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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
RETIREMENT PLAN FOR GENERAL
EMPLOYEES OF THE CITY OF NORTH MIAMI
BEACH and ROBIN STEIN,
Petitioners,
v.
THE MCGRAW-HILL COMPANIES, INC.,
Respondent.
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PETITIONERS’ REPLY TO
RESPONSE OF THE MCGRAW-
HILL COMPANIES, INC. IN
OPPOSITION TO PETITIONERS’
PETITION PURSUANT TO N.Y.
C.P.L.R. ARTICLE 4
Index No. 650349/2013
Hon. Jeffrey K. Oing
FILED: NEW YORK COUNTY CLERK 05/10/2013 INDEX NO. 650349/2013
NYSCEF DOC. NO. 31 RECEIVED NYSCEF: 05/10/2013
i
TABLE OF CONTENTS
I. INTRODUCTION ...............................................................................................................1
II. FACTUAL BACKGROUND ..............................................................................................3
III. ARGUMENT .......................................................................................................................4
A. New York Common Law Supports Petitioners’ Demand ........................................4
1. Petitioners Have Established A Proper Purpose ..........................................5
2. Petitioners’ Request for Board-Level Materials was Narrowly Tailored to
Obtain Only the Necessary Documents .......................................................9
B. The Teamsters Decision Has No Bearing on Petitioners’ Demand for
Books and Records ................................................................................................12
IV. CONCLUSION ..................................................................................................................15
ii
TABLE OF AUTHORITIES
Page(s)
CASES
Application of Ditisheim, 96 N.Y.S.2d 622 (Sup. Ct. 1950)............................................................6
Barouh v. Barouh,
No. 012254/2008, 2009 WL 1172596 (N.Y. Sup. Ct. Apr. 20, 2009) .....................................10
Bed Bath & Beyond Inc. v. Hill,
No. 600561/08, 2008 WL 6487330 (N.Y Sup. Ct. Dec. 22, 2008) ...........................................5
Matter of Bondi v. Bus. Ed. Forum, Inc.,
52 A.D.2d 1046 (4th Dep’t 1976) ........................................................................................5, 12
Matter of Camhe-Marcille v. Sally Lou Fashions Corp.,
289 A.D.2d 162 (1st Dep’t 2001) ..............................................................................................6
Carroll ex rel. Pfizer, Inc. v. McKinnell,
19 Misc. 3d 1106(A), 2008 WL 731834 (N.Y. Sup. Ct. Mar. 17, 2008) ...........................13, 14
Matter of Colwell v. Colwell Lead Co.,
76 A.D. 615 (1st Dep’t 1902) ....................................................................................................6
Durr v. Paragon Trading Corp.,
270 N.Y. 464 (1936) ....................................................................................................1, 6, 9, 12
Dyer v. Indium Corp. of Am.,
2 A.D.3d 1195 (3d Dep’t 2003) .................................................................................................9
Guenzel v. American Culture, Inc.,
2012 N.Y. Slip Op. 30409(U), 2012 WL 756601 (Sup. Ct. Feb. 17, 2012) ..............................5
Henik ex rel. LaBranche & Co. v. LaBranche,
433 F. Supp 2d 372 (S.D.N.Y. 2006).......................................................................................14
Hughey v. DuBois Press,
37 N.Y.S.2d 343 (Sup. Ct. 1942) .........................................................................................5, 11
Koch v. Specto Optical, Inc.,
184 A.D.2d 701 (2d Dep’t 1992) ...............................................................................................5
L-Tec Elecs. Corp. v. Cougar Elec. Org., Inc.,
198 F.3d. 85 (2d Cir. 1999)......................................................................................................13
Lapsley v. Sorfin International, Ltd.,
43 A.D.3d 1113 (2d Dep’t 2007) ...............................................................................................6
iii
Matter of Liaros v. Ted's Jumbo Red Hots, Inc.,
96 A.D.3d 1464 (4th Dep’t 2012) ....................................................................................2, 5, 10
Martin v. Columbia Pictures Co.,
133 N.Y.S.2d 469 (Sup. Ct. 1953) .........................................................................................5, 6
Papilsky v. Berndt,
466 F.2d 251 (2d Cir. 1972).....................................................................................................14
Pinnacle Consultants, Ltd. on Behalf of S’holders of Leucadia Nat. Corp. v. Leucadia
Nat. Corp.,
923 F. Supp. 439 (S.D.N.Y. 1995) ............................................................................................7
Rockwell v. SCM Corp.,
496 F. Supp. 1123 (S.D.N.Y. 1980).....................................................................................4, 10
Matter of Steinway,
159 N.Y. 250 (1899) ..................................................................................................................9
Matter of Tatko v. Tatko Bros. Slate Co.,
173 A.D.2d 917 (3d Dep’t 1991) .....................................................................................1, 5, 10
Teamsters Allied Benefit Funds v. McGraw,
No. 09-cv-00140, 2010 WL 882883 (S.D.N.Y. Mar. 11, 2010) ....................................3, 12, 14
W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp.,
914 A.2d 636 (Del. Ch. 2006)..................................................................................................13
Wells v. League of Am. Theatres & Producers, Inc.,
183 Misc. 2d 915, 706 N.Y.S.2d 599 (Sup. Ct. 2000) ....................................................... 11-12
STATUTES
N.Y. Bus. Corp. Law
§ 624 (McKinney 2013) .........................................................................................................4, 5
1
I. INTRODUCTION
Respondent’s strategy throughout this entire process has been to throw up hurdle after
hurdle to obstruct Petitioners from inspecting its corporate books and records, which Petitioners
are entitled to under New York statutory and common law. Respondent’s brief provides nothing
more than shopworn arguments citing cases for general propositions that simply do not refute the
facts and claims as alleged by Petitioners in their Petition Pursuant to N.Y. C.P.L.R. Article 4
(“Petition”) or its supporting Memorandum of Law.
