630 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
sight into Ethics
Del.Ch.,2009.
In re Citigroup Inc. Shareholder Derivative Litigation
964 A.2d 106
from problems in the subprime lending market and for failing to properly disclose Citigroup’s exposure to subprime
assets. Plaintiffs allege that there were extensive fired flags” that should have given defendants notice of the problems
that were brewing in the real estate and credit markets and that defendants ignored these warnings in the pursuit of
short term profits and at the expense of the Company’s long term viability.
Plaintiffs further allege that certain defendants are liable to the Company for corporate waste for (1) allowing the
For the reasons set forth below, the motion to stay or dismiss in favor of the New York Action is denied. The motion to
dismiss is denied as to the claim in Count III for waste for approval of the November 4, 2007 Prince letter agreement.
All other claims are dismissed for failure to adequately plead demand futility pursuant to Rule 23.1.
I. BACKGROUND
A. The Parties
FN1. The director defendants are C. Michael Armstrong, Alain J.P. Belda, George David, Kenneth T. Derr,
John M. Deutch, Andrew N. Liveris, Anne M. Mulcahy, Richard D. Parsons, Roberto Hernández Ramirez, Ju-
dith Rodin, Robert E. Rubin, Robert L. Ryan, and Franklin A. Thomas (collectively, the fidirector defendants”).
Plaintiffs and defendants agree that the director defendants constitute the board for demand futility purposes.
mid-2007, rating agencies downgraded bonds backed by subprime mortgages.
FN2. fiSubprime” generally refers to borrowers who do not qualify for prime interest rates, typically due to
weak credit histories, low credit scores, high debt-burden ratios, or high loan-to-value ratios.
FN3. The facts are drawn from the complaint and taken as true for purposes of the motion to dismiss.
Much of Citigroup‘s exposure to the subprime lending market arose from its involvement with collateralized debt obli-
FN4. RMBSs are securities whose cash flows come from residential debt such as mortgages.
According to plaintiffs, Citigroup’s alleged $55 billion subprime exposure was in two areas of the Company’s Securi-
FN5. Rights to cash flows from CDOs are divided into tranches rated by credit risk, whereby the senior
tranches are paid before the junior tranches.
By late 2007, it was apparent that Citigroup faced significant losses on its subprime-related assets, including the fol-
lowing as alleged by plaintiffs:
•
October 1, 2007:
Citigroup announced it would write-down approximately $1.4 billion on funded and unfunded
bringing $49 billion in assets onto its balance sheet and taking full responsibility for the SIVs’ $49 billion worth of as-
sets.
•
January 15, 2008:
Citigroup announced it would take an additional $18.1 billion write-down for the fourth quarter
2007 and a quarterly loss of $9.83 billion. Citigroup also announced that the Company lowered its dividend to $0.32
per share, a 40% decline from the Company’s previous dividend disbursement.
mortgages that had decreased in value, and the normally liquid commercial paper market became illiquid. Because
the SIVs could no longer meet their cash needs by attracting new investors, they had to sell assets at allegedly fifire
sale” prices. In November 2007, Citigroup disclosed that it provided $7.6 billion of emergency financing to the seven
SIVs the Company operated after they were unable to repay maturing debt. Ultimately, Citigroup was forced to bail
out seven of its affiliated SIVs by bringing $49 billion in assets onto its balance sheet, notwithstanding that Citigroup
FN6. Plaintiffs also assert a claim for fireckless and gross mismanagement.” Consol. Second Am. Derivative
Compl. (hereinafter, fiCompl.”) ¶¶ 219-25. Delaware law does not recognize an independent cause of action
against corporate directors and officers for reckless and gross mismanagement; such claims are treated as
claims for breach of fiduciary duty. Delaware fiduciary duties are based in common law and have been care-
fully crafted to define the responsibilities of directors and managers, as fiduciaries, to the corporation. In defin-
tion against defendants. In the two sentences of their answering brief on the motion to dismiss that address
Count IV, plaintiffs equate Count IV to their
Caremark
claim in Count I. Because I find that Count I fails, it fol-
lows that Court IV also fails.
