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The Wynn Board and the Business Judgment Rule discussion
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Good Faith and Synnful Behavior: California Association of Underpaid College Professors
Pension Fund (on its own behalf and on behalf of Synn Resorts Limited) v. Steve Synn and the
Board of Directors of Synn Resorts Limited.
This exercise provides you with the opportunity to demonstrate your ability to identify and analyze
the balance between the core duties and responsibilities that bear on a corporate director’s
performance and the principal legal shield that may insulate the director from liability for alleged
breaches of these core duties.
Our hypothetical scenario is a thinly-veiled adaptation of our favorite, currently unfolding corporate
soap opera: the saga of Steve Wynn and his Wynn Resorts Limited. The scenario for our exercise
involves the fictional Steve Synn and the gambling giant he founded and, until recently, commanded
as Chief Executive Officer and Chairman of the Board of Directors, Synn Resorts Limited (“Synn
Resorts” or “Company”).
Among the Company’s institutional investors is the California Association of Underpaid College
Professors Pension Fund (the “Pension Fund”). The Pension Fund has filed a lawsuit, in a California
court, known as a “derivative” suit, by which shareholders may assert legal claims on behalf of the
company itself, often against members of the company board and/or executive management (who,
after all, would not be expected to bring such a lawsuit against themselves). For the purpose of this
exercise, assume that the Company is a California corporation and that California law is the
governing law of the case.
The opening paragraph of the lawsuit, provided below, summarizes nicely the main factual
assertions advanced by the plaintiff shareholders.
“This action asserts derivative claims on behalf of Synn Resorts Limited (“Synn
Resorts” or “Company”) to redress the injury and losses sustained by the Company
as a result of egregious breaches of fiduciary duty, abuses of fiduciary power and
violations of law involving the Company committed by the Company’s founder,
Chairman and Chief Executive Officer, Stephen Synn (“Mr. Synn”), and breaches of
fiduciary duty by the Company’s Board of Directors. As alleged more particularly
herein, Mr. Synn engaged in a pervasive pattern of egregious misconduct involving
the Company in his positions of leadership, and the Company’s Board of Directors
turned a blind eye and continued to: endorse Mr. Synn’s leadership of the Company
and Mr. Synn’s continued positions as director, Chairman of the Board and Chief
Executive Officer and suitability as a gaming operator; pay extraordinary lavish
compensation and benefits to Mr. Synn; assure the stockholders that the Company’s
risk, compliance and governance controls were extensive and effective to detect,
prevent and remedy such misconduct, in seeking votes in favor of their continuation
as directors; and expose the Company to existential jeopardy in its business and
licensing, which are fundamentally important to the Company’s existence and value.
Mr. Synn’s reported decades of sustained egregious misconduct involving the
Company in his position and the Board’s intentional disregard of the misconduct, as
alleged herein, has caused substantial losses and injury to the Company, the value
of the business and expansion projects and the continued operation and licensure of
the Company’s core business. The actions and inactions by Defendants alleged
herein constitute knowing and intentional breaches of their fiduciary duties as
Directors and/or Officers of the Company and involved intentional misconduct, fraud
or a knowing violation of law, for which Defendants are liable personally to the
Company. Further, the compensation and benefits paid to Mr. Synn and the directors
during their fiduciary misconduct unjustly enriched them at the expense of the
The final section of a legal complaint is often referred to as a “Prayer for Relief.” This part specifies
what it is that the plaintiff is asking the court to do. The Plaintiff’s Prayer for Relief in the Synn case
is provided below and it highlights what is at stake for the Defendants; potential personal liability for
the loss in the Company’s value caused by the revelations of Mr. Synn’s behavior, which the
Defendants failed to prevent – a sum that could amount to billions of dollars.
