United States District Court, S.D. New York
September 15, 2005.
GAIL D. FINK, Derivatively on Behalf of Nominal Defendant Citigroup, Inc., Plaintiff,
SANFORD I. WEILL, STANLEY FISCHER, ROBERT E. RUBIN, MICHAEL TERRY MASIN FRANKLIN A. THOMAS, JOHN M. DEUTSCH, GEORGE DAVID, ANN DIBBLE JORDAN, ARTHUR ZANKEL, DUDLEY C. MECUM, II, REUBEN MARK, ALAIN J.P. BELDA, KENNETH T. DERR, ROBERTO HERNANDEZ RAMIREZ, ALFREDO HARP HELU, ANDRALL E. PEARSON, C. MICHAEL ARMSTRONG RICHARD D. PARSONS, Defendants, and CITIGROUP, INC., Nominal Defendant.
The opinion of the court was delivered by: LAURA SWAIN, District Judge
OPINION AND ORDER
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
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.
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 position with the requisite factual particularity here; rather, the Complaint
asserts only generally that any liability insurance would not
cover derivative claims if the directors were to be sued. (Compl.
Plaintiff argues that Defendants' failure to prevent the
alleged unlawful and fraudulent transactions with Enron and other
companies was such a "gross abdication of their directorial
duties" that such inaction alone creates a reasonable doubt as to
Defendants' disinterestedness and independence. (Pltf Mem. of
Law, at 14-15.) With the exception of isolated and insufficient
allegations regarding Defendants Weill and Rubin, Plaintiff fails
entirely to proffer particularized allegations of any of the
Defendants' knowledge of or involvement in any of these
transactions. Plaintiff's allegations are entirely conclusory.
The only involvement of Defendants that Plaintiff cites with any
specificity is with regard to Defendant Weill, alleging that he
made affirmative statements as to the effectiveness of
Citigroup's risk management policies (Compl. ¶ 67) and that Jack
Grubman reported to Weill regarding the upgrade of AT&T stock
(Id. ¶ 144), and, with regard to Defendant Rubin, that Rubin
contacted Moody's Investors Service to maintain Enron's
investment grade credit rating. Those allegations are clearly
insufficient to create a reasonable doubt as to the
disinterestedness or independence of a majority of Citigroup's
board of directors.
Plaintiff has not alleged facts sufficient to support any
reasonable doubt as to the disinterestedness or independence of
the board of directors. Plaintiff's derivative claims must
therefore be dismissed for failure to satisfy the demand
Section 14(a) Claim
Plaintiff's securities law claim must be dismissed for the
further reason that, to the extent it can be construed as a direct, rather than derivative
claim, it fails to state a claim upon which relief may be
granted. In deciding a motion to dismiss a complaint for failure
to state a claim upon which relief may be granted, a court must
accept as true the material facts alleged by the plaintiff and
draw all reasonable inferences in the plaintiff's favor. Grandon
v. Merrill Lynch, 147 F.3d 184, 188 (2d Cir. 1998). The court
must not dismiss the complaint unless "`it appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief.'" Cohen v. Koenig,
25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley v. Gibson,
355 U.S. 41, 45-46 (1957)). However, "[a] complaint which consists of
conclusory allegations unsupported by factual assertions fails
even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears,
Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996) (internal
Section 14(a) of the Securities Exchange Act provides that
"[i]t shall be unlawful for any person . . . in contravention of
such rules and regulations as the [SEC] may prescribe . . . to
solicit . . . any proxy or consent or authorization in respect of
any security . . . registered pursuant to . . . this title."
15 U.S.C.A. § 78n(a) (West 1997). Rule 14a-9(a) promulgated
thereunder provides that:
No solicitation subject to this regulation shall be
made by means of any proxy statement . . . containing
any statement which, at the time and in the light of
the circumstances under which it is made, is false or
misleading with respect to any material fact, or
which omits to state any material fact necessary in
order to make the statements therein not false or
misleading. . . .
