A Commercial Division judge has dismissed a shareholder derivative class action against Suffolk County-based software company FalconStor, which admitted last year in a $6 million settlement with the U.S. Securities and Exchange Commission and federal prosecutors that it paid bribes to secure contracts with JPMorgan Chase. The shareholders allege they suffered losses when FalconStor’s scheme was revealed. The suit was brought derivatively on behalf of the company against FalconStor’s officers and directors.
However, Supreme Court Justice Emily Pines in Suffolk County (See Profile) ruled on March 5 that the shareholders had not first asked its directors to file suit, or pleaded that doing so would be futile, as required by the law of Delaware, where the company is incorporated. Though the shareholders argued that the directors could not be impartial, Pines noted that five of the six board directors are outside directors and four joined the board after the events that led to the settlement. "In this case, despite serious criminal activity on the part of those employees and officers named, not a single one of the current members of the board of directors was implicated either in the criminal or civil litigations described above," Pines wrote in In re FalconStor Software Derivative Litigation, 2555/11.