“Based on the foregoing, Plaintiff prays that the Court rule as follows:
1. Find that Stephen A. Synn knowingly and intentionally breached his fiduciary duties as an
officer and director;
2. Find that the other members of the Board (Sleepy, Geezer, Scrooge, Nimrod, Dopey, Dufus,
Hopeless, Clueless and Careless) have knowingly and intentionally breached their fiduciary
duties to Synn Resorts;
3. Find against all Defendants and in favor of the Company for the amount of any and all
damages sustained by the Company and unjust profits obtained from the Company as a
result of Defendants’ breaches of fiduciary duty in the maximum amount allowed by law;
4. Find against all Defendants and in favor of the Company for all relief and compensation as
permitted by law, including compensation to the Company for the diminution of the value of
the Company caused by Defendants;
5. Direct the Company to take all necessary actions to reform and improve its internal controls
and Board oversight concerning sexual harassment;
6. Award Plaintiff the cost and disbursements of this action, including reasonable attorneys’ and
expert’s fees; and
7. Granting such other and further relief and compensation as the Court deems just and proper.”
Exercise Directions: In no less than three pages explain whether California’s Business Judgment
Rule is likely to shield our Defendants (Synn, Sleepy, Geezer, Scrooge, Nimrod, Dopey, Dufus,
Hopeless, Clueless and Careless) from liability for breaches of their duties of loyalty and care.
The source of California’s Business Judgment Rule is California Corporations Code section 309,
which is replicated on slide 27 of our Corporate Governance – Introduction powerpoint. Courts
generally will not intervene in corporate decisions if the decision-makers acted in good faith and with
the reasonable belief that their actions were in the corporation’s best interest. Put another way,
California law applies a presumption that directors’ decisions are based on sound business
judgment. Thus, shareholders claiming a breach of the duties of loyalty or care have the burden of
overcoming this presumption. Therefore, this exercise compels you to rely on facts (as alleged by
the Plaintiff) that demonstrate that such a presumption isn’t warranted in this case.
Provided in the following pages are various facts as alleged by the Plaintiff concerning the behavior
of the Defendants that you may find useful in your analysis.
Your analysis is due by March 12 via the Turnitin app on our Canvass page.
1. Mr. Synn’s 11.8% of the stock of the Company had a market value of approximately $2.4
billion as of January 25, 2018. Mr. Synn is considered by some as integral to the Company’s
success. Mr. Synn is so ingrained into the identity of the Company that his signature is the
Company’s logo. In a recent securities filing citing possible risks to the business, the
Company said, “If we lose the services of Mr. Synn, or he is unable to devote sufficient
attention to our operation for any reason, our business may be significantly impaired.”
2. In a court filing in May 2017, Elaine Synn (Mr. Synn’s former wife) said, “The Synn Board
may be the most compliant board of any major public company…In only three instances in
the history of the Company has a director voted against Mr. Synn’s position on any issue.”
3. The Board has previously come under fire for its weak corporate governance and deference
to Mr. Synn. Specifically, the Board has been criticized for overpaying Mr. Synn and other
executives while allowing perks such as corporate jets and a land deal between the Company
and Synn. In 2013, the New York Times reported that Mr. Synn had enjoyed more than a
million dollars’ worth of personal travel in 2012 on the Company’s private jet.
4. In 2015 and 2016, Institutional Shareholder Services, Inc. (“ISS”), a shareholder advisory
firm, recommended withholding votes to re-elect members of the Board’s Compensation
Committee. ISS cited Mr. Synn’s sizable pay packages compared with other CEOs and a
severance agreement equating to $330 million that “exceeds the upper parameter of
acceptable amounts,” according to a report from ISS last year.
5. Glass Lewis & Co, another advisory firm, also recommended that shareholders vote against
the Company’s compensation package, citing “poor overall design” and “performance
disconnect.” In fact, Glass Lewis gave the Company an “F” for its pay-for-performance
practices for the last two years.
6. In 2017, ISS gave Synn Resorts its worst ranking for governance risk.
7. Shareholder advisory firms Vanguard Group and Blackrock Inc. also point to a lack of current
corporate experience on the board. In addition to Defendant Geezer, a former head of a
regional water authority, the Synn Resorts Board includes a former Nevada Governor, a
former U.S. ambassador to China, the retired heads of three big businesses and three heads
of smaller firms. Defendant Careless, the lead independent director, has never worked for a
business, according to his Synn Resorts biography.
8. On January 26, 2018, the Wall Street Journal published a report (“WSJ Report”) setting forth
accounts of former employees of Mr. Synn describing a decades long pattern of sexual
misconduct with Company employees by Mr. Synn. The Wall Street Journal reportedly
contacted more than 150 people who work or had worked with Mr. Synn. Most of those who
spoke with the Journal stated they worried that doing so could hurt their future employment
options because of Mr. Synn’s influence in the casino industry.
