The Second Circuit affirmed an order dismissing a shareholder derivative action brought against Citigroup Inc.'s Board of Directors. The 2013 lawsuit alleged that Citigroup's directors breached their duty of loyalty in two ways: (1) by permitting Citibank to engage in unlawful foreclosure and mortgage servicing practices through the implementation of inadequate internal controls; and (2) by failing to issue a supplemental proxy describing the terms of a consent order with the Office of the Comptroller of the Currency to resolve investigations into Citibank's mortgage servicing operations, into which Citibank entered after Citigroup had issued its 2011 proxy materials, but before its 2011 shareholders' meeting.
In a summary order issued just one week after oral argument, the Second Circuit found that demand on the board was not excused under Delaware law. As to the mortgage servicing claim, the Second Circuit found that Citigroup had in place the requisite internal controls and procedures to monitor Citibank's operations, and the plaintiff failed to allege sufficient "red flags" to support an inference that the board was aware of any wrongful conduct in Citibank's mortgage servicing operations. As to the proxy disclosure claim, the Second Circuit found that the district court had correctly concluded that the board was under no duty to disclose the OCC Consent Order before it was finalized. It also rejected the plaintiff's argument that the board had a duty to disclose the OCC Consent Order after it was finalized because it was public information before the shareholders' meeting.