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September 15, 2005.

GAIL D. FINK, Derivatively on Behalf of Nominal Defendant Citigroup, Inc., Plaintiff,

The opinion of the court was delivered by: LAURA SWAIN, District Judge


Gail D. Fink ("Fink" or "Plaintiff"), a Citigroup, Inc. ("Citigroup") shareholder, brings this derivative action on behalf of Citigroup against directors of Citigroup ("Defendants") alleging a violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), breach of fiduciary duty, gross mismanagement, and waste of corporate assets. Plaintiff alleges that the defendant Citigroup directors caused injury to Citigroup's stock, goodwill, and reputation by allowing the company to engage in a series of unlawful or fraudulent transactions with Enron Corporation ("Enron"), Dynegy Inc. ("Dynegy"), Adelphia Communications Corporation, ("Adelphia"), AT&T Corporation ("AT&T"), and Worldcom Inc. ("Worldcom"), all companies which ultimately experienced severe financial difficulties. The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331, 28 U.S.C. § 1332(a)(1), 28 U.S.C. § 1367, and 15 U.S.C. § 78a.

  Defendants move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the Complaint*fn1 for failure to state a claim. Plaintiff has moved for leave to file a Third Amended Complaint,*fn2 which Defendants oppose. The Court has considered thoroughly the arguments and submissions of the parties in connection with these motions. For the reasons that follow, Defendants' motion to dismiss the Complaint is granted, and Plaintiff's motion to file a Third Amended Complaint is denied. BACKGROUND

  The following summary of material facts takes as true Plaintiff's allegations and undisputed factual assertions, but does not in any way constitute factual findings by the Court. Plaintiff Gail D. Fink is a shareholder of Citigroup. (Compl. ¶ 20.) Nominal Defendant Citigroup, Inc. is a financial services institution that provides a range of banking and investment services to consumer and corporate customers through its various subsidiaries and divisions. (Id. ¶ 21.) Defendants, directors of Citigroup, are named as follows: Sanford I. Weill ("Weill"), Chairman of the Board and Chief Executive Officer; Robert E. Rubin ("Rubin"); Stanley Fischer ("Fischer"); Franklin A. Thomas ("Thomas"); Dudley C. Mecum II ("Mecum"); Arthur Zankel ("Zankel"); Reuben Mark ("Mark"); Kenneth T. Derr ("Derr"); Richard D. Parsons ("Parsons"); Michael Terry Masin ("Masin"); Ann Dibble Jordan ("Jordan"); Andrall E. Pearson ("Pearson"); John M. Deutch ("Deutch"); Alain J.P. Belda ("Belda"); C. Michael Armstrong ("Armstrong"); George David ("David"); Alfredo Harp Helu ("Helu"); and Roberto Hernandez Ramirez ("Ramirez"). (Id. ¶¶ 25-42.)

  Citigroup engaged in an extensive series of unlawful and fraudulent transactions, principally with Enron, and additionally with Dynegy, Adelphia, Worldcom, and AT&T.*fn3 Plaintiff alleges that, as a result of their positions as directors of Citigroup, Defendants knew or should have known about the risky and fraudulent nature of the transactions that ultimately damaged Citigroup financially and also caused injury to Citigroup's reputation and goodwill. In their capacity as directors, Defendants signed Citigroup's Form 10-K, filed with the Securities Exchange Commission during the relevant period,*fn4 and several of the Defendants also signed an accompanying Management Report submitted with the Form 10-K. (Id. ¶¶ 65, 216.) Some of the Defendants also served on committees within the Citigroup corporate structure, including the Audit Committee, the Public Affairs Committee, and the Executive Committee. (Id. ¶¶ 65, 70-80, 216.)

  Citigroup had in place an internal risk management system, which purported to involve committees of the board of directors. (Id. ¶ 61 (quoting Citigroup's 2001 Report on Form 10-K, filed March 12, 2002)); see also id. ¶ 65 (quoting Citigroup's 1998 Report on Form 10-K, filed March 8, 1999)). In July 2000, Defendant Weill discussed the success of the risk management policies, stating publicly, "`Our outstanding results for the quarter demonstrate the impact of our market share gains around the world, the consistent growth of our consumer businesses, the company's discipline in managing risk and our continued investment in our future.'" (Id. ¶ 67) (emphasis in Compl.). In October 2000, Weill further stated, "`Our continued management discipline, business diversification, and geographic reach enable us to deliver consistently strong results for our shareholders.'" (Id. ¶ 68) (emphasis in Compl.).

  The Complaint alleges that, on various occasions, certain Defendants were complicit in carrying out fraudulent transactions. For example, Defendant Weill allegedly encouraged Salomon Smith Barney stock analyst Jack Grubman to review and improve AT&T's stock rating in order to curry favor with Defendant Armstrong, the Chief Executive Officer of AT&T. (Id. ¶¶ 144-47.) Defendant Rubin allegedly pressured Moody's Investors Service to maintain Enron's investment grade credit rating so that Dynegy would be encouraged to complete its acquisition of Enron, thereby allowing Defendants to continue to hide their earlier fraudulent transactions with Enron. (Id. ¶ 179.) Plaintiff further alleges that the proxy statement used by Citigroup in connection with the annual elections of directors during the relevant period included false and misleading statements insofar as such proxy documents did not discuss Citigroup's risky transactions with Enron and other companies. (Id. ¶ 246.)

