Shareholder Derivative Suits Premised on False Claims Act Violations

The government and the whistleblowers who assist the government are not the only parties taking aim at corporate America. Private plaintiffs are finding ways to bring civil actions based in part on alleged False Claims Act violations. Recently there have been a rash of shareholder derivative suits that allege breaches of fiduciary duties and reckless mismanagement by officers and directors. Although shareholder derivative suits are not new, the charge alleged in these suits is—namely, that the failure to manage risk appropriately led to violations of the False Claims Act or other fraud statutes.

One prominent example is the case of Galaviz v. Berg. In that case, the plaintiff, on behalf of Oracle (one of the largest software corporations in the world), filed suit against certain senior officers and members of the board of directors for breach of fiduciary duty and abuse of control. Specifically, the plaintiff alleged that defendants abused their controlling positions at Oracle by their reckless mismanagement of the company, authorizing the company to defraud the United States by failing to disclose deep discounts Oracle offered to commercial customers but not made available to federal government agencies. According to the complaint, the federal government was overcharged millions of dollars as a result of the deception.

The fraud was first revealed in a whistleblower action filed by a former senior executive, Paul Franscella. As discussed in our October 21, 2011, post, Mr. Franscella’s allegations were recently settled when Oracle agreed to pay $199.5 million—$40 million of which Mr. Franscella recovered directly. To date, the shareholder derivative action has been stalled by motions focused on esoteric legal issues. But, now that the whistleblower suit is resolved, the shareholder derivative action may take on new life. One thing is clear, the Galaviz case will serve as a road map for other private litigants who are determined to send a message to corporate America.

Michelle Merola is a partner in the Business Litigation Practice at Hodgson Russ LLP. You can reach her at mmerola@hodgsonruss.com.

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