Following a spate of regulatory investigations and settlements, a shareholder derivative action was filed against Citigroup’s directors and officers, claiming that they had failed to meet their obligation to “oversee company employees’ compliance with law” under the landmark In re Caremark International Inc. Derivative Litigation decision. At first blush, the case deals with issues very similar to those considered in a separate shareholder derivative suit against Wells Fargo & Company, in which a federal district court in May and October 2017 denied motions to dismiss and permitted discovery to proceed – the subject of a separate blog post. However, in the Citigroup case (Oklahoma Firefighters Pension & Retirement System v. Corbat et al.), the Delaware Chancery Court granted the defendants’ motion to dismiss and then denied a plaintiff motion to reopen the case. It is instructive to consider the Chancery Court’s analysis in the Citigroup case and to contrast the allegations there with the issues in the Wells Fargo case.

In the Citigroup case, the defendants moved to dismiss the complaint. On the threshold issue of pre-suit demand to the company, the plaintiffs argued futility because of the high risk of Caremark liability and the consequent lack of disinterest. The defendants argued that demand was not excused because plaintiffs had failed to allege with sufficient particularity facts demonstrating a likelihood of personal liability for board oversight failures. Vice Chancellor Glasscock held that claims of wide-ranging bank misconduct in the complaint – violations of anti-money laundering rules, fraud in a Mexican subsidiary, foreign exchange manipulation and deceptive credit card practices – did not allege the necessary scienter to state a Caremark claim, and thus pre-suit demand was not excused.

Vice Chancellor Glasscock characterized Caremark claims as “among the most difficult to prove in our corporate law” and wrote that directors may be personally liable only if they “have failed to put in place any system whereby they may be made aware of and oversee corporate compliance with law” or “where the board has an oversight system in place, but nonetheless fails to act to promote compliance, . . . but only where their failure to act represents a non-exculpated breach of duty.” Caremark requires “actual scienter” not just inaction, which means that a complaint must adequately allege bad faith on the part of directors, not just that, “despite [] red flags, [they] failed to take actions that may have avoided loss to the company.” Bad faith “may be inferred where the directors knew or should have known that illegal conduct was taking place, yet ‘took no steps in a good faith effort to prevent or remedy that situation.’” (Quoting Caremark; emphasis in original). In Stone v. Ritter, the Delaware Supreme Court had recognized that “directors’ good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both.’”

The different results in the Citigroup and Wells Fargo cases seem to turn on two key distinctions in the facts and claims. First, the claims of misconduct at Wells Fargo related chiefly to one type of activity – the systemic unauthorized opening of accounts arising from overly aggressive cross-selling – which gave rise to a series of similar red flags over an extended period of time. The court held that plaintiffs had adequately alleged that allegations had been brought to Well Fargo's Chairman by 2011 and the other board members by 2013, and that these allegations should have prompted more forceful action by the bank’s directors and senior officers. In contrast, the claims of misconduct at Citigroup related to disparate and largely unrelated activities which did not give rise to any, or at least any clear, red flags, much less over an extended period of time.

Second, and related to the first distinction, the degree of board involvement in the underlying conduct was different. At Wells Fargo, cross-selling products and opening a large number of accounts was a core business strategy for the entire company that the board had considered and approved. At Citigroup, the activities underlying the shareholder derivative claims were not insignificant business activities, but they could not be considered core businesses or a critical strategy for the company as a whole, and thus did not have the same depth of board involvement as product cross-selling at Wells Fargo.

Each of these differences related, ultimately, to what kind of banks were involved. Wells Fargo had a narrower business model, which made aggressive cross-selling and account-opening a high-priority activity. By comparison, Citigroup had a large and wide global footprint, such that any one activity was unlikely to be seen as a key priority and be the focus of board consideration. The decisions in these cases support the logical conclusion that Boards will be expected to pay more attention, and respond more quickly, to arguable “red flags” that arise in a company’s core business.

Following dismissal of the Citigroup complaint in December 2017, the plaintiffs asked the Chancery Court in January to reopen the derivative litigation, citing a January 4 announcement by the Office of the Comptroller of the Currency (“OCC”) of a $70 million fine against Citigroup for failure to comply with a 2012 OCC order that required corrective action to address the anti-money laundering violations that were the basis, in part, for the shareholders’ derivative lawsuit. The plaintiffs also appealed to the Delaware Supreme Court, which on January 26, remanded the case to the Chancery Court for consideration of reopening “in the interest of justice and judicial efficiency.” On March 12, the Chancery Court declined to reopen the judgment, ruling that the OCC consent order did not alter the court's conclusion that demand is not futile as to the anti-money laundering allegations because the consent order "does not give rise to a reasonable inference of intentional dereliction of duties."