Southern District of New York rejects proposed settlement in shareholder derivative suit for inadequate corporate ethics reforms

On May 17, 2018, Judge Robert W. Sweet of the United States District Court for the Southern District of New York issued an opinion in Scott v. Weig, No. 15 CIV. 9691 (RWS), 2018 WL 2254541 (S.D.N.Y. May 17, 2018), rejecting a proposed settlement in a shareholder derivative action, finding that the corporate ethics reforms contemplated by the proposed settlement were insufficient. This decision reflects a continued trend, as in Delaware courts, of enhanced judicial scrutiny of non-monetary shareholder settlements as well as shareholder suits more generally, and serves as a reminder that judges increasingly expect class action settlements involving enhanced corporate compliance programs to contain real and meaningful compliance reforms.

The shareholder derivative suit was filed in December 2015 on behalf of 6D Global Technologies, Inc., alleging breach of fiduciary duty and unjust enrichment. Specifically, the complaint alleged that the company’s current and former directors, officers, and controlling shareholders: (1) failed to supervise Benjamin Wey, a controlling shareholder of the company who allegedly engaged in stock price manipulation; (2) failed to maintain adequate internal and financial controls; and (3) failed to prevent the company from making allegedly false and misleading statements to the investing public. After related enforcement actions by the Department of Justice and the Securities and Exchange Commission were voluntarily dismissed in August 2017 and September 2017, the parties entered into settlement negotiations.

Click here to view the discussion and implications of this settlement.