•
May 27, 2005:
Economist Paul Krugman of the
New York Times
said he saw fisigns that America’s housing mar-
ket, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative
•
August 1, 2007:
Two hedge funds managed by Bear Stearns that invested heavily in subprime mortgages de-
clared bankruptcy.
•
August 9, 2007:
American International Group, one of the largest United States mortgage lenders, warned that
mortgage defaults were spreading beyond the subprime sector, with delinquencies becoming more common among
borrowers in the category just above subprime.
FN7. Compl. ¶¶ 73–74. I have provided only a small sample of the numerous fired flags” alleged in the Com-
plaint.
Plaintiffs also allege that the director defendants and certain other defendants are liable to the Company for waste for:
(1) allowing the Company to purchase $2.7 billion in subprime loans from Accredited Home Lenders in March 2007
and from Ameriquest Home Mortgage in September 2007; (2) authorizing and not suspending the Company’s share
1.
The New York Action
The first New York Action was filed on November 6, 2007 in the United States District Court for the Southern District
of New York. On August 22, 2008, the five pending derivative actions were consolidated as
In re Citigroup, Inc.
2.
The Delaware Action
2008. Defendants filed a motion to dismiss the Consolidated Amended Derivative Complaint on April 21, 2008. Plain-
tiffs responded by filing a Consolidated Second Amended Derivative Complaint (the fiComplaint”), which was accept-
ed by the Court on September 15, 2008. Pending before the Court is defendants’ motion to dismiss or stay.
II. MOTION TO DISMISS OR STAY IN FAVOR OF THE NEW YORK ACTION
FN8.
McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co.,
263 A.2d 281, 283 (Del.1970).
FN9.
See id.
FN10.
In re The Bear Stearns Cos. S’holder Litig.,
C.A. No. 3643-VCP, 2008 WL 959992, at *5 (Del.Ch. Apr.
FN11.
Merrill Lynch,
2008 WL 4824053, at *3 (citing
Texas Instruments Inc. v. Cyrix Corp.,
C.A. No. 13288,
1994 WL 96983, at *3-4 (Del.Ch. Mar. 22, 1994)).
FN12.
Bear Stearns,
2008 WL 959992, at *5 (treating actions filed three days apart as contemporaneous).
The parties agree that the New York Action was first commenced on November 6, 2007. Plaintiffs assert that
this action was first commenced on November 7, 2007-meaning it was filed the day after the New York Ac-
FN13.
Biondi v. Scrushy,
820 A.2d 1148, 1159 & n. 22 (Del.Ch.2003) ( fiWhere one person seeking to act in a
representative capacity chooses to litigate in Delaware and another in a different forum, there is little reason
1) the applicability of Delaware law in the action; 2) the relative ease of access to proof; 3) the availability of com-
pulsory process for witnesses; 4) the pendency or non-pendency of any similar actions in other jurisdictions; 5) the
FN14.
In re Chambers Dev. Co. S’holders Litig.,
C.A. No. 12508, 1993 WL 179335, at *2 (Del.Ch. May 20,
1993).
A party is not entitled to a stay as a matter of right; rather, the granting of a motion to stay rests with the sound discre-
FN15.
See Taylor v. LSI Logic Corp.,
689 A.2d 1196, 1199 (Del.1997) ( fiAn action may not be dismissed up-
on bare allegations of inconvenience without a particularized showing of the hardships relied upon.”).
FN16.
Bear Stearns,
2008 WL 959992, at *5 (fiMotions to stay litigation on grounds of
forum non conveniens
are granted only in the rare case.”);
Aveta, Inc. v. Colon,
942 A.2d 603, 608 (Del.Ch.2008) (fi[T]o achieve a
stay or dismissal for
forum non conveniens,
a defendant must demonstrate that litigating in the plaintiff’s cho-
sen forum would present an overwhelming hardship.”);
Ryan,
918 A.2d at 351 (citing
Berger v. Intelident So-
lutions, Inc.,
906 A.2d 134 (Del.2006)). I am aware of the so-called debate as to whether there exists a differ-
when the Court is considering a motion to stay on grounds of
forum non conveniens
that would have the
same practical effect as dismissal.
