Master Recommends Citigroup Hand Over Records Related to Possible Fraud in Mexico

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By Michael Greene

Oct. 2 — A Master in Chancery's Sept. 30 report recommends that the Delaware Chancery Court order Citigroup, Inc. to permit inspection of books and records related to possible mismanagement by the company's board involving recent investigations of fraud and money laundering at the company's subsidiaries in Mexico (Okla. Firefighters Pension & Ret. Sys. v. Citigroup Inc.).

Master in Chancery Abigail M. LeGrow found that plaintiff stockholder put forward sufficient evidence “to infer possible mismanagement or wrongdoing by Citigroup's Board or senior management.”

Books and Records Demand

In March, an Oklahoma retirement system stockholder made a books and records demand on Citigroup under 8 Del. C. §220 for the purpose of investigating possible mismanagement or wrongdoing by the company's board.

The demand sought books and records related to recently disclosed events involving two of Citigroup's wholly owned subsidiaries: (1) the discovery of fraud at Banco Nacional de Mexico, S.A. (“Banamex”) and (2) a money-laundering investigation involving Banamex USA.

On June 27, LeGrow issued a draft report recommending the court find that the plaintiff had stated a proper purpose, but also recommending that the court order a more narrow inspection than the plaintiff demanded.

Citigroup subsequently filed an exception to LeGrow's recommendations. In its exceptions, the company argued that LeGrow had improperly concluded that the plaintiff had established a proper purpose for the inspection and that the recommended order included inspection of books and records that went beyond the stated purpose.

Credible Basis

Citigroup described the fraud at Banamex as a “discrete, unfortunate event” and asserted that there is “no nexus linking the Citigroup Board or senior management to any alleged wrongdoing.”

In her final report, however, LeGrow rejected this description and found that “[t]he scope of the fraud at the subsidiary, the significance of the subsidiary to the parent company's profits, the public reports indicating that investigations uncovered deficiencies in internal controls, and the fact that one of the parent company's senior executives oversees the subsidiary and the parent company's board and its committees are responsible for overseeing the controls in question” provided some evidence from which the court could infer possible mismanagement by Citigroup's board.

Citing the low burden of proof to compel production under §220, the final report noted that the plaintiff did not need specific, concrete evidence of wrongdoing or mismanagement by the board. Instead, the plaintiff only needed “‘some evidence' of a credible basis to infer possible mismanagement or misconduct by Citigroup's Board or senior management.”

The Master final report added “[o]f course, that showing falls well short of ‘demonstrating that anything wrong occurred,' but it is sufficient to permit Plaintiff to inspect targeted books and records.”

Revised Scope

Citigroup also argued there was insufficient evidence to establish a nexus between the company's board and the money laundering investigation involving Banamex USA.

Acknowledging that the Banamex USA money laundering compliance evidence was a much “closer case,” the final report concluded that findings by certain regulators, the fact that Citigroup had agreed to three consent orders “to improve compliance and controls in that area” and that prosecutors had issued subpoenas to examine whether Banamex USA lacked proper controls, “taken as whole,” state a credible basis for the limited inspection recommended in the draft report

In the final report, however, LeGrow did revise her recommendation on the scope of review, to provide a more narrow inspection of the books and records. LeGrow recommended limiting the topic covering “Citigroup's fraud detection and prevention” to books and records related to “Banamex's fraud and detection and prevention.”

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Ryan Tuck at

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