Oklahoma Firefighters Pension & Ret. Sys. v. Citigroup Inc., C.A. No. 9587-ML (VCN) (Del. Apr. 24, 2015) (Noble, V.C.)

In this memorandum opinion, the Court denied the exceptions of defendant Citigroup Inc. (“Citigroup” or the “Company”) to the Master’s Final Report and adopted the recommendations therein related to a demand to inspect the books and records of Citigroup.  After trying the case on a paper record, the Master in Chancery recommended that the Court find that Plaintiff had stated a proper purpose for inspection, but narrowed the scope of documents sought by Plaintiff’s demand.

Plaintiff sought, pursuant to 8 Del. C. § 220, to inspect the books and records of Citigroup in order to investigate possible mismanagement and breaches of fiduciary duty by its directors and officers in connection with two recently disclosed events at Citigroup’s subsidiaries. More specifically, Plaintiff sought to investigate: (i) fraud at Banco Nacional de Mexico, S.A. (“Banamex”); and (ii) Banamex USA’s compliance with the Bank Secrecy Act (the “BSA”) and anti-money laundering (“AML”) requirements under federal laws and banking regulations.

Citigroup argued that Plaintiff had not established a credible basis to infer possible mismanagement or wrongdoing by the Company’s fiduciaries.  Citigroup further argued that, assuming Plaintiff had stated a proper purpose, the scope of inspection demanded was overbroad.

To investigate waste and mismanagement, which is a proper purpose, a stockholder “must present some credible basis from which the court can infer that waste or mismanagement may have occurred.”  Plaintiff intended to test whether it had a viable Caremark claim against Citigroup’s fiduciaries for failing to fulfill their oversight responsibilities.  The Court noted that “Caremark claims are among the hardest to plead successfully.”  However, the relevant question was whether the record established a “credible basis,” the “lowest burden of proof.”

Regarding the fraud at Banamex, the Court concluded that the record would not likely support fiduciary duty claims capable of surviving a motion to dismiss.  But the record did establish a credible basis to support a conclusion that Plaintiff’s demand was based on more than mere suspicion and conjecture.

Mere wrongdoing where the board has oversight was not by itself sufficient.  But, before the fraud was revealed, there were red flags indicating issues at Banamex.  The fraud occurred at a subsidiary that was “an integral part” of Citigroup’s global network and accounted for approximately 10% of Citigroup’s annual profits.  The fraud was material enough to Citigroup to cause it to restate its financial results and involved a “core component” of the bank’s business.  In 2010, debt ratings agencies stopped rating Oceanografia, the counterparty to the Banamex fraud loans, due to insufficient financial information.  But Citigroup did not review its credit exposure to Oceanografia until 2014 when it learned that the Mexican government suspended Oceanografia  from being awarded new Mexican government contracts.  The Company’s CEO confirmed that employees missed signs that should have been elevated to superiors.

Regarding regulatory compliance at Banamex USA, the Court noted that Citigroup’s receipt of subpoenas regarding BSA/AML issues did not alone adequately suggest mismanagement or wrongdoing by its fiduciaries.  However, there is evidence that the subpoenas were not merely the consequence of Citigroup being “caught up in the dragnet of a federal investigation.” The subpoenas were issued shortly after Citigroup entered the Consent Orders, which arose from findings by the OCC, the FDIC, and the Federal Reserve that Citigroup and certain of its subsidiaries, including Banamex USA, did not maintain adequate controls for compliance with BSA/AML requirements.  The government investigation was thus targeted at Citigroup and Banamex USA, and at least part of the government’s reason for investigating related directly to events at Banamex USA that one might expect not to occur if the Consent Orders had been properly implemented.  Therefore, Plaintiff “has cobbled together sufficient evidence, taken as a whole, to satisfy the threshold credible evidence standard.”

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