First, Respondent does not, and cannot, refute that Petitioners have asserted in their books
and records Demand proper purposes (i.e., to determine whether wrongdoing occurred at
McGraw-Hill that was caused by the Board’s failure to oversee S&P resulting in
mismanagement and breaches of fiduciary duties and whether a demand on the Board to institute
litigation against wrongdoers would be futile) that have long been recognized under New York
law. See, e.g., Matter of Tatko v. Tatko Bros. Slate Co., 173 A.D.2d 917, 918 (3d Dep’t 1991)
(proper purposes include “to investigate management’s conduct[] and to obtain information in
aid of legitimate litigation”).
Second, conceding that Petitioners stated a proper purpose, Respondent argues that they
have not made a factual showing to support these proper purposes – failing to grasp that
Petitioners do not have to provide evidence of actual wrongdoing. In fact, the courts in New
York are steadfast in their determination that a shareholder need not plead or prove
mismanagement to inspect a corporation’s books and records. See, e.g., Durr v. Paragon
Trading Corp., 270 N.Y. 464, 471 (1936) (right of inspection would be “illusory if a denial of
mismanagement . . . were sufficient to defeat a demand for inspection until mismanagement is
conclusively established”). Petitioners have more than met this threshold by citing, among other
things, the Senate Report (which concluded S&P was complicit in the financial crisis),
2
complaints, and other evidence garnered from investigations by the DOJ, the SEC, and the
Attorneys General for New York, Massachusetts, and Connecticut, all of which provide
information relating to wrongdoing at S&P. It is of no consequence that the foregoing
investigations and lawsuits do not allege that McGraw-Hill’s directors breached their fiduciary
duties. Respondent cannot escape from the reality that McGraw-Hill’s Board is legally charged
with overseeing S&P – a major generator of the Company’s revenues – and, as a result, the mere
fact that wrongdoing occurred at S&P is sufficient, and far from speculative, to allege that the
Board breached its fiduciary duties in failing to properly oversee S&P.
Third, Respondent casts vague aspersions like “overbroad on its face” and baseless
statements like “unprecedented in New York jurisprudence” at Petitioners’ Demand, apparently
with the hope that mere repetition will sway this Court in ruling against Petitioners. But the facts
simply undermine these assertions. From the outset, Petitioners have sought only “those
documents, records, and information relevant and necessary to [their] proper purposes.”
Matter of Liaros v. Ted's Jumbo Red Hots, Inc., 96 A.D.3d 1464, 1465 (4th Dep’t 2012)
(emphasis added). Petitioners have met this burden. In fact, Petitioners have described with
specificity the reasons why the categories of documents requested in their Demand are relevant
and necessary. To emphasize the lengths Petitioners went through before filing their Petition –
an outcome they hoped to avoid – Petitioners tried to engage Respondents in numerous “meet
and confers,” which resulted in Petitioners voluntarily narrowing their requests and identifying
specific types of documents and precise individuals subject to the Demand. The end product of
these negotiations was represented in Schedule A appended to Petitioners’ Opening Brief –
which was not even referenced by Respondent in its opposing papers.
3
Fourth, Respondent again misguidedly contends that the disposition of Teamsters Allied
Benefit Funds v. McGraw, No. 09-cv-00140, 2010 WL 882883 (S.D.N.Y. Mar. 11, 2010), a
shareholder derivative action, has some relevance to Petitioners’ request for books and records.
Respondent has identified no authority for its proposition that the right of a shareholder to
inspect a company’s books and records is subject to qualification merely because an earlier
derivative suit was dismissed – particularly when, as here, the earlier derivative suit was not
preceded by a books and records request. Respondent’s estoppel argument is speculative at best,
and overlooks the fact that such procedural limitations are subject to exceptions that apply here.
