This final report stems from plaintiff-shareholder Oklahoma Firefighters Pension & Retirement System’s (“Oklahoma Firefighters” or “Plaintiff”) demand under 8 Del. C. §220 for access to defendant Citigroup Inc.’s (“Citigroup” or “Defendant”) books and records in connection with alleged fraud and money laundering at two Citigroup subsidiaries. Following a paper record trial in June 2014, the court concluded in its draft report that Plaintiff had a proper purpose in seeking access to the books and records, but the court narrowed the scope of Plaintiff’s initial request. At the present phase of the case, Citigroup objects to the conclusions reached in the draft report, arguing that the incidents at the subsidiaries do not give Plaintiff a credible basis from which to infer wrongdoing or mismanagement on the part of the Citigroup Board of Directors. Moreover, Citigroup contends that even if Plaintiff’s purpose were proper, the scope of the documents requested is still too broad.
The demand arises from incidents at Banco Nacional de Mexico, S.A. (“Banamex”) and Banamex USA, which together account for 10% of the global profits of Citigroup. At Banamex, a fraudulent accounts receivables finance arrangement was discovered, which caused Citigroup to adjust downward its 2013 fourth quarter and full year financials by $235 million. Investigations into the fraud indicated that Citigroup may not have had the proper internal controls in place to prevent fraud, and Moody’s subsequently downgraded Banamex’s debt and deposit ratings due to the allegations surrounding the bank. Another smaller fraud of $30 million was also uncovered at Banamex. At Banamex USA, grand jury subpoenas were issued by the United States District Attorney for the District of Massachusetts regarding compliance with Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) regulations. The grand jury subpoenas were issued subsequent to a number of consent orders between Citigroup and various financial regulatory agencies regarding insufficient BSA and AML controls, risk management, the flow of drug cartel-related funds, and general oversight. In response to the BSA and AML concerns, the Citigroup Board of Directors charged the Board’s Audit Committee with responsibility for legal compliance oversight.
The court noted that (i) a proper purpose for access to books and records is one that is “reasonably related to [the] person’s interest as a stockholder,” and (ii) the “credible basis” test is the “lowest possible burden of proof under Delaware law.” While the court agreed with Citigroup’s argument that the “mere fact” of a subsidiary’s wrongdoing is insufficient to infer mismanagement at the level of the parent company’s board of directors, the court pointed to the significance of the Banamex fraud to Citigroup’s financials, the public and ongoing investigations about lack of internal controls, and the ultimate compliance responsibility of the Citigroup Risk Management and Audit Committees. The court concluded that the Banamex and Banamex USA incidents were a credible basis for inferring mismanagement at Citigroup and are a proper purpose for inspection of books and records.
The court then discussed the appropriate scope of the request, which must be limited to those books and records “necessary and essential” to the stated purpose. In considering Citigroup’s request that the scope be reconsidered, the court agreed that the scope should be narrowed to certain categories of documents addressing just Banamex fraud and detection, rather than fraud and detection at Citigroup generally. Plaintiff was granted access to three categories of documents: (1) board and committee minutes and materials, (2) materials containing talking points or scripts or other summaries of remarks at board or committee meetings, and (3) policies and procedures. The documents must be limited in subject to the Banamex fraud, BSA and AML matters at Banamex USA, Banamex’s fraud and detection efforts, and Citigroup’s BSA and AML compliance.