  Despite these concerns about the manner in which Citigroup was conducting its business, Plaintiff did not make a demand on the board of directors because, she alleges, any demand for corrective action would have been futile given the directors' self-interest and influence over each other. (Id. ¶ 216.) The Complaint details a number of alleged current and prior professional and social connections among certain of the Defendants, including that they had numerous business dealings with each other, sat on the boards of other corporations together, were business partners, and were acquainted in various social and political settings. (Id. ¶ 217.) The Complaint does not, however, explain how these connections would likely impede the board members' ability to assess independently a demand for corrective action herein.

  Plaintiff brings this derivative action on behalf of Citigroup, asserting that Defendants violated section 14(a) of the Securities Exchange Act with regard to the proxy statements for the annual elections of directors, and that Defendants breached their fiduciary duties, engaged in gross mismanagement, and wasted corporate assets. Defendants move to dismiss this action pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiff has failed to state a claim for relief under section 14(a) of the Securities Exchange Act, and that Plaintiff's derivative claims must fail because she neither made a demand on the board of directors nor established that such demand would be futile.


  Derivative and Demand Requirement Claims

  Plaintiff asserts claims against the Defendants on Citigroup's behalf, alleging that Defendants violated section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder, breached their fiduciary duties, engaged in waste of corporate assets, and committed gross mismanagement. It is a long held principle of corporate law that directors manage the business of the corporation. Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, (Del. 2000). Where a shareholder brings a derivative lawsuit on behalf of the corporation against the directors based on their actions or failure to act, there is a threshold question of standing as to whether the shareholder has exhausted intracorporate remedies, namely whether the shareholder has made a demand on the board of directors. Fed.R.Civ.P. 23.1; accord Del. Ch. Ct. R. 23.1. Federal Rule of Civil Procedure 23.1 provides that the "complaint shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and the reasons for the plaintiff's failure to obtain the action or for not making the effort. Id.; accord Del. Ch. Ct. R. 23.1. Because Rule 23.1 requires that Plaintiff make particularized allegations, it imposes a pleading standard higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6). In re Trump Hotels S'holder Derivative Litig., Nos. 96 Civ. 7820 DAB, 96 Civ. 8527 DAB, 2000 WL 1371317, at *6 (S.D.N.Y. Sept. 21, 2000).

  In the instant matter, Plaintiff Fink concedes that she did not make a demand on the Citigroup Director-Defendants. (Compl. ¶ 216.) Her standing to bring this lawsuit therefore turns on the question of demand futility.*fn5 Plaintiff essentially alleges that, throughout Citigroup's unlawful and fraudulent dealings with Enron and other companies, Defendants failed to take action to prevent such transactions. (Compl. ¶¶ 216, 222, 228, 233, 238.) Because Plaintiff accuses Defendants of failing to act, the Court applies the test for demand futility as set forth in Rales v. Blasband, 634 A.2d 927 (Del. 1993). See Seminaris v. Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995) (applying Rales where directors accused of failing to prevent misrepresentations). Under the Rales standard, Plaintiff must provide particularized allegations that "create 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, 634 A.2d at 934.*fn6 A director is considered to be interested where the director is positioned to receive a personal financial benefit from a transaction that would not be equally shared by the corporation or shareholders or where a transaction would be materially detrimental to the director but not to the corporation or shareholders. Id. at 936. Plaintiff does not allege anywhere in the Complaint that the Director-Defendants stood to receive a personal financial benefit from the Enron and other transactions or that they were in danger of being injured by such transactions. Instead, Plaintiff lists Defendants' business associations with each other, specifically stating that they are friends, and in some cases, business partners. (Compl. ¶ 217.) The Complaint does not, however, include any allegations as to how the connections would likely impede the board members' ability to assess independently a demand for corrective action as to the matters complained of here. Such generalized allegations of connections are not sufficient to create reasonable doubt that a majority of the board is disinterested. Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) ("Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director's independence.") Moreover, as the Rales court stated, "[t]o establish a lack of independence, [Plaintiff] must show that the directors are `beholden' to [the other stockholders] or so under their influence that their discretion would be sterilized." Rales, 634 A.2d at 936. Other than a conclusory assertion that defendant Weill "exercised substantial influence over the other Individual Defendants,"*fn7 the Complaint is devoid of such allegations. The conclusory allegation as to Weill's influence is plainly insufficient to meet the particularization requirement of Rule 23.1 and Rales' requirement that the facts pled be sufficient to create reasonable doubt as to whether the board was disinterested at the time the litigation was initiated.

  Plaintiff further argues that demand should be excused because making a demand on the board would require the directors to sue themselves. (Compl. ¶ 219.) Simply naming directors as defendants, however, is not a sufficient basis on which to claim demand futility. Scopas Tech. Co. v. Lord, No. 7559, 1984 WL 8266, at *4 (Del. Ch. Nov. 20, 1984). In addition, the mere threat of personal liability does not create a reasonable doubt as to the director's disinterestedness or independence. Aronson, 473 A.2d at 815; see also In re Baxter Int'l, Inc. S'holders Litig., 654 A.2d 1268, 1270 (Del. Ch. 1995) (court could not conclude that there was substantial likelihood of liability which would disable board from considering demand fairly unless claim was pled with sufficient particularity). Plaintiff does not plead her ...

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