While there are certainly significant procedural differences, in many cases the practical effect of staying liti-
gation in favor of a lawsuit pending in another jurisdiction is the same as ordering dismissal. A stay in favor
of another action results in the action in Delaware being put on hold until the resolution of the action in an-
showing hardship that would entitle them to a stay or dismissal in favor of the New York Action.FN17 First, Delaware
law applies to this action. Citigroup is incorporated in Delaware, and the fiduciary duties owed by its officers and di-
636 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
rectors are governed by Delaware law. Defendants argue that this case does not pose novel issues of Delaware law
and only calls for application of the established doctrines governing
Caremark
and waste claims to the facts in this
FN17. Alternatively, even if the Court were to apply a preponderance of the evidence standard rather than re-
FN18.
See id.
at *3;
Topps,
924 A.2d at 954 (fiWhen new issues arise, the state of incorporation has a particu-
larly strong interest in addressing them, and providing guidance.”).
FN19.
See Merrill Lynch,
2008 WL 4824053, at *3. It is also highly unlikely that this case will require a view of
the premises.
FN20.
Id.
Fourth, although there is an action pending in New York that arises out of the same nucleus of operative fact, the
pendency of such action does not give rise to the hardship required to establish entitlement to a stay. Although some
overlap may result, the pendency of a similar action in another jurisdiction regarding corporate governance issues
under Delaware law does not necessarily override the interest of Delaware in resolving such claims. Defendants ar-
FN21.
Bear Stearns,
2008 WL 959992, at *6-8.
FN23.
Bear Stearns,
2008 WL 959992, at *8.
FN24. The New York Action is pending in the Southern District of New York before Judge Sidney H. Stein.
The decision not to stay this action should not be seen as reflecting on the expertise of Judge Stein, who, to
my knowledge, is an excellent jurist, fully capable of adjudicating issues of Delaware law.
III. THE MOTION TO DISMISS UNDER RULE 23.1
FN25. 8
Del. C.
§ 141(a).
FN26.
Aronson v. Lewis,
473 A.2d 805, 811 (Del.1984).
FN27.
See Stone v. Ritter,
911 A.2d 362, 366-67 (Del.2006).
FN28. Ct. Ch. R. 23.1(a);
see Stone,
911 A.2d at 367 n. 9;
Brehm v. Eisner,
746 A.2d 244, 254 (Del.2000).
FN29.
Am. Int’l Group, Inc., Consol. Derivative Litig.,
965 A.2d 763, 807-09, 2009 WL 366613, at *29
(Del.Ch.2009).
[14][15] Under the familiar
Aronson
test, to show demand futility, plaintiffs must provide particularized factual allega-
FN30.
Brehm,
746 A.2d at 253 (quoting
Aronson,
473 A.2d at 814).
FN31.
Rales v. Blasband,
634 A.2d 927, 933-34 (Del.1993).
FN32.
Id.
at 934.
[16][17] In evaluating whether demand is excused, the Court must accept as true the well pleaded factual allegations
FN33.
Brehm,
746 A.2d at 254.
FN34.
Id.
Plaintiffs have not alleged that a majority of the board was not independent for purposes of evaluating demand. Ra-
ther, as to the claims for waste asserted in Count III, plaintiffs allege that the approval of certain transactions did not
constitute a valid exercise of business judgment under the second prong of the
Aronson
test. Plaintiffs allege that
FN35.
Jacobs v. Yang,
C.A. No. 206-N, 2004 WL 1728521, at *6 n. 31 (Del.Ch. Aug. 2, 2004).
FN36.
Aronson,
473 A.2d at 815. The Complaint appears to allege that demand on defendants Rubin and
Ramirez would be futile because 1) Rubin faces a substantial threat of personal liability because he benefited
3) Ramirez is not independent because he ran a subsidiary of Citigroup and received security and other ser-
vices valued at more than $2 million from Citigroup while doing so.
