Allied, Inc.is a publicly-traded Delaware corporation which designs, manufactures and sells airbags to US automakers.Since 2002, Allied uses cartridges containing ammonium nitrate as the propellant designed to explode upon impact.Between 1991 and 2002, Allied had used tetrazole as its propellant, as do most other airbag manufacturers.However, tetrazole is produced in limited quantities and is expensive, and ammonium nitrate is plentiful and incredibly cheap.When the use of tetrazole began squeezing the profit margins at Allied, it switched to using ammonium nitrate.

Allied's Research and Development (R&D) team has for several years raised concerns about the use of ammonium nitrate as the airbag propellant.It pointed to explosives manuals warning that the ammonium nitrate "tended to disintegrate with irregular ballistic consequences," "changed phases with temperature swings," and "readily absorbed moisture from the atmosphere." The R&D team, however, always thought the problem was not in the ammonium nitrate itself, but in the way the manufacturing did not seal out the moisture from the cartridges.Nonetheless, Allied's Board of Directors had been given the R&D reports and knew of the potential issue and warnings by the R&D team.They directed R&D to work on stabilizing ammonium nitrate rather than discontinue its use.

Allied purchases all its cartridges from Tactical Airbag Products, Inc. (TAP).TAP's majority shareholder is Steve Brooks.Allied is TAP's only customer.Brooks is also the CEO of Allied and is one of the wealthiest Americans.Among Brooks' other interests is his horse racing empire, for which he has bred several champion thoroughbreds.

Allied's Board of Directors consists of 3 inside directors - Stewart, Colbert, and Maddow - and four outside directors.All three inside directors make up the Audit Committee for Allied.

Lately, Allied has come under intense scrutiny.Since 2013, premature rupturing of Allied's airbags has caused 9 deaths and over 100 injuries in the U.S.The airbag explosions were caused by exposure of the volatile chemical ammonium nitrate to heat and humidity.Use of this chemical increased the unprovoked explosions because the cartridge used to encase the chemical lacked material to absorb moisture and did not create airtight seal, which led them to inflate prematurely and spontaneously explode, especially in hot and humid climates.

As a result, in 2013, the U.S. issued a recall of all Allied-manufactured ammonium nitrate airbags.Since the U.S. automakers were Allied's main customer, approximately $30 million of ammonium nitrate and TAP cartridges containing ammonium nitrate held by Allied became obsolete as a result.Allied could neither use nor sell these supplies.

Between 2013 and 2015, Allied understated its inventory quantities and created a bogus subsidiary and phony accounting entries to hide the losses related to this inventory.Allied's fraudulently reclassified entries totaled $8.8 million in 2013, $7.1 million in 2014, and $8.2 million in 2015.

Mallon, Inc. had been Allied's outside auditors since 2012.In 2014, they issued a "material weakness letter" (a letter reporting potential problems) to Allied's Audit Committee concerning Allied's internal controls over financial reporting and inventory.The letter focused on Allied's lack of a comprehensive or formal inventory management system, and the company's failure to disclose a subsidiary as a related entity.In its material weakness letter, Mallon stated "there is currently no review process in place to ensure that data is entered accurately and that inventory balances at any point in time are stated fairly.We recommend that Allied acquire and implement a comprehensive inventory management system to assist management in properly managing and controlling inventory in a consistent and organized manner."The Audit Committee did not take any action.

In early 2015, after a review of the financial status of the company, Mallon advised Allied not to file its annual report until an inventory investigation could be completed. Brooks called Mallon and left a hostile voicemail telling Mallon to sign off on the annual report.Mallon refused, and Allied submitted its annual report to the SEC for electronic filing.The filing contained an audit report with a forged auditor's signature and Brooks's signature as CEO.Mallon received a copy of the report.Mallon resigned as auditor of Allied.

As the majority shareholder of TAP, Brooks controlled the price TAP charged Allied for its cartridges.TAP charged Allied roughly double the amount of reasonable costs for its products. As CEO of Allied, Brooks was able to direct Allied to pay TAP's inflated costs and purchase TAP's entire inventory.Brooks was able to divert at least $10 million in excess costs from Allied to TAP, disguising it in Allied's financial statements and disclosures. In order to assure itself of a steady supply of cartridges, Allied concealed the existence of Brooks' relationship with TAP from auditors and investors until 2013, when Mallon required Allied to file an amended SEC Form 10-K to disclose TAP's ownership and Allied's related transactions with TAP.The amended form failed to disclose, however, that Brooks controlled TAP's business, Brooks determined the price TAP would charge Allied, and that Brooks directed Allied to pay TAP's costs.