Finally, in a last ditch effort to appear reasonable and cooperative, Respondent has the
temerity to claim that it had offered to Petitioners, long after being served with Petitioners’
opening brief, “thousands of pages of books and records from the Company.” Resp. Opp. at 13.1
Respondent’s offer comes nowhere close to the types of documents sought in Schedule A. Most
importantly, what Respondent has deliberately failed to point out is that these materials, offered
sight unseen and only on the condition that Petitioners withdraw the Petition before being
allowed to carefully review the documents, are basically useless to Petitioners’ ability to
undertake their investigation into possible mismanagement and wrongdoing by McGraw-Hill’s
directors. Respondent’s offer is nothing more than window dressing.
II. FACTUAL BACKGROUND
The Petitioners’ Demand and the protracted negotiations that resulted from it are detailed
in the Petition and its supporting Memorandum of Law.
1 All references to Response of The McGraw-Hill Companies, Inc. in Opposition to Petitioners’
Memorandum of Law in Support of the Petition Pursuant to N.Y. C.P.L.R. Article 4 (Doc. No. 24) appear
herein as “Resp. Opp.”
4
Within weeks after Petitioners filed their Opening Brief, in a clearly manufactured and
conveniently-timed demonstration of cooperation, Respondent contacted Petitioners to discuss a
supplementary production of materials. On April 17, 2013, the parties held a meet and confer
during which Respondent agreed to provide a supplemental production consisting of materials
that S&P previously disclosed to the Senate Permanent Subcommittee on Investigations (the
“PSI”) and additional shareholder meeting minutes. Petitioners agreed to review the materials to
determine what extent the supplemental production responded to Schedule A.
Following the meet and confer, the parties began negotiating the terms of a
confidentiality agreement, which were swiftly resolved. However, on April 24, 2013,
Respondent forwarded the confidentiality agreement with a never-agreed-to qualification that
Petitioners unconditionally withdraw their Petition once the supplemental production was made.
Petitioners objected, noting that they could not blindly agree to withdraw their Petition without
an opportunity to carefully review these supplemental materials and determine in good faith to
what extent the production was responsive to their requests. Petitioners’ April 24, 2013 letter is
attached hereto as Roseman Decl. Ex. A. Two days later, Respondent reaffirmed its position that
the supplemental production of documents submitted to the PSI was conditioned on withdrawal
of the Petition. Thus, no additional materials were forthcoming.
III. ARGUMENT
A. New York Common Law Supports Petitioners’ Demand
The common law right of inspection is broader than the statutory right, and N.Y. Bus.
Corp. Law § 624 was enacted simply to supplement those rights.2 Rockwell v. SCM Corp., 496
2 While Petitioners are entitled to the three categories of documents identified by Respondent pursuant to
Section 624, see Resp. Opp. at 9, Petitioners do not concede that this Court is foreclosed from compelling
production beyond those enumerated categories. Respondent completely overlooks that “[n]othing in (Footnote cont’d next page)
5
F. Supp. 1123, 1126 (S.D.N.Y. 1980). This broad right to inspect includes those documents,
records, and information relevant and necessary to proper purposes. Liaros, 96 A.D.3d at 1465.
1. Petitioners Have Established A Proper Purpose
There is no question that Petitioners identified numerous proper purposes in their
Demand. ¶ 273; see also Ex. A to Petition. In fact, Respondent does not – and cannot –
challenge that these are facially valid proper purposes for inspecting a corporation’s books and
records. See Tatko, 173 A.D.2d at 918.4 Thus, the fact remains that Respondent has pointed to
no authority calling into question the propriety of the purposes asserted by Petitioners.5
With the legitimacy of the Petitioners’ stated purposes and good faith unquestioned,
Respondent is left with no other option but to quibble with the facts supporting these allegations.
In doing so, Respondent attempts to impose on Petitioners an onerous evidentiary standard to
establish a proper purpose not supported by any reading of the law. Actual wrongdoing need not
[Section 624] shall impair the power of courts to compel the production for examination of the books and
records of a corporation.” BCL § 624(f); see also Koch v. Specto Optical, Inc., 184 A.D.2d 701, 704 (2d
Dep’t 1992) (court invoked power to compel under BCL § 624(f), under which shareholders would be
allowed to inspect books and records pursuant to BCL § 624(a) through (e), which contemplates a broader
category of documents). 3 All references to the Petition Pursuant to CPLR Article 4 appear herein as “¶_”.