See
Compl. ¶ ¶ 181-82. The Court does
not need to determine the adequacy of these demand futility allegations because plaintiffs have not made
similar individualized allegations regarding the other director defendants. Thus, even if the allegations in the
Complaint are sufficient to excuse demand as to Rubin and Ramirez, plaintiffs have still failed to properly
FN37.
In re Caremark Int’l Inc. Derivative Litig.,
698 A.2d 959 (Del.Ch.1996).
FN38. 188 A.2d 125 (Del.1963).
FN39.
Id.
at 130.
With regard to director liability standards, the Court distinguished between (1) fi
a board decision
that results in a loss
FN40.
Caremark,
698 A.2d at 967.
FN41.
Id.
;
see Brehm,
746 A.2d at 259.
What should be understood, but may not widely be understood by courts or commentators who are not often re-
quired to face such questions, is that compliance with a director’s duty of care can never appropriately be judicially
FN42.
Caremark,
698 A.2d at 967-68 (footnotes omitted).
In the latter class of cases, where directors are alleged to be liable for a failure to monitor liability creating activities,
FN43.
Id.
at 971.
[19][20][21][22][23] In
Stone v. Ritter,
the Delaware Supreme Court approved the
Caremark
standard for director
FN44.
Stone,
911 A.2d at 370.
Caremark
articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed
FN45.
Id.
(footnotes omitted).
Thus, to establish oversight liability a plaintiff must show that the directors
knew
they were not discharging their fidu-
FN46.
See Guttman v. Huang,
823 A.2d 492, 506 (Del.Ch.2003) ( fi[T]he [
Caremark
] opinion articulates a
FN47.
Stone,
911 A.2d at 369;
Desimone v. Barrows,
924 A.2d 908, 935 (Del.Ch.2007) (fi
Caremark
itself en-
640 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
couraged directors to act with reasonable diligence, but plainly held that director liability for failure to monitor
1.
Plaintiffs’ Caremark Allegations
Plaintiffs’ theory of how the director defendants will face personal liability is a bit of a twist on the traditional
Caremark
FN48.
See, e.g., David B. Shaev Profit Sharing Account v. Armstrong,
C.A. No. 1449-N, 2006 WL 391931, at
*2 (Del.Ch. Feb. 13, 2006) (
Caremark
claims for failure to discover involvement in allegedly fraudulent busi-
ness practices).
FN49. Pls.’ Answering Br. at 2.
Although these claims are framed by plaintiffs as
Caremark
claims, plaintiffs’ theory essentially amounts to a claim
that the director defendants should be personally liable to the Company because they failed to fully recognize the risk
FN50. fiHindsight bias is the tendency for people with knowledge of an outcome to exaggerate the extent to
which they believe that outcome could have been predicted.” Hal R. Arkes & Cindy A. Schipani,
Medical Mal-
practice v. The Business Judgment Rule: Differences in Hindsight Bias,
73 OR. L.REV. 587, 587 (1994).
FN51.
Aronson,
473 A.2d at 812.
FN52.
Id.
FN53.
Id.
Additionally, Citigroup has adopted a provision in its certificate of incorporation pursuant to 8
Del. C.
§ 102(b)(7) that
FN54.
Wood v. Baum,
953 A.2d 136, 141 (Del.2008) (quoting
Guttman,
823 A.2d at 501).
[28] The Delaware Supreme Court has stated that bad faith conduct may be found where a director fiintentionally acts
with a purpose other than that of advancing the best interests of the corporation, … acts with the intent to violate ap-
FN55.
In re Walt Disney Co. Derivative Litig.,
906 A.2d 27, 67 (Del.2006).
FN56.
Wood,
953 A.2d at 141.
Turning now specifically to plaintiffs’
Caremark
claims, one can see a similarity between the standard for assessing
oversight liability and the standard for assessing a disinterested director’s decision under the duty of care when the
company has adopted an exculpatory provision pursuant to § 102(b)(7). In either case, a plaintiff can show that the