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Sarnacki v. Golden

United States Court of Appeals, First Circuit

February 4, 2015

AARON SARNACKI, derivatively on behalf of Smith & Wesson Holding Corporation, Plaintiff, Appellant,
v.
MICHAEL F. GOLDEN; JOHN A. KELLY; BARRY M. MONHEIT; KENNETH W. CHANDLER; JOHN B. FURMAN; I. MARIE WADECKI; JEFFREY D. BUCHANAN; ROBERT L. SCOTT; MITCHELL A. SALTZ; COLTON R. MELBY; ANN B. MAKKIYA; LELAND A. NICHOLS; THOMAS L. TAYLOR; SMITH & WESSON HOLDING CORPORATION, Defendants, Appellees

As Amended February 11, 2015.

Page 218

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Michael A. Ponsor, U.S. District Judge.

Julia M. Williams, with whom Craig W. Smith, Robbins Arroyo LLP, Terence K. Ankner, and Partridge, Ankner & Horstmann, LLP were on brief, for appellant.

John A. Sten, with whom Jason C. Moreau, Victoria E. Thavaseelan, and McDermott Will & Emery LLP were on brief, for appellees.

Before Lynch, Chief Judge, Stahl and Kayatta, Circuit Judges.

OPINION

Page 219

LYNCH, Chief Judge.

This is a shareholder derivative suit under state law which, after investigation by a Special Litigation Committee, the corporation rejected. It is one of several suits alleging that Smith & Wesson Holding Corporation (" Smith & Wesson" ) made misleading public statements in 2007 about demand for its products. We previously affirmed a grant of summary judgment for the corporation in a class action alleging that these statements constituted violations of federal securities laws. In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012).

In this case, Aaron Sarnacki asserts Nevada state-law claims against Smith & Wesson's officers and directors, including breach of fiduciary duties, waste of corporate assets, and unjust enrichment. In reaction to earlier and parallel cases, in June 2009, Smith & Wesson's Board formed a Special Litigation Committee (SLC) to investigate and determine the viability of any of these claims and to make a recommendation to the Board whether to pursue any of these claims. The SLC recommended against filing any claims. On the basis of that decision, the defendants here moved for summary dismissal under Delaware law, as adopted by Nevada. After limited discovery, the district court granted the motion. We affirm.

I.

Smith & Wesson is a major gun manufacturer incorporated in Nevada with its principal place of business in Springfield, Massachusetts. The defendants are or were officers or directors of Smith & Wesson,

Page 220

including both its CEO and former CFO. Sarnacki is a shareholder of Smith & Wesson who is a citizen of Maine.

Sarnacki's suit alleged that, starting in the second quarter of 2007, the defendants made or caused the company to make a series of public statements, including press releases, touting high sales projections due to the company's new rifle and shotgun business. For example, on September 6, 2007, the company issued a press release raising sales projections for fiscal year 2008[1] based on " growth in [their] core handgun business as well as [their] newly established long gun business." [2] Through September 10, 2007, the company continued to predict strong sales growth and raised earnings guidance in press releases, on conferences calls, and in federal filings.

Sarnacki alleged that all this time, Smith & Wesson and the defendants had evidence that these projections were false. Smith & Wesson had overinvested in production while demand collapsed at the start of the economic downturn, leading to excessive inventory. Although aware of this, the defendants continued to tout high projected sales, and some of the defendants sold millions of their shares.

The defendants finally corrected their alleged misrepresentations. On October 29, 2007, the company reduced its net income guidance by ten cents per diluted share, causing a 40% drop in share price. In that new guidance, the defendants pointed in part to soft demand for long guns and excessive inventory. On December 6, 2007, the company again reduced guidance by thirteen cents per diluted share, and on January 22, 2008, the company withdrew their earnings guidance completely. In total, the company lost $726 million in market capitalization.

As is often the case in these situations, a number of securities fraud cases were brought against the company. In December 2007 and January 2008, three putative class actions were filed in federal district court in Springfield against the company and three individuals, alleging violations of federal securities laws. See In re Smith & Wesson Holding Corp. Sec. Litig., 604 F.Supp.2d 332, 334-35 (D. Mass. 2009) . Those actions were consolidated into one case, the " Securities Class Action." Id. at 334 n.1. The district court eventually granted summary judgment to the defendants on March 25, 2011, finding that there was insufficient evidence of scienter and that the company's statements were neither false nor misleading. In re Smith & Wesson Holding Corp. Sec. Litig., 836 F.Supp.2d 1, 3 (D. Mass. 2011). This court affirmed. In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d at 77.

On February 1, 2008, Sarnacki filed a shareholder derivative suit in Massachusetts state court. That case was consolidated with other similar cases and dismissed in January 2009 because the plaintiffs failed to make a proper pre-suit demand on the Board of Directors. See Sarnacki ex rel. Smith & Wesson Holding Corp. v. Golden, 4 F.Supp.3d 317, 320-21 (D. Mass. 2014) (explaining procedural history and previous litigation).

Having received two other demand letters, Smith & Wesson formed a Special Litigation Committee on June 22, 2009, to evaluate the viability of claims in the demand letters. See In re Smith & Wesson Holding Corp. Derivative Litig., 743 F.Supp.2d 14, 17 (D. Mass. 2010). The

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SLC consisted of three directors: John Furman, Robert Scott, and I. Marie Wadecki. Two of those directors, Furman and Wadecki, were also outside directors and members of the Audit Committee during the relevant times. The SLC hired an independent law firm, then known as Fierst, Pucci & Kane LLP of Northampton, Massachusetts, and conducted the investigation at issue in this case.

On September 4, 2009, Sarnacki sent a demand to Smith & Wesson's Board, insisting that it commence an independent investigation and recover damages caused by the officers' and directors' breaches of fiduciary duties. Corporate counsel for the Board responded to Sarnacki, notifying him of the SLC and demanding information proving Sarnacki's ownership of shares during ...


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