9. Among other allegations, the WSJ Report stated that in 2005, a manicurist who worked at
Synn Las Vegas was forced by Mr. Synn to have sex with Mr. Synn after giving him a
manicure in his office suite. According to the WSJ Report, Mr. Synn repeatedly pressured the
manicurist to take her clothes off and lie on a massage table, despite the manicurist’s protests
that she did not want to have sex and was married, and Mr. Synn persisted in his demands.
10. According to the WSJ Report, following the encounter, the manicurist returned to the on-site
salon visibly distressed and informed her supervisor of what occurred, and the supervisor
filed a detailed report to the Company’s human-resources department recounting the
episode. The salon manager said she got a call from a Company executive castigating her
for submitting the filing to HR. The former manager said no one followed up with her about
the matter. The manicurist soon left the Company and Synn ultimately paid her a $7.5 million
settlement. The Las Vegas Review-Journal reported that the $7.5 million settlement involved
a paternity claim by the manicurist.
11. Allegations of such egregious fiduciary misconduct by the Company’s Chairman and CEO
involving the Company could not be ignored without an investigation by fiduciaries acting in
good faith based on any proper rational business purpose. The Synn Board knowingly failed
to investigate the credible allegations and continued to support Mr. Synn’s positions of
leadership, compensation and suitability as a gaming operator. The Las Vegas ReviewJournal also reported that Elaine Synn learned of the incident in 2009 while preparing
documents for her divorce filing. Elaine Synn then spoke with two company officials who
already had knowledge of the allegations and shared the information with about the
conversations with her divorce lawyers. Likewise, the WSJ Report stated that Elaine Synn
raised the issue internally when she learned of it. A CNBC article reported that Elaine Synn
brought it to the attention of a representative of the Board immediately after learning about it.
Ms. Synn herself was a member of the Board in 2009.
12. In addition, the allegations of egregious misconduct by Mr. Synn involving the Company were
referenced in the lawsuit in which Elaine Synn sought to lift restrictions on the sale of her
stock in Synn Resorts. In the lawsuit between the Synns, Ms. Synn cited a “multimillion dollar
payment” made by Mr. Synn following allegations he had engaged in “serious misconduct”
on company property against an employee. A filing said Ms. Synn had learned of the
settlement in 2009. The amended complaint in the litigation alleges that Sinatra, the
Company’s General Counsel, knew about the settlement. Elaine Synn’s attorneys have
argued that in making the settlement in 2005 without telling the Board, Mr. Synn recklessly
exposed the Company and other directors to liability. The Board, however, eventually learned
of the allegations of egregious misconduct involving the Company. Ms. Synn’s lawsuit also
accuses Mr. Synn of using the Company “to fund his lavish lifestyle and personal politics”
and displaying “reckless risk-taking behavior” that places the Company in jeopardy and has
exposed it to legal challenges. Thus, regardless of whether Mr. Synn initially concealed the
settlement and allegations of egregious misconduct involving the Company, the Board knew
of the settlement and allegations of patently egregious misconduct involving the Company
by at least 2015 and failed to act and continued to support and recommend to the
stockholders Mr. Synn’s continued leadership and compensation. The Board knowingly failed
to investigate the allegations of patently egregious misconduct by the Chairman and CEO
and Mr. Synn’s suitability for his fiduciary positions and regulatory compliance and his
suitability as a gaming operator. Knowing failure to act by the Board on the allegations of
such egregious misconduct involving the Company constituted a knowing and intentional
violation of its fiduciary duties to the Company for which the Director Defendants are liable.
13. Former employees reported that they have resorted to entering fake appointments in the
books to help other female workers get around a request for services in Mr. Synn’s office or
arranged for others to pose as assistants so they wouldn’t be alone with him. They told of
female employees hiding in the bathroom or back rooms when they learned he was on the
way to the salon. “Everybody was petrified,” said a former artistic director at the salon, who
also reported that he and others repeatedly told high-level company executives Mr. Synn’s
sexual advances were causing a problem, but “nobody was there to help us.”