17 C.F.R. § 240.14a-9(a) (2005).
Plaintiff alleges that Defendants "participated in the issuance
of materially false and misleading written statements to
shareholders" which were contained in proxy statements that failed to disclose information regarding Citigroup's
transactions with Enron, Dynegy, Worldcom, Adelphia, and AT&T.
(Compl. ¶ 245.)
The Second Circuit has held "that no general cause of action
lies under § 14(a) to remedy a simple breach of fiduciary duty."
Koppel v. 4987 Corp., 167 F.3d 125, 133-34 (2d Cir. 1999);
accord Field v. Trump, 850 F.2d 938, 947 (2d Cir. 1988)
(quoting Maldonado v. Flynn, 597 F.2d 789, 796 (2d Cir. 1979))
(Section 14(a) cannot serve as "an avenue for access to the
federal courts in order to redress alleged mismanagement or
breach of fiduciary duty."). Plaintiff's section 14(a) claim
fails because the wrongs flowing from the allegedly false and
misleading disclosure are improper governance and injury
resulting from the undisclosed transactions, rather than from any
particular action taken by shareholders on the basis of the proxy
Moreover, Plaintiff does not specify the type of relief she
seeks as to her section 14(a) claim. To the extent she seeks
equitable relief, her claim is moot because, while the Amended
Complaint covers the period from 1999 to 2002, a new board of
directors was elected in April 2003, after Citigroup's dealings
with Enron and other companies had been disclosed.*fn8
Plaintiff argues that, had shareholders known of the Citigroup
transactions discussed in the Amended Complaint, the shareholders
would not have re-elected the Director-Defendants. (Pltf's Mem.
of Law in Opp'n to Mot. to Dismiss, at 8-9.) The post-disclosure
facts do not, however, provide any support for her
prognostication. Fourteen of the eighteen Director-Defendants were re-elected in April 2003.*fn9 (Defts' Mot. to Dismiss,
Ex. O). Because a new board has already been elected, and in the
absence of a viable claim for monetary damages or other operative
relief for financial losses caused by the challenged director
election, the only remedy the Court could provide in respect of
this claim would be declaratory relief. Where any potential
remedy is merely declaratory, a section 14(a) claim must be
dismissed unless such a declaration might prevent behavior that
could predictably be repeated again. Browning Debenture Holders'
Cmte. v. DASA Corp., 524 F.2d 811, 816-17 (2d Cir. 1975).
Plaintiff's section 14(a) claim, which is predicated on
non-disclosure of a particular set of relationships and
transactions, is therefore dismissed.
Motion for Leave to File a Third Amended Complaint
Subsequent to the briefing on the motion to dismiss the First
Amended Complaint, Plaintiff has twice requested leave to file
another amended complaint. Her proposed Third Amended Complaint
is now before the Court.*fn10 Federal Rule of Civil
Procedure 15 provides that leave to file "shall be freely given
when justice so requires." Fed.R.Civ.P. 15(a). Leave need not be granted, however, where the amendment would be
futile. Foman v. Davis, 371 U.S. 178, 182 (1962). Plaintiff's
proposed Third Amended Complaint adds further detail, drawn
largely from published third-party reports, concerning
Citigroup's alleged culpability in connection with the Enron and
other transactions cited in the Complaint, but makes no changes
that would cure the particularization and other defects
identified in the motion practice and discussed above. Nor is
Citigroup's settlement of certain Enron-related claims, an event
cited by Plaintiff in post-briefing correspondence, indicative
that opportunity to amend further would result in a pleading that
demonstrates with the requisite particularization of the futility
of a board demand or a pleading that states a viable section
14(a) claim. Accordingly, Plaintiff's motion for leave to file a
further Amended Complaint is denied.
For the foregoing reasons, Defendants' motion to dismiss the
First Amended Complaint for failure to comply with Federal Rule
of Civil Procedure 23.1 is granted. Plaintiff's section 14(a)
claim is also dismissed with prejudice pursuant to Rule 12(b)(6).
Plaintiff's motion for leave to file a further Amended Complaint
is denied. The Clerk of Court is hereby respectfully requested to
close this case.
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