4 See also Matter of Bondi v. Bus. Ed. Forum, Inc., 52 A.D.2d 1046, 1047 (4th Dep’t 1976) (stockholder
“acting in good faith and for the purpose of protecting his investment and ascertaining whether the
corporation is being properly managed, has the right to inspect the corporate minutes and books of
account and records . . .”); Martin v. Columbia Pictures Co., 133 N.Y.S.2d 469, 474 (Sup. Ct. 1953)
(“bona fide claim that a corporation is being mismanaged will support an order for an inspection of
corporate books and records even though such inspection ultimately establishes that in fact there was no
mismanagement”); Hughey v. DuBois Press, 37 N.Y.S.2d 343, 344-45 (Sup. Ct. 1942) (granting
application by a stockholder to inspect the books and records of the company to investigate allegations of
mismanagement and waste in the conduct of the affairs of the corporation). 5 Guenzel v. American Culture, Inc., 2012 N.Y. Slip Op. 30409(U), 2012 WL 756601 (Sup. Ct. Feb. 17,
2012), and Bed Bath & Beyond Inc. v. Hill, No. 600561/08, 2008 WL 6487330 (N.Y Sup. Ct. Dec. 22,
2008), are not to the contrary. In Guenzel, the court noted that proper purposes include to “obtain
information in aid of legitimate litigation,” and exclude purposes that are “inimical to the corporation,
such as those aimed at discovering business secrets to aid a competitor of the corporation, to secure
prospects for personal gains or business or to acquire information to pursue one’s own social or political
goals.” 2012 WL 756601, at *3. Likewise, in Bed Bath & Beyond, the only purpose the court could infer
was that petitioners were trying to “find defects in [a] corporate transaction[] for the purpose of instituting
a strike suit,” a purpose which is improper under Tatko. 2008 WL 6487330.
6
be shown to establish a proper purpose. To the contrary, “the mere fact that petitioner has not
affirmatively established that the corporation is being mismanaged is insufficient basis for
disputing his good faith.” Martin v. Columbia Pictures Co., 133 N.Y.S.2d 469, 475 (Sup. Ct.
1953) (emphasis added); see also Application of Ditisheim, 96 N.Y.S.2d 622, 626 (Sup. Ct.
1950) (“It is to be further noted that the right of a stockholder to an inspection does not require
him either to plead or prove mismanagement.”) (internal citations omitted). In affirming a
decision allowing shareholders to inspect the books and records of a corporation despite its
denials of wrongdoing, the New York Court of Appeals firmly established that proving
mismanagement is not a prerequisite:
An examination of the books might be necessary to establish the truth of the
petitioners' allegations, and a stockholder's right to examine the corporate books
to determine whether there had been corporate mismanagement would often be
illusory if a denial of mismanagement by the corporate officers were sufficient to
defeat a demand for inspection until mismanagement is conclusively established.
So far as such denial leaves unimpaired the force of conceded facts sufficient to
show that the examination is sought in good faith for a proper purpose, the
allegations which are denied may be disregarded as immaterial.
Durr, 270 N.Y. at 471.
While Respondent cherry-picks certain paragraphs of the Petition and casts them as
“unproven allegations,” see Resp. Opp. at 12, Petitioner is not required to proffer evidence and
establish wrongdoing.6 The lynchpin of Petitioners’ position is wrongful conduct committed at
6 The cases cited by Respondent are unavailing. For instance, in Matter of Colwell v. Colwell Lead Co.,
76 A.D. 615, 616 (1st Dep’t 1902), the court, after receiving answering affidavits that thoroughly
explained the transactions of “doubtful legality,” found that management of the corporation had been
“prudent and conservative.” Id. Moreover, the court emphasized that the record revealed that there was
no “usual statement of a belief on the part of the petitioner that the company or any stockholder has lost
anything or is likely to lose anything by such transactions; or that the company or a stockholder or any
one else intends to ask reparation or bring suit because of them.” Likewise, Respondent’s reliance on
Matter of Camhe-Marcille v. Sally Lou Fashions Corp., 289 A.D.2d 162 (1st Dep’t 2001), and Lapsley v.
Sorfin International, Ltd., 43 A.D.3d 1113 (2d Dep’t 2007), for the proposition that Petitioners’ claims
are unsupported is misplaced. This is clearly not the case here. One of the primary purposes of
Petitioners’ Demand is to evaluate possible mismanagement and failure of oversight by McGraw-Hill’s (Footnote cont’d next page)
7
S&P and that McGraw-Hill’s Board breached its fiduciary duties in failing to oversee the S&P
subsidiary. With this in mind, it is beyond dispute that the Demand, as well as Petitioners’
repeated correspondences with Respondent, have identified indicia of wrongdoing at S&P, which
the Board is unquestionably responsible for overseeing.7 For example, the wrongful conduct at
S&P, as alleged in Petitioners’ Demand, is rooted in the ratings of complex structured finance
products, including the packaging of subprime RMBSs and CDOs, which Respondent concedes
led to a barrage of civil and regulatory investigations, including those by the SEC, the DOJ, and
the Attorneys General of New York, Connecticut, and Massachusetts, among others. Moreover,
as the full complement of regulatory agencies proceeded with their investigations into S&P, in
July 2008, the SEC Office of Economic Analysis, Office of Compliance, Inspections, and
Examinations, and Division of Trading and Markets issued a report criticizing the ratings
agencies, S&P chiefly among them, for failing to completely disclose ratings criteria and lacking
necessary policies and procedures for, among other things, rating RMBSs and CDOs and
managing conflicts of interest (the “SEC July Report”). See, e.g., ¶¶ 11-12.
