In Re: Citigroup Inc. Shareholder Derivative Litigation, No. 1:2007cv09841 - Document 57 (S.D.N.Y. 2009)
Court Description: OPINION AND ORDER:#97963 Because the complaint does not adequately plead that plaintiffs are excused from the pre-suit demand requirement, defendants' motion is granted and the complaint is dismissed. Any motion to amend the complaint must be made by September 14, 2009. (Signed by Judge Sidney H. Stein on 8/25/2009) Filed In Associated Cases: 1:07-cv-09841-SHS, 1:07-cv-09900-SHS, 1:07-cv-10333-SHS, 1:07-cv-10344-SHS, 1:07-cv-11581-SHS(jfe) Modified on 8/28/2009 (eef).
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4 DOCUMENT ELEC~RONICALLYFILED UNlTED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ........................................ -----X 0l25I09 9 07 Civ. 9841 IN RE CITIGROUP INC. SHAREHOLDER DERIVATIVE LITIGATION ................................................................. OPINION & ORDER X SIDNEY H. STEIN, U.S. District Judge. This is a consolidated shareholder derivative action brought by shareholders of Citigroup, Inc., a Delaware corporation, against a number of Citigroup's current and former officers and directors. Plaintiffs brought this action without first making a demand on Citigroup's board to bring suit as required by Delaware law. Defendants have moved to dismiss the consolidated complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1. Defendants contend that (1) the complaint does not adequately allege that plaintiffs are excused from the pre-suit demand requirement and (2) the complaint fails to state a claim upon which relief may be granted. Because the complaint fails to allege with specificity facts showing that plaintiffs are excused from the pre-suit demand requirement, defendants' motion to dismiss is granted. I. BACKGROUND Unless otherwise noted, the following facts are drawn from the complaint and are, at this stage of the proceedings, presumed to be true. A. The Parties Plaintiffs are shareholders of Citigroup, Inc., a global financial services company incorporated in Delaware and headquartered in New York. (Compl. fl8-10.) After five shareholder derivative actions were filed on behalf of Citigroup in this Court, the actions were consolidated, and lead plaintiffs, lead counsel, and liaison counsel were appointed. (Order, Aug. 22,2008.) A consolidated complaint was filed on November 10,2008.' Defendants are current and former officers and directors of Citigroup, including Charles 0. Prince, Citigroup's former CEO and Board Chairman (Compl. 7 12); current and former members of Citigroup's board of directors (id. 71 13-26); and current and former officers of Citigroup and Citigroup subsidiaries (id. 11 27-35). B. Citigroup's Losses from Mortgage-Related Holdings The impetus of this action is the billions of dollars that Citigroup has lost from its investments in mortgages and mortgage-related securities. Plaintiffs allege that, in the mid-2000s, Citigroup invested heavily in assets tied to real estate mortgages, especially so-called "subprime" mortgages that carried a greater risk of default. (Id. 11 44-47.) When the housing market collapsed in 2006 and 2007, plaintiffs allege that Citigroup was forced to take billion-dollar write-downs on its mortgage-related holdings, and as a result, Citigroup's stock price precipitously declined. (Id. 71 82-83.) C. This Action Plaintiffs bring this action on behalf of Citigroup alleging five types of wrongdoing in connection with Citigroup's mortgage-related losses. First, plaintiffs allege that defendants breached their fiduciary duties of care and loyalty by allowing ' Unless otherwise noted, all references to the "complaint" in this Opinion are references to the "Verified Consolidated Derivative Action Complaint7'dated November 10, 2008. Citigroup to make risky mortgage-related investments when defendants knew, or should have known, that the investments could lead to significant losses. (See id. 7 53-66.) Plaintiffs claim that defendants ignored "red flags" that should have alerted them to the impending downturn in the housing market and, therefore, to Citigroup's potential losses. (Id. 77 49-52.) Second, plaintiffs allege that defendants breached their fiduciary duty of disclosure by failing to inform shareholders of Citigroup's "subprime exposure." (Id. 77 67-83.) According to plaintiffs, various statements made by Citigroup and individual defendants were misleading because the statements never "discussed or disclosed" the "extent of Citi's massive subprime risk and impending collapse." (Id. 7 68.) Third, plaintiffs allege that defendants breached their fiduciary duties of care and loyalty and wasted corporate assets by causing Citigroup to repurchase a substantial amount of its own stock in 2007. (Id. 77 96-99.) Defendants knew or should have known, plaintiffs claim, that the price at which Citigroup repurchased its shares was "artificially inflated." (Id. 7 96.) Fourth, plaintiffs allege that defendants committed securities fraud. Although plaintiffs' claim is far from precise, plaintiffs appear to assert that defendants committed securities fraud by making or authorizing misleading statements that omitted the extent of Citigroup's investment in subprime mortgages. (Id. 17 123-38.) Plaintiffs bring that claim on behalf of Citigroup, and not on behalf of themselves or other investors, on the ground that Citigroup suffered losses from the alleged fraud when defendants caused Citigroup to repurchase its own stock in 2007. (Id.) Fifth, plaintiffs claim that some defendants committed insider trading by selling Citigroup stock while in the possession of material, non-public information. (Id. 77 8487.)* D. The Delaware Action On November 9,2007, three days after this action was filed, a group of shareholders brought a derivative action on behalf of Citigroup in the Delaware Court of Chancery asserting claims similar to those alleged here. See In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 114-15 (Del. Ch. 2009) (Chandler, c . ) . ~ Like the complaint in this action, the complaint in the Delaware Citigroup action alleged that current and former officers and directors of Citigroup breached their fiduciary duties by "(1) failing to adequately oversee and manage Citigroup's exposure to the problems in the subprime mortgage market, even in the face of alleged 'red flags' and (2) failing to ensure that the Company's financial reporting and other disclosures were thorough and accurate." Id. at 114. The Delaware Citigroup complaint also alleged, similar to the complaint here, that the directors and officers wasted corporate assets by "authorizing and not suspending the Company's share repurchase program in the first quarter of 2007, which allegedly resulted in the Company buying its own shares at 'artificially inflated prices. "' Id. at 115. 