costs to defend
The test for waste under Delaware law is “severe,” and gives officers and directors wide
latitude to exercise business judgment without facing liability for unwise decisions. See, e.g.,
Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993) (finding that plaintiff is unlikely to
prove waste under “severe” test, and denying injunction for failure to show probability of
success on the merits). As the Delaware Supreme Court recently reiterated, “[t]o recover on a
claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange
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was ‘so one sided that no business person of ordinary, sound judgment could conclude that the
corporation has received adequate consideration.’” Disney V, 906 A.2d at 74 (quoting Brehm v.
Eisner, 746 A.2d 244, 263 (Del. 2000). The Disney V decision is the legal framework under
which the waste claims alleged in the Amended Complaint must be analyzed. For the reasons
discussed below, including (i) the broad discretion afforded directors in making business
decisions, (ii) the undisputed lack of knowledge of the board of directors and officers concerning
the ongoing conditions of the Inyx loan, and (iii) the lack of evidence suggesting that those
directors acted contrary to WHI’s best interests, the SLC has concluded that there is no corporate
Unjust Enrichment: Count IV of the Amended Complaint alleges that all the Defendants
improperly received compensation and benefits from WHI. See Amended Compl. ¶ 102-104.
Plaintiffs allege that these defendants earned benefits and compensation as a result of their
wrongful omissions. Plaintiffs seek disgorgement for the amounts paid as a result of their breach
of their fiduciary duties. See id. ¶ 104. “In determining whether to award a remedy based on
unjust enrichment, courts look for proof of the following elements: (1) an enrichment, (2) an
impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of
justification, and (5) the absence of a remedy provided by law.” Triton Construction Company,
Inc., v. Eastern Shore Electrical Services, Inc., 2009 WL 1387115 (Del. Ch. 2009) citing
The SLC has concluded that Plaintiff’s claim for unjust enrichment fails for many
reasons. Chief among these is the failure of most of Triton’s elements. Plaintiff fails to
to Plaintiff. Compensation paid was for work performed, and although the Board had inaccurate
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occurred, as WHI derived benefit from Defendants material work efforts of Defendants as
executive officers and directors at WHI did, in fact, benefit it. Additionally, Plaintiffs cannot
meet Triton’s “absence of justification” element: Justification for the challenged benefits
occurred nearly every day, when Defendants showed up for work. Lastly, Triton’s test requires
that Plaintiffs demonstrate that they have no adequate remedy at law, a test which Plaintiff also
Complaint alleges a claim pursuant to Laws of Puerto Rico, General Corporations Law of 1996,
Count V of the Amended Complaint also alleges that the Defendants caused the
publication of false SEC filings. In reviewing this claim, the SLC found Wadsworth, Inc. v.
Schwarz-Nin, 951 F.Supp. 314 (D. P.R. 1996) to be persuasive. The Plaintiff has not pled facts
that demonstrate that the Defendants knowingly published false financial reports. The SLC has
not been able to find any instance where any Defendant was informed or had knowledge of the
Inyx fraud. The SLC also noted that the Company and the Defendants relied on Deloitte &
Touche for its general and specialized audits. The SLC, therefore, seeks to dismiss this claim.
Under Zapata, the Court has discretion to apply its own independent business judgment
to decide whether a motion to dismiss derivative litigation should be granted. In applying this
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discretionary, second step, the Court may consider the merits of Plaintiff’s claims, as well as
various ethical, commercial, promotional, public relations, employee relations and other
considerations. See Zapata, 430 A.2d at 788. The purpose of this discretionary, second step is to
prevent abuse where the “technical requirements” have been satisfied, but a dismissal
nonetheless appears “irrational” or “egregious.” Katell, slip op. at 26; Carlton Invs., slip op. at 4.
Given the clear and undisputed record of independence and the good faith and reasonableness of
the SLC's investigation and conclusions, there is no reason for this Court to apply the second step
Nonetheless, if the Court opts to apply the second step of Zapata, the SLC respectfully
submits that the Court should concur with the conclusions set forth in the SLC's Report. The
Special Committee based its determination on the absence of any factual support for many of
Plaintiff's allegations, and its conclusion that the claims asserted in the Complaint lack merit.
While the absence of merit to the claims asserted by Plaintiff alone provides a sufficient basis for
the SLC to determine in the exercise of its business judgment that continued prosecution of
meritless claims is not in the best interests of WHI, or its stockholders, the SLC considered other
factors that also counsel in favor of dismissal. Among the other factors the SLC considered were
the potential for indemnification claims by the individual defendants, the diversion of
management time and resources associated with continuing prosecution of meritless claims, and
a variety of direct and indirect uninsured costs that would be borne by WHI, including the effect
of continuing litigation on the Company's reputation with its distributors and clientele. See
IV. CONCLUSION
Amended Complaint, the SLC was mindful that its mandate was to determine what courses of
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action are in the best interests of the Company. The SLC believes, after weighing all the
available information that it has reached conclusions that are truly in the best interests of the
Company and its shareholders, and that dismissal of all the claims is appropriate.
Respectfully Submitted,
and
Carlos F. Concepcion
Florida Bar No.: 386730
Scott A. Burr
Florida Bar No.: 099325
Manuel Rodriguez
Florida Bar No.: 0598240
CONCEPCIÓN SEXTON & MARTINEZ
355 Alhambra Circle, Suite 1250
Coral Gables, Florida 33134
Tel.: 305-444-6669 / Fax.: 305-446-3665
E mail: cconcepcion@cfclaw.com
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CERTIFICATE OF SERVICE
I hereby certify that on December 15, 2009, I electronically filed the foregoing document
with the Clerk of the Court using CM/ECF. I also certify that the foregoing document is being
served this day on all counsel of record identified on the attached Service List via transmission of
Notices of Electronic Filing generated by CM/ECF or in some other authorized manner for those
counsel or parties who are not authorized to receive electronically Notices of Electronic Filing.
Respectfully Submitted,
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SERVICE LIST
29