Petitioners also rely on the findings in the Senate Report, which expressly concluded that
S&P was complicit in the financial crisis, citing internal S&P emails revealing that S&P analysts
and senior management continued to provide top ratings to various financial products despite
their keen awareness of increasing risks in the mortgage market, including higher risk mortgage
directors based on wrongdoing that occurred at S&P and determine whether a derivative action should be
brought against them. Petitioners’ decision was not made haphazardly and was the product of carefully
examining McGraw-Hill’s public filings, the Senate Report and supporting exhibits, the SEC July Report,
and information related to the state and federal regulatory investigations. This was further corroborated
by the subsequent SEC Wells Notice, the civil lawsuit filed by the DOJ, the judgment by the Australian
federal court, and the decision of the Illinois state court. 7 See, e.g., Pinnacle Consultants, Ltd. on Behalf of S’holders of Leucadia Nat. Corp. v. Leucadia Nat.
Corp., 923 F. Supp. 439, 447 (S.D.N.Y. 1995) (under New York law, directors “owe a fiduciary duty to
manage the property of the corporation in good faith, according to their best judgment and skill, and in the
interest of the stockholders”) (internal quotations omitted).
8
products, lax lending standards, poor quality loans, and mortgage fraud.8 See, e.g., ¶¶ 17-19.
Contrary to the misleading representations made by Respondent, the SEC July Report and the
Senate Report are replete with facts directly implicating S&P in the financial crisis.
Respondent, however, desperately attempts to lure the Court’s attention away from these
critical, and prolific, facts implicating pervasive misconduct at S&P by suggesting that neither
the Senate Report nor a 2008 Wall Street Journal article concluded any wrongdoing by the
Company’s Board. Resp. Opp. at 12. This is irrelevant to Petitioners’ request to inspect
Respondent’s books and records for a number of reasons. First, the Senate Report was the end-
product of the PSI’s investigation of the causes that spurred the financial crisis in 2008, which
included S&P affixing its highest ratings on novel, and exceedingly complex, financial products,
not to investigate mismanagement at McGraw-Hill or whether its Board was liable for breaches
of fiduciary duty in failing to oversee S&P. The important fact here is that the Senate Report
concluded that S&P, which the Board is required to oversee, was complicit in the financial crisis.
Second, in their rush to criticize Petitioners’ “misleading citation” to a 2008 Wall Street
Journal article, see Resp. Opp. at 12, Respondent simply does not refute the fact that this article,
the Senate Report, and other materials clearly demonstrate the fact that wrongdoing occurred at
S&P and the Board failed in properly overseeing S&P, thus breaching its fiduciary duties. In
fact, both the Wall Street Journal article and the Senate Report reference the Board’s oversight
of S&P. For instance, the 2008 Wall Street Journal article reported that Harold McGraw,
Chairman and CEO of McGraw-Hill, oversaw S&P’s budget and was “a big supporter of the
8 The Senate Report critically examined the ratings process for RMBSs and CDOs by S&P and
acknowledged the mass downgrades of the ratings of these securities, with the S&P-rated CDO named
Delphinus as “[o]ne more striking example.” Any attempt by Respondent to cast the Senate Report that
thoughtfully and methodically explored the financial crisis in any other light is disingenuous at best.
9
innovative products,” such as RMBSs and CDOs, that were driving S&P’s escalating profits.9
See, e.g., ¶ 16. And a number of exhibits contained in the Senate Report confirm that the Board
oversaw S&P’s business, such as a March 3, 2007 email indicating that S&P’s RMBS rating
division was scheduled to present to McGraw-Hill executives on the subprime situation,
including ratings and how to deal with fallout from the mortgage industry. ¶ 19.
It is beyond dispute that Petitioners’ concerns about the Board’s conduct are neither
“speculative” nor “conclusory.” Wrongful conduct occurred at S&P under the watch of
McGraw-Hill’s Board, which is charged with oversight responsibility in the management of the
Company. Thus, Petitioners are seeking their examination of McGraw-Hill’s books and records
in good faith and for proper purposes. See, e.g., Durr, supra.; Dyer v. Indium Corp. of Am., 2
A.D.3d 1195, 1196-97 (3d Dep’t 2003) (claim that petitioner had no basis for investigating
possible mismanagement was “insufficient to raise a question of fact regarding petitioner’s good
faith”).
