Harris v. Prince et al

Filing 75

OPINION & ORDER, #100329 that defendants' motion to dismiss the First Amended Consolidated Derivative Action complaint is granted and the amended complaint is dismissed with prejudice. SO ORDERED. (Signed by Judge Sidney H. Stein on 5/17/2011) 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 (lnl) Modified on 5/17/2011 (ajc).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE CITIGROUP INC. SHAREHOLDER
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DERIVATIVE LITIGATION
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This document relates to all actions.
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07 Civ. 9841 (SHS)
OPINION & ORDER

SIDNEY H. STEIN, U.S. District Judge.
Plaintiffs, shareholders of Citigroup, Inc., allege in this consolidated derivative action
that defendants – current and former Citigroup officers and directors – are liable for wrongdoing
in connection with the company’s issuance of, and investments in, mortgage-backed assets. This
Court dismissed the prior complaint in this matter on the ground that it failed to demonstrate that
plaintiffs were excused from their obligation to make a demand on Citigroup’s board of directors
prior to bringing this suit. Plaintiffs have submitted an amended complaint that defendants
maintain suffers from the same defect. Defendants have now moved pursuant to Federal Rules
of Civil Procedure 12(b)(6) and 23.1 to dismiss the complaint on that basis. Because plaintiffs’
allegations do not give rise to a reasonable doubt that a majority of the Citigroup board – as it
existed in September 2009 when the amended complaint was filed – would not objectively assess
a demand, the Court grants defendants’ motion.
I. BACKGROUND
A. The Consolidated Complaint
Citigroup announced on November 4, 2007 an $8 to $11 billion write-down on mortgagebacked assets. (First Am. Consolidated Derivative Action Compl. (“Am. Compl.”) ¶ 139.) That
prompted a flurry of litigation, including this consolidated shareholder derivative action brought
on behalf of Citigroup. Plaintiffs’ initial consolidated complaint alleged that various Citigroup

officers and directors harmed the company by breaching their fiduciary duties of care and loyalty
by allowing Citigroup to invest in risky mortgage-backed assets; breaching their fiduciary duty
of disclosure by concealing Citigroup’s exposure to these assets; wasting corporate assets on the
repurchase of Citigroup stock at inflated prices in 2007; committing securities fraud via
misleading statements regarding Citigroup’s mortgage-backed assets; engaging in insider
trading; and unjustly enriching themselves. (Verified Consolidated Derivative Action Compl.
(“Cons. Compl.”) ¶¶ 129-60.)
It is uncontested that plaintiffs did not demand of Citigroup’s board of directors that
Citigroup itself pursue these claims against defendants before plaintiffs filed this action. As a
result, plaintiffs are required to show that “demand [upon the board of directors] is excused
because the directors [were] incapable of making an impartial decision regarding whether to
institute such litigation.”1 Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 367 (Del.
2006). This Court granted defendants’ motion to dismiss the consolidated complaint because
plaintiffs failed to plead particularized facts demonstrating that the board “as it existed in
November 2007 was incapable . . . of objectively evaluating a demand.” In re Citigroup Inc.
S’holder Derivative Litig. (Citigroup Derivative), No. 07 Civ. 9841, 2009 WL 2610746, at *4
(S.D.N.Y. Aug. 25, 2009) (internal quotation marks and footnote omitted). In that opinion – the
reader’s knowledge of which is presumed – the Court permitted plaintiffs to seek leave to file an
amended complaint. Id. at *13.

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Because Citigroup is a Delaware corporation, that state’s law controls this issue. In re Citigroup Inc.
S’holder Derivative Litig., No. 07 Civ. 9841, 2009 WL 2610746, at *3 n.4 (S.D.N.Y. Aug. 25, 2009); see Scalisi v.
Fund Asset Mgmt., L.P. 380 F.3d 133, 138 (2d Cir. 2004) (“The substantive law which determines whether demand
is, in fact, futile is provided by the state of incorporation of the entity on whose behalf the plaintiff is seeking
relief.”).

