Stay current on changes and developments in corporate law with a wide variety of resources and tools.
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.”
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.
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.”
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 firstname.lastname@example.org
To contact the editor responsible for this story: Ryan Tuck at email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)