Stanley Rubenstein v. Linda L. Adamany

Background

Stanley Rubenstein, a shareholder of Jefferies Financial Group Inc., brought a derivative action on behalf of the company. He alleged that senior officers and directors issued proxy statements that violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 by omitting information about allegedly excessive personal use of Jefferies’s corporate aircraft and misstating executive compensation.

Rubenstein alleged that company aircraft were used extensively for personal purposes, including by non-employees, and that company records described some personal flights as business flights. He also alleged that a board investigation found that nearly 70% of aircraft use was personal use by the officer defendants. The court’s earlier ruling dismissed Rubenstein’s state-law claims and the Section 14(a) claim. On appeal, the Second Circuit affirmed dismissal of the state-law claims but vacated and sent back the Section 14(a) claim for further consideration.

After the remand, Rubenstein amended his complaint and offered two new theories of loss causation—meaning a causal connection between the alleged proxy-statement violation and his claimed injury. The defendants moved to dismiss the amended complaint. The opinion addresses that motion.

The “say-on-pay” theory

Rubenstein argued that inaccurate proxy statements deprived shareholders of their federal right to vote on executive compensation under the Dodd-Frank Act. He acknowledged that these compensation votes were advisory rather than binding.

The court concluded that the advisory votes could not have caused shareholders to approve the compensation packages because the votes had no actual effect on those packages. Relying on the Supreme Court’s decision in Virginia Bankshares, the court explained that a causation theory based on a nonbinding or “cosmetic” vote is too speculative. The court also rejected Rubenstein’s argument that the loss of an advisory compensation vote should be treated like the loss of state appraisal rights. It found that appraisal rights provide substantive protections and may cause economic harm, while Rubenstein alleged no comparable economic harm from the loss of the say-on-pay vote.

The “tainted election” theory

Rubenstein also argued that the directors’ elections were defective because the directors had approved and awarded compensation without fully disclosing it to shareholders. The court held that this theory was moot because none of the directors elected through the challenged proxy statements remained on the board and their terms had ended.

The court found that Rubenstein’s added requests for an injunction and disgorgement did not preserve the claim. The amended complaint addressed only proxy statements issued from 2017 through 2020 and did not seek relief concerning future proxy statements. The court also concluded that repayment of directors’ compensation was not a proper remedy under Section 14(a) in these circumstances, and that an injunction would serve no purpose.

Ruling and disposition

The court held that the amended complaint failed to adequately plead loss causation and therefore failed to state a Section 14(a) claim. Because amendment would be futile, the court granted the defendants’ motion to dismiss. The clerk was directed to terminate the motions at ECF Nos. 21 and 28 and close the case. The opinion separately states that the defendants’ renewed motion directed at the original complaint was denied as moot.