In 2015, Brooks as CEO attended a full board meeting of Allied which included all members of the Audit Committee and the 4 outside board members.In the meeting they discussed the following:the SEC had begun an investigation into (1) the Allied-Brooks-TAP relationship; (2) the sudden departure of the auditing firm of Mallon, Inc. shortly after Allied submitted the annual report.They also discussed the creation of an independent committee to conduct an investigation into how Allied controlled its inventory.At the meeting, Brooks informed the board that he would not agree to an investigation that independent board members would oversee.He would only agree to an investigation that he oversaw.No one questioned or challenged Brooks' objection.Ultimately, Brooks oversaw the investigation after hiring a firm that he selected, controlled who they could talk to, and produced the documents he wanted to produce.

Allied had few internal controls over the use of corporate checks and credit cards.As a result, Brooks was able to use Allied as his personal piggy bank.Between 2011 and 2016 Brooks used Allied checks and corporate credit cards to pay for millions of dollars in his personal expenses, including such items as luxury cars, jewelry, art, real estate, extravagant vacations, use of personal aircraft, prostitutes, horse training, clothing and accessories from high fashion designers, and more than $120,000 for iPads included in gift bags for guests at his daughter's Sweet 16 birthday party. Of the $4.7 million personally used by Brooks, none was repaid.

Brooks, upon learning in the BOD meeting that the SEC was investigating Allied, ordered his broker to immediately begin divesting him of his Allied shares - not all at once, but over time.He also refused to exercise his option to purchase Allied shares at his annual option date.He had always exercised his option to purchase in years past.When asked by other directors why he did not exercise his option, he claimed he was heavily investing in a horse that showed promise and did not want to make the option purchase.

Lucy Lunatic, a shareholder with sufficient holdings, brought a derivative suit against Allied; she did not file a demand.Another set of shareholders brought suit against Mallon, Inc. alleging that Mallon aided and abetted in violation of Rule 10b-5.They are both seeking to recover monetary damages for the corporation.

Allied appointed a Special Litigation Committee (SLC) to determine if the lawsuit filed by Lucy Lunatic should continue.They appointed Fallon, Corden, and Noah, three of the four outside directors.All were longtime friends and neighbors of Brooks with personal relationships that spanned decades.Fallon lived close to Brooks and he and his family went out to dinner with Brooks and the Brooks family 2 or 3 times a month. Fallon was Brooks' insurance agent for Allied and TAP and members of the Brooks' family.In that capacity, he received upwards of $148,000 per year in commissions. Corden and his family had a social relationship with Brooks and the Brooks family, and regularly attended Brooks' family social functions. Corden also had investments in Brooks' horse operations.Noah had a relationship with Brooks starting in 1998 or 1999, and was Brooks' brother-in-law before Brooks asked him to join Allied's board.All of them were influenced by Brooks' wealth and the financial opportunities that their loyalty provided.For example, all were often invited to Brooks' seats in the skybox at Madison Square Garden which they used to cultivate their business contacts, shared Brooks' box seats at the Triple Crown events, accepted lavish gifts, vacationed at Brooks' lodge in Aspen, and otherwise enjoyed benefits of their friendship with him.

The SLC conducted the investigation on behalf of Allied and advised the court via a Motion to Dismiss that in their opinion, it is in the best interest of the corporation that all the pending litigation should be dismissed.

Before answering, read all of the questions and only answer the question asked in the order that it is asked.Label all of your answers as A., B., C., etc.Do not answer in one long narrative.

A. How will the court evaluate Lucy Lunatic's failure to file a demand?

B. Assuming Lucy is able to withstand the Motion to Dismiss for failing to file a demand, how will the court proceed in considering the Motion to Dismiss?What is the likely outcome of it?

C. What cause(s) of action, if any, can be brought against the members of the Board of Directors and what defense(s) would be raised?

D. What cause(s) of action can be brought against Steve Brooks and what defense(s) would be raised?

E. What cause(s) of action can be brought against the members of the Audit Committee and what defense(s) would be raised?

F. How will Mallon, Inc. defend against the claims filed by the shareholders?

G. Should the contents of the 2015 Board of Directors meeting or any other information about Allied be discussed in the MD&A section of the annual report for that year?What information, if any, is required to be revealed?

H. What causes of action can be brought for violations of Rule 10b-5 and against whom?What defenses, if any, can be raised?