2. Petitioners’ Request for Board-Level Materials was Narrowly
Tailored to Obtain Only the Necessary Documents
Respondent casts nothing more than hyperbole like “overbroad on its face” and
“unprecedented in New York jurisprudence” at Petitioners’ Demand in a feeble attempt to
persuade the Court by repetition.10
Contrary to Respondent’s conclusory charges, Petitioners’
9 It is no great mystery that the rise of RMBSs, CDOs, and other complex securities had a substantial
effect on the bottom-line of S&P – casting it as a generator of more than a quarter of McGraw-Hill’s
revenues during the boom years – and, as the materials suggest, garnering S&P attention by the Board.
In the first quarter of 2002, Respondent reported revenue of approximately $380 million for its Financial
Services segment, but, by the third quarter of 2005, this segment’s revenues ballooned to over $605
million before peaking at $821 million in the second quarter of 2007. ¶ 8. 10
Respondent cites a litany of cases for the general proposition that requests for books and records “must
be granted cautiously” and for “limited review.” Resp. Opp. at 13 (citing Matter of Steinway, 159 N.Y.
250 (1899)). However, there is no indication that the petitioner in Matter of Steinway amassed the same
level of attestation of wrongdoing that Petitioners did here, e.g., the Senate Report and supporting
materials, the SEC July Report, and the DOJ investigation and subsequent lawsuit, just to name a few. (Footnote cont’d next page)
10
requests are clearly tailored in seeking “documents, records, and information relevant and
necessary to [a shareholder’s] proper purposes.” Liaros, 96 A.D.3d at 1465.
First, as discussed above, Petitioners have established a number of proper purposes for
their Demand, notably including the investigation of mismanagement of McGraw-Hill by its
Board for its failure to properly oversee S&P. On several occasions, Petitioners confirmed that
the Demand was appropriately seeking only a discrete category of documents that McGraw-
Hill’s Board reviewed, prepared or disseminated within each category of materials sought which
relate directly to the Board’s oversight of S&P. See, e.g., ¶¶ 39, 39, 41-42. In other words,
Petitioners’ Demand seeks a limited number of documents related to specifically identifiable
categories from a defined number of individuals, i.e., McGraw-Hill’s Board members, during
a discrete time period. This is a far cry from the “wholesale access to an array of material on
broad grounds” that Respondent asserts Petitioners are seeking. See Resp. Opp. at 13.
Second, contrary to Respondent’s suggestion, see Resp. Opp. at 13, Petitioners have
described with the requisite specificity how the categories of documents requested in their
Demand is relevant and necessary. The categories of documents sought for the period January 1,
Likewise, Matter of Tatko v. Tatko Bros. Slate Co., 173 A.D.2d 917 (3d Dep’t 1991), and Rockwell v.
SCM Corp., 496 F. Supp. 1123 (S.D.N.Y. 1980), do not counsel against granting Petitioners’ request. To
the contrary, the Appellate Division in Tatko, noting that malfeasance was not charged, directed the lower
court to limit petitioner’s inspection of books and records to satisfy his stated purpose of verifying the
correct value of his holdings. 173 A.D.2d at 919. In Rockwell, the same result occurred where the
plaintiff sought information so that he could communicate with his fellow shareholders. 496 F. Supp. at
1127. In contrast, here, Respondent’s vague references to limited review are no more than hot air, and
ignore the voluntarily narrowed set of materials identified in Schedule A that are relevant and necessary
for Petitioners to investigate, among other things, mismanagement. Lastly, Barouh v. Barouh, No.
012254/2008, 2009 WL 1172596 (N.Y. Sup. Ct. Apr. 20, 2009), is inapposite. There, a minority
shareholder sought access to 82 categories of documents that effectively requested all of the documents in
the company’s possession. The court set a hearing for the plaintiff to specifically identify the materials
sought, the reason for seeking them, and the authority establishing the right to get them. Id. at *12. Here,
Petitioners have certainly not asked for every document in McGraw-Hill’s possession and have already
set out in Schedule A the specific documents that are relevant and necessary to satisfy their proper
purposes.