14. Mr. Synn’s conduct and repeated pattern of sexual harassment was pervasive and well
known. As alleged above, the Board of Directors knew the allegations of egregious
misconduct as a result of Elaine Synn, then a Company Board member, learning of the
misconduct in 2009 and alerting a representative of the Board regarding the 2005 $7.5 million
settlement. In addition, Mr. Synn’s conduct was referenced in the lawsuit filed by Elaine Synn
that the Board cited as the reason for removing her from the Board. Moreover, numerous
former employees have stated that they reported the sexual misconduct to management of
Synn Resorts. In fact, a Company spokesman confirmed that the Board knew of allegations
and when questioned whether the Board investigated the allegations when it learned of them,
did not respond to the question. In addition, Company counsel stated that the Company
intentionally did not disclose the $7.5 million settlement to Massachusetts gaming regulators
in the licensing process which is continuing for the Synn Boston Harbor. The Board
knowingly turned a blind eye to allegations of patently egregious misconduct by Mr. Synn
involving the Company, taking no action to protect the Company and its suitability for
regulatory compliance and to discharge the directors’ known fiduciary duties to the Company
to do otherwise until the WSJ Report shed light to the public, and even then the Board is
merely conducting an internal investigation. Additionally, the Board continued to approve of
licensing applications to gambling authorities that omitted Synn’s conduct as the Board
continued to take no action to investigate the allegations of egregious misconduct involving
the Company.
15. In the wake of the WSJ Report, the Board, saying it is “deeply committed to ensuring the
safety and wellbeing” of all employees reportedly formed a special committee comprised of
allegedly independent directors to investigate the allegations. An independent Board acting
in good faith to protect the Company would have engaged a truly independent investigation.
Defendant Nimrod will serve as chair of the special committee. Defendants Dufus and
Clueless will also serve on the special committee. The creation of a special committee in
response to the WSJ Report evidences that the Synn Board has not previously investigated
allegations of Mr. Synn’s patently egregious misconduct involving the Company and
knowingly turned a blind-eye as the directors and Mr. Synn continued to reap substantial
compensation and benefits at the Company’s expense and the Company continued with a
cancerous existential threat from its Chairman and CEO.
16. As detailed below, Defendants’ knowing and intentional breaches of duty have caused
significant losses and harm to date, with the potential for more.
17. Shares of Synn Resorts fell 10% on January 26, 2018, the day the WSJ Report was released.
On the following Monday, shares fell an additional 9.3%.
18. On January 30, 2018, Standard Poor’s Global Rating revised its outlook for Synn Resorts to
“negative” from “stable.” The ratings downgrade reflected the “Significant uncertainty” over
the resolution of the various investigations into Synn’s misconduct discussed below. The
ratings agency further stated that the misconduct allegations “could impair the Company’s
brand and ability to maintain or review its gaming licenses.”
19. Joseph Genius, an analyst with J.P. Morgan, projected shares could drop to around the $150
level before the fallout is over. “Steve’s name is on each one of his resorts in Las Vegas and
Macau and therefore they are potentially susceptible to downward swings in patronage,”
Greff said in his report. “Such allegations (in the Journal article) can’t be helpful to Synn in
competitive integrated resort license and development globally, such as in Japan, or in
gaming license renewals in Macau and Nevada.”
20. The WSJ Report has already triggered investigating by gaming regulators in Nevada,
Massachusetts and Macau.
21. On January 30, 2018, after a preliminary review of the accusations against Mr. Synn, the
Nevada gambling regulators opened a formal investigation into the sexual-misconduct
allegations. “Nevada regulators have a broad range of options when it comes to potential
disciplining of a licensee,” Don Corleone, former chairman of the Nevada Gaming Control
Board, the state’s main regulatory body, stated. “These include things like complaints, fines,
and even Gaming regulators in Massachusetts, where Synn Resorts is building a $2.4 billion
property on Boston Harbor, are also investigating the allegations. Massachusetts gambling
commissioners met on January 31, 2018 to discuss the allegations against Mr. Synn. Synn
Resorts was granted a license based on a 2011 state law which required the gambling
commission to consider the “integrity, honesty, good character and reputation of the
applicant” when considering bids for a gambling license. The law also notes that licensees
“shall have a continuing duty to maintain their integrity and financial sta …
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