2 The complaint asserts those claims by means of six counts. Count I alleges violations of Section 10(b) of the Exchange Act, 15 U.S.C. 5 78j(b), and Rule 10b-5, 17 C.F.R. 3 240.10b-5. (Id. 129-38.) Count I1 alleges a breach of the fiduciary duties of care and loyalty. (Id. 77 139-44.) Count I11 alleges a breach of fiduciary duty for insider trading. (Id. d.7 145-49.) Count IV alleges a breach of the fiduciary duty of disclosure. (Id. 77 150-54.) Count V alleges waste of corporate assets. (Id. 77 155-57.) Count VI alleges unjust enrichment. (Id. 77 158-60.) 3 That action will be referred to as the "Delaware Citigroup" action. The Delaware Citigroup complaint was not, however, identical to the complaint in this action. The Delaware Citigroup complaint asserted three additional claims of waste that are not asserted here, including a claim that the board wasted corporate assets by "approving a multi-million dollar payment and benefit package for defendant Prince upon his retirement as Citigroup's CEO in November 2007." Id. Furthermore, the Delaware Citigroup complaint did not allege securities fraud, though securities fraud is alleged here. On February 24, 2009, Chancellor Chandler dismissed each of the claims in the Delaware Citigroup complaint except the claim of waste involving Prince's retirement package. Id. at 139-140. Chancellor Chandler found that dismissal was warranted because the complaint had inadequately alleged that plaintiffs were excused from the presuit demand requirement. Id. With respect to the claim of waste for Prince's retirement package, Chancellor Chandler explained that he had too little information regarding the circumstances of the deal to find that demand was not excused. Id. at 138. Although defendants have not asserted claim or issue preclusion in connection with the Delaware Citigroup action, Chancellor Chandler's opinion nevertheless provides particularly instructive guidance. To the extent that Delaware law controls in this action, Chancellor Chandler's opinion presents a Delaware court's application of Delaware law to claims and defenses substantially similar to those raised here. It is "well-established" that "the controlling interpretation of state laws should normally be given by state rather than federal courts." Yoon v. Fordham Unzv. Faculty h Admin. Ret. Plan, 263 F.3d 196, 203 (2d Cir. 2001) (collecting cases). 11. DISCUSSION A asserting a derivative action on behalf of a Delaware corporation must allege with particularity either (I) that the plaintiff has demanded that the board bring suit and the board has wrongfully refused or (2) that the plaintiff is excused fiom making a pre-suit demand because "the directors are incapable of making an impartial decision regarding whether to institute such litigation." Stone ex rel. AmSouth Bancorp. v. Ritter, 91 1 A.2d 362, 366-67 (Del. 2006).~Here, plaintiffs have alleged that demand is excused. (Compl. 103.) A complaint must allege that demand is excused by means of "particularized factual statements." Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000); see also Fed. R. Civ. P. 23.1 .5 Thus, the complaint "must comply with stringent requirements of factual particularity" that "differ substantially" from the requirements of notice pleading. Brehm, 746 A.2d at 254. "Plaintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences." Id. at 255. Delaware courts have established two tests for deciding whether demand is excused. Where the complaint either "does not address an action taken by the board" or "alleges that the board failed to act," In re infoUSA, Inc. S 'holders Lit@, 953 A.2d 963, Issues involving pre-suit demand are analyzed under the law of the state of incorporation-here, Delaware. Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004) (citing Kamen v. Kemper Fin. Sews., 500 U.S. 90, 108-09 (1991)). 5 "[Wlhen one or more shareholders or members of a corporation . . . bring a derivative action to enforce a right that the corporation . . . may properly assert but has failed to enforce[,] . . . [tlhe complaint must be verified and must . . . state with particularity . . . (A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort." Fed. R. Civ. P. 23.1 (emphasis added). 986 Ch. 2007), the must set forth particularized allegations creating a reasonable doubt that, "as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand," Rales v. Blasband, 634 A.2d 927,934 (Del. 1993). where the complaint challenges a specific transaction approved by the board, a complaint can show that demand is excused by creating a reasonable doubt that either (1) "the directors are disinterested and independent" or (2) "the challenged transaction was . . . the product of business judgment." Aronson v. Lewis, 473 A.2d 805,814 (Del. 1984); see also Brehm, 746 A.2d at 253. The complaint here focuses almost entirely on creating a reasonable doubt that the directors were "disinterested and independent" (see Compl. 71 103-28), which is the only way to show that demand is excused under Rales, 634 A.2d at 934, and one of two ways to do so under Aronson, 473 A.2d at 814. The complaint makes only one attempt to show that demand is excused under the second prong of Aronson, as the only specific, boardapproved transaction the complaint challenges is the directors' authorization of a stock 1 repurchase program.6 (Compl. 1 123-28.) In assessing whether the complaint shows that the directors are disinterested and independent, the inquiry focuses on "the circumstances existing at the commencement of [the] suit-" Aronson, 473 A.2d at 810; see also In re infoUSA, 953 A.2d at 985 ("[DIemand is made against the board of directors at the time of filing of the complaint."). Here, therefore, the question is whether the Citigroup board as it existed in 6 Plaintiffs argue that "all counts" of the complaint should be analyzed under Aronson (Pls.' Mem. in Opp. 12), but they do not identify any board-approved transactions-other than the stock repurchase programthat they challenge under Aronson's second prong.
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