11
2002 through the present include, among others, Board, committee, and special committee
meeting minutes; charters of the Board’s committees and any special committees; Board
documents and presentations that reference S&P’s credit ratings of RMBSs and CDOs or
conflicts of interest arising out of S&P’s “issuer pays” model; presentations to the Board by S&P
or third parties concerning S&P’s market share for rating RMBSs and CDOs; documents related
to investigations by the Board or any of its committees conducted from 2007 to 2012 concerning
S&P’s compliance framework for its business operations; and memorandums and forms related
to any policies of the Company regarding the independence of the members of the Company’s
Board. Each of these categories of documents will enable Petitioners to determine whether, in
fact, the directors breached their fiduciary duties in failing to properly oversee S&P, which
caused harm to the Company, and whether making a demand on the Board to take corrective
action is futile. See, e.g., Hughey v. DuBois Press, 37 N.Y.S.2d 343, 344-45 (Sup. Ct. 1942)
(where limited examination was inadequate, court found that petitioner was entitled to
examination of the books and records of the corporation with proper safeguards against
disclosure of trade secrets). This voluntary contraction of documents subject to the Demand was
illustrated in Schedule A, yet not even referenced by Respondent in its opposing papers.
Third, from the outset, Respondent has attempted to restrict the scope of Petitioners’
Demand to minutes of the annual shareholder meeting and profit and loss statements – materials
that would be utterly useless to investigate potential mismanagement – or require Petitioners to
categorically withdraw any claim for additional discrete documents without evaluating their
responsiveness. See, e.g., Roseman Decl. Ex. A. To allow Respondent to continue its
machinations would render the “right to inspection [ ] wholly illusory if the corporation was
permitted to decide which of its records members were allowed to see.” Wells v. League of Am.
12
Theatres & Producers, Inc., 183 Misc. 2d 915, 920, 706 N.Y.S.2d 599, 604 (Sup. Ct. 2000)
(evaluating a demand under Not-For-Profit analogue to Section 624); see also Durr, 270 N.Y. at
471; Matter of Bondi v. Bus. Ed. Forum, Inc., 52 A.D.2d 1046, 1047 (4th Dep’t 1976) (appellate
court held that lower court improperly limited petitioner’s inspection rights to minutes and the
balance sheets and annual profit and loss statements, noting stockholder’s broader common law
right to inspect corporate books and records). In other words, if Petitioners were only permitted
access to the narrow set of documents, as Respondent suggests, these materials would be
woefully inadequate to allow Petitioners to make an informed decision about the Board’s
awareness of S&P’s wrongful conduct.
B. The Teamsters Decision Has No Bearing on Petitioners’
Demand for Books and Records
Respondent again misguidedly contends that the disposition of Teamsters has some
relevance to Petitioners’ request for books and records. Respondent has identified no authority
for the proposition that the right of a shareholder to inspect a company’s books and records is
somehow curtailed merely because an earlier derivative suit based on the public disclosures of
Respondent was dismissed. That proposition is particularly inapt when, as here, the prior
derivative plaintiff made no request for books and records at all. See Teamsters Allied Benefit
Funds v. McGraw, No. 09-cv-00140, 2010 WL 882883, at *2-4 (S.D.N.Y. Mar. 11, 2010).
Moreover, in their Demand to inspect Respondent’s books and records, Petitioners articulated a
number of proper purposes independent of the intent to assess the extent of any wrongdoing and
evaluate the propriety of a shareholder derivative suit, and those independent purposes were
sufficient on their own to warrant the requested inspection.
Respondent’s argument that the Court should deny Petitioners’ request to inspect its
books and records because res judicata and collateral estoppel principles may limit later actions
13
that Petitioners may bring is fundamentally flawed. While under New York law, res judicata
and collateral estoppel may preclude a shareholder derivative plaintiff from litigating certain
issues that were decided in a prior derivative action,11
there are exceptions that Respondent
conveniently ignores.12
First, res judicata and collateral estoppel do not limit a subsequent derivative action if a
plaintiff can demonstrate “newly discovered evidence . . . [that] was either fraudulently
concealed or [] could not have been discovered with due diligence.” L-Tec Elecs. Corp. v.
Cougar Elec. Org., Inc., 198 F.3d. 85, 88 (2d Cir. 1999) (quotation marks omitted). An
argument could be made – at the appropriate time (i.e, in response to a motion to dismiss a
shareholder derivative complaint) – that Petitioners already have evidence, including the Senate
Report and its supporting evidence and the DOJ investigation and subsequent lawsuit,13
that was
11
See Carroll ex rel. Pfizer, Inc. v. McKinnell, 19 Misc. 3d 1106(A) (Table), 2008 WL 731834, at *4-8
(N.Y. Sup. Ct. Mar. 17, 2008). 12
These exceptions aside, the applicability of the rule itself to a situation such as this – where a previous
shareholder plaintiff has filed a derivative suit without first seeking a review of the company’s books and
records – has been called into doubt. As the Delaware Chancery Court reasoned:
Equitable considerations render dubious the majority position on this issue. Preventing
subsequent individual plaintiffs from bringing potentially meritorious suits based on
additional information gained in a section 220 [books and records] demand would
undercut the purpose of the statute and the policy concern articulated by the Delaware
Supreme Court that plaintiffs should employ section 220 before filing suit. While a prior
suit by another plaintiff with similar allegations of demand futility may bar a second
plaintiff from filing the same suit, if the second plaintiff makes substantially different
allegations of demand futility based on additional information, issue preclusion, from
both a logic and fairness standpoint, would not apply.
