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Judge: Telos litigation back at ‘Square One’

Dismissed in ’08, suit is on remand after ruling in unrelated case

After nine years of litigation, what’s another month?

That’s what a Baltimore City Circuit Court judge decided Thursday in an activist hedge fund’s lawsuit against Telos Corp., which a different judge dismissed in 2008.

Facing the suit on remand from the Court of Special Appeals, Administrative Judge W. Michel Pierson gave both sides more time to weigh in on what evidence he should consider before deciding whether to end the shareholder derivative suit or let it proceed to trial.

“I suppose it’s in someone’s interest to do this in a way to bring this to a conclusion,” said, alluding to the case’s “prodigious amount of litigation” and duration. “I’m going to be careful with how we proceed.”

Ashburn, Va.-based Telos successfully moved to dismiss the case nearly six years ago, when then-circuit court Judge Albert J. Matricciani Jr. ruled the cybersecurity company had shown its Special Litigation Committee reasonably concluded the shareholders’ lawsuit was not in the company’s best interest. Matricciani ruled the burden of proof was on the plaintiffs to show the Special Litigation Committee was not independent or not acting reasonably and in good faith.

The hedge fund plaintiffs, Boston-based Costa Brava Partnership III L.P. and New York-based Wynnefield Partners Small Cap Value L.P., appealed in 2009. The Court of Special Appeals did not decide the case until 2012.

In between, the Court of Appeals issued a ruling in an unrelated shareholder derivative action, Boland v. Boland. The top court found the burden of proof is on the corporation, not the shareholders, to show the SLC “was independent, acted in good faith and made a reasonable investigation.”

Based on Boland, the Court of Special Appeals sent the Telos case back to the trial court.

“We are not able to hold as a matter of law that the circuit court’s ultimate findings on these issues would have been the same if it had evaluated the evidence by correctly applying a burden of proof which allocated the burden to the defendants,” the unanimous three-judge panel said.

Pierson got the case on remand because, by then, Matricciani was no longer on the court: he had been elevated to the Court of Special Appeals.

“How can I perform the mental gymnastics to prove Judge Matricciani would have ruled differently if the burden of proof was shifted?” Pierson asked rhetorically Thursday. “I think I have to go back to Square One.”

So, lawyers on both sides provided similar arguments to ones they made in the same courtroom almost seven years ago.

In the underlying lawsuit, the shareholders alleged Telos and several of its officers and directors abdicated their responsibilities and permitted Telos’ CEO and its largest investor to control the corporation, preventing the company from paying dividends and redeeming investors’ shares.

Telos actually had two SLCs investigate the allegations. In August 2006, when the committee’s draft report was nearing completion, several directors resigned from the board, including the two SLC members. The second SLC was formed with two new members of the reconstituted board.

Ava Lias-Booker

Ava Lias-Booker, attorney for Telos Corp., defended the actions of the Special Litigation Committee that decided the shareholders’ suit would not be in the company’s best interest.

Ava E. Lias-Booker, a lawyer for Telos, said the second SLC picked up the first SLC’s work to produce a final report. She provided numbers demonstrating the thoroughness of the SLC’s conclusion: 84,000 pages of documents reviewed; 40 interviews; eight drafts of a final report; and a final report with 45 pages and 25 exhibits, all at a cost of $1.67 million to the company.

“This is not a rubber-stamp inquiry but one that involves a deep review of every document and every choice the committee made,” said Lias-Booker, managing partner of the Baltimore office of McGuireWoods LLP.

Lias-Booker also cited the “pre-eminent experience” of SLC members and the lawyers hired to investigate the shareholder claims.

But Harry Levy, a lawyer for the shareholders, said pre-eminence is not the same as independence. Members of the second SLC did not attend investigation interviews, they said; instead, they showed the report to Telos’ board of directors and “deferred” to the company to verify facts of the investigation.

“That’s not a good-faith investigation,” said Levy, of Shumaker Williams P.C. in Towson. “That’s a whitewash.”

Telos has offices across the country, including in Fulton. The individual defendants in the case include past and present directors Robert Marino, John Wood, Geoffrey Baker, David Borland, Norman Byers, Fred Iklé, Langhorne Motley and Malcolm Sterrett; and past and present officers Michael Flaherty, Robert Marino, Edward Williams, John Wood, John McDuffie, Michele Nakazawa and Richard Tracy.

Iklé died in 2011 and lawyers on both sides said Thursday they are working on a motion to dismiss him from the case.

The case is Costa Brava Partnership III L.P. et al. v. Telos Corp. et al., 24C05009296.