Saints and Sinners. I’ve blogged here before about Ed Rock’s thesis that Delaware common law operates as much by singling out particular corporate actors for scathing criticism than by imposing formal sanction (arguably, the recent conflagration was because Delaware departed from that practice – but maybe not; at least some seem to have taken issue with judicial “tone,” as well).
Anyhoo, VC Laster’s opinion in Leo Investments Hong Kong Limited v. Tomales Bay Capital Anduril III, L.P. is a shining example of the genre. Laster ended up only imposing nominal damages of $1 on the defendant fund manager, but man did he rake the fund manager over the coals. The case, incidentally, is also an interesting little window into private company capitalization – and, as I previously have blogged about, how private companies increasingly work closely with supposedly “independent” funds that hold their shares.
The setup: Iqbaljit Kahlon is a fund manager with ties to Peter Thiel. He formed a fund designed to buy certain shares of SpaceX. One of the investors in the fund was supposed to be a publicly traded Chinese company, but Chinese law required that it disclose the investment. SpaceX was not happy; for various political and regulatory reasons, it tries to avoid having Chinese investors. So, SpaceX refused to allow the fund to have the shares unless the fund kicked out the Chinese investor, which then sued the fund. Laster found that Kahlon largely acted within his fiduciary obligations – his duties ran to the fund, not individual investors, and getting rid of this one investor was the best way to protect the fund – and within his contractual obligations. But, as Laster demonstrates, his entire approach to this deal was extraordinarily sloppy, from failing to understand the kinds of disclosures the Chinese investor would have to make to trying to place all the blame on the investor after the fact in order to remain in SpaceX’s good graces, to – Laster notes almost as an aside – misleading other investors about the Fund’s access to SpaceX shares in order to prompt some voluntary withdrawals. Laster concludes, “Leo Group did not show that Kahlon acted recklessly. Leo Group proved that Kahlon acted callously towards one of his investors. Leo Group would be justified in never doing business with Kahlon again, and other investors might want to think twice.” Yikes.
To Be Fair, My Inbox is Pretty Full Too. In 1995, Congress passed the Private Securities Litigation Reform Act, which, among other things, imposes high pleading burdens on plaintiffs bringing claims under Section 10(b). These plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted with” scienter – and of course, they must do so without access to discovery. These days, plaintiffs usually try to get hold of former employees who are willing to dish, but it’s often practically or legally impossible to take statements from the higher ranking employees who are really in a position to know what the top officials knew.
So the plaintiffs in Washtenaw County Employees’ Retirement System v. Dollar General Corp. et al., 2025 WL 1749664 (M.D. Tenn. June 24, 2025), must have thought they hit the jackpot when former employees told them they had actually emailed the individual defendants with reports of the internal problems, and received responses from, inter alia, a vice president and the CEO’s secretary. But was that enough to plead scienter? Reader, it was not:
[T]he defendants correctly note that the Complaint does not allege that any of the Individual Defendants actually read or responded to the emails. On this point, after first merely noting that the emails “prompted . . . response[s] from Defendants’ subordinates,” the plaintiffs state that two Individual Defendants “had their subordinates respond.” But the Complaint does not actually allege that any defendant directed anyone to respond to either [former employee]. Thus, consistent with the facts alleged in the Complaint, certain Individual Defendants’ subordinates could have read the emails and responded, or forwarded them to other Company employees for response, without consulting any Individual Defendant. While it may be a plausible inference from the facts alleged that subordinates would not respond to emails of this sort—or forward them to another high-level official for response—without consulting their bosses, it strikes the court as also plausible that, at a company of Dollar General’s size, CEOs and CFOs may not manage their own inboxes and are not consulted about emails from individual Store Managers or mass-emails individual Store Managers send upon their resignation, listing problems with the Company….[T]he Complaint does not allege that any defendant read the emails and does not allege with particularly any fact showing that any defendant either knew about the emails or directed their subordinates to respond.
In other words, it is not sufficient under the PSLRA to identify the specific communications informing the defendants of problems, because how can you be sure they check their email?
Goes to show, a requirement of “particularity” in pleading is standardless when the rubber meets the road; there are always going to be facts missing, if you want them to be.
A cert grant. The Supreme Court will hear argument over whether individual investors (i.e., Saba Capital) can sue under the Investment Company Act to invalidate fund takeover defenses. I’ve blogged a few times about Saba’s battles with closed-end funds; Mike Levin and I also discussed the cert petition while it was still pending on the Shareholder Primacy podcast, here on Apple, here on Spotify, and here on YouTube.
Some personal news. I’ve moved! In case anyone missed it, I’ve recently left Tulane to join the faculty at the University of Colorado Law School. Tulane was a fantastic academic home for me for 10 years, and there is nowhere in the world like New Orleans; I will miss them both terribly. But I am also excited for my new adventure.
And there is no other thing. The Shareholder Primacy podcast is on a break this week for the holiday. Happy 4th, everyone!