W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 643 n.22 (Del. Ch. 2006). 13
On August 17, 2011, The New York Times published an article reporting that the DOJ was investigating
whether S&P improperly rated mortgage products, such as RMBSs and CDOs. Ultimately, on February
4, 2013, the DOJ filed its 118-page civil complaint alleging that, from 2004 through at least 2007,
McGraw-Hill, through S&P, issued credit ratings for RMBSs and CDOs that were falsely represented as
objective, independent, and free from conflicts of interest. Following in the footsteps of the DOJ lawsuit,
the attorneys general of several states also filed actions against McGraw-Hill and S&P alleging that S&P
violated state consumer protection and unfair trade practices laws. In addition, on November 5, 2012, the
Federal Court of Australia issued a nearly 1500-page judgment that painstakingly described how S&P (Footnote cont’d next page)
14
unavailable to the Teamsters plaintiff. In addition, internal documents that Respondent will
produce will allow Petitioners to investigate the full extent of the Board’s knowledge of
wrongdoing at S&P – an issue regulators have not focused on. Setting that argument aside,
Respondent contends that Petitioners’ action is factually indistinguishable from the Teamsters
action, but would have this Court deny Petitioners any opportunity to review the corporate
records to which they are entitled – documents that could plausibly reveal previously-
undisclosed evidence.
Second, neither res judicata nor collateral estoppel applies in a derivative action if the
plaintiff in the earlier action inadequately represented the interests of other shareholders. See
Papilsky v. Berndt, 466 F.2d 251, 259-60 (2d Cir. 1972); Henik ex rel. LaBranche & Co. v.
LaBranche, 433 F. Supp 2d 372, 381 (S.D.N.Y. 2006) (citing Restatement (Second) of
Judgments, § 42(e)).14
Petitioners take no position here on the adequacy of the derivative
plaintiff’s efforts in Teamsters,15
except to note that an argument in that respect remains
available, further underscoring the fact that Respondent’s arguments are speculative at best. In
any event, raising the issues of res judicata and collateral estoppel in this proceeding is wholly
premature and not relevant in ruling on the Petition.
misled twelve local councils and their financial advisor by assigning its highest rating to a pair of constant
proportion debt obligations. ¶ 46. The Australian Court found that S&P was liable to the councils and
their financial advisor for negligence, negligent misstatement, and violation of various Australian statutes
prohibiting the dissemination of false and/or misleading statements concerning financial products, noting
that S&P’s representations “were misleading and deceptive, likely to mislead and deceive and false in a
material particular because the opinion was not based on reasonable grounds and S&P had not exercised
reasonable care or skill in reaching the opinion.” ¶ 50. A mere two days later, on November 7, 2012, an
Illinois state court ruled that the Illinois Attorney General could proceed with her claim that S&P and
McGraw-Hill, as its parent company, engaged in deceptive business practices when they assured investors
“that the process by which S&P rated various securities was independent, objective, and unbiased.” 14
It is well-established that “New York law [concerning res judicata and collateral estoppel] is
substantially identical” to federal law. Carroll, 2008 WL 731834, at *2. 15
The Teamsters opinion includes a detailed description of the efforts undertaken by the plaintiff in that
action. See 2010 WL 88283, at *1-4.
15
IV. CONCLUSION
For the foregoing reasons, Petitioners respectfully request that the Court enter an order
directing Respondent, The McGraw-Hill Companies, Inc. to produce and permit the Petitioners
and their attorneys to inspect, examine, and copy the books, records, and papers of The McGraw-
Hill Companies, Inc., as set forth in the attached Schedule A; to make photostatic copies or other
reproductions thereof; and to afford all necessary facilities for such inspection and copying at
such times and places that may be designated by the Court, without interference on the part of
Respondent, its agents, representatives, and employees.
Dated: May 10, 2013 Respectfully submitted,
SPECTOR ROSEMAN KODROFF &
WILLIS, P.C.
By: /s/ Robert M. Roseman
Robert M. Roseman
Daniel J. Mirarchi
Joshua B. Kaplan
1818 Market Street, Suite 2500
Philadelphia, PA 19103
Telephone: (215) 496-0300
WOLF POPPER, LLP
By: /s/ Patricia I. Avery
Patricia I. Avery
Carl L. Stine
845 Third Avenue
New York, NY 10022
Telephone: (212) 759-4600
Attorneys for Petitioners