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B. The Amended Complaint
Three weeks after the Court’s opinion was issued, plaintiffs moved for leave to file an
amended complaint and submitted a proposed First Amended Consolidated Derivative Action
Complaint (“Amended Complaint”). The Court granted that motion.
The Amended Complaint repeats essentially the whole of its predecessor pleading, with
two main additions. Drawing heavily from the complaint filed in In re Citigroup Bondholders
Litigation, No. 08 Civ. 9522 – a document specifically incorporated by reference into the
Amended Complaint, (Am. Compl. ¶ 265) – plaintiffs now allege that defendants were
responsible for misleading statements and omissions in certain Citigroup registration statements.
(Id. ¶ 1, see id. ¶¶ 78-92, 108-35, 141-72.) These allegations form the basis of claims arising
under Section 11 of the Securities Act of 1933.2 (Id. ¶¶ 300-08.) Plaintiffs also claim that the
board of directors wasted corporate assets in the retirement package the board gave Charles
Prince, Citigroup’s departing CEO, on November 4, 2007. (Id. ¶¶ 223-28, 294-95.)
II. DISCUSSION
In resolving a motion to dismiss pursuant to Rule 12(b)(6), a court considers the
complaint as well as “any written instrument attached to the complaint, statements or documents
incorporated into the complaint by reference, legally required public disclosure documents filed
with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in
bringing the suit.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). A
court accepts the truth of the facts alleged in the complaint and draws all reasonable inferences in
the plaintiff’s favor. Id. But that acceptance need not extend to allegations “contradicted by
documents deemed to be part of the complaint, or materials amenable to judicial notice.” In re

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They also form the basis of claims arising under Section 12 of the Securities Act, (Am. Compl. ¶¶ 309-17);
however, plaintiffs have specifically withdrawn those claims, (see Pls.’ Opp. to Mot. to Dismiss at 2 n.2).

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Yukos Oil Co. Sec. Litig., No. 04 Civ. 5243, 2006 WL 3026024, at *12 (S.D.N.Y. Oct. 25, 2006);
see Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1095 (2d Cir. 1995).
A. Plaintiffs must plead demand futility as to the September 2009 Citigroup board
Demand futility is assessed with the respect to the board of directors extant “as of the
time the complaint was filed.” Braddock v. Zimmerman, 906 A.2d 776, 785 (Del. 2006). For the
initial consolidated complaint, that meant evaluating demand as against the November 2007
Citigroup board. Citigroup Derivative, 2009 WL 2610746 at *4 & n.7. But where, as here, “a
complaint is amended with permission following a dismissal without prejudice . . . the [] demand
inquiry must be assessed by reference to the board in place at the time when the amended
complaint is filed.” Braddock, 906 A.2d at 786 (emphasis added). The Court therefore evaluates
whether a demand on the board would be futile with respect to the Citigroup board of directors
as it existed in September 2009, when plaintiffs submitted the Amended Complaint as part of
their motion for leave to amend the initial consolidated complaint.
Plaintiffs agree that the subject of the demand inquiry is the September 2009 board.
(Pls.’ Opp. to Mot. to Dismiss (“Pls.’ Opp.”) at 10.) Yet plaintiffs do not correctly identify the
members of that board, an easily verifiable fact. Defendants repeatedly point this out. (See
Defs.’ Mem. in Supp. of Mot. to Dismiss at 4 n.7; Exs. 2, 3 to Decl. of Richard Rosen (“Rosen
Decl.”) dated Nov. 22, 2010; Defs.’ Reply in Supp. of Mot. to Dismiss at 2-3.)
Citigroup’s filings with the Securities and Exchange Commission reveal multiple changes
in board membership between November 2007 and September 2009. By September 2009, the
board had seventeen directors.3 Nine of them had joined since November 2007.4 And five who

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Citigroup’s 2009 and 2010 proxy statements, as well as a July 2009 Form 8-K, establish that the seventeen
members of the board in September 2009 were C. Michael Armstrong, Alain J.P. Belda, Timothy C. Collins, John
M. Deutch, Jerry A. Grundhofer, Robert L. Joss, Andrew N. Liveris, Anne M. Mulcahy, Michael E. O’Neill, Vikram
S. Pandit, Richard D. Parsons, Lawrence R. Ricciardi, Judith Rodin, Robert L. Ryan, Anthony M. Santomero, Diana

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were directors in November 2007 – George David, Kenneth T. Derr, Roberto Hernandez
Ramirez, Robert E. Rubin and Franklin A. Thomas – had left the board by September 2009.5
The Court takes judicial notice of the specifics of this evolution in the membership of
Citigroup’s board as set forth in Citigroup’s SEC filings. See, e.g., Sears v. Magnolia Plumbing,
Inc., --- F. Supp. 2d ----, No. 10 Civ. 02313, 2011 WL 1518631, at *2 & n.6 (D.D.C. Apr. 21,
2011) (relying on regulatory filings to take judicial notice of composition of board of directors);
In re Computer Sciences Corp. Derivative Litig., 244 F.R.D. 580, 587 n.8 (C.D. Cal. 2007)
(same); see also Fink v. Weill, No. 02 Civ. 10250, 2005 WL 2298224, at *5 n.9 (S.D.N.Y. Sept.
19, 2005) (“Because the composition of Citigroup’s board of directors is public information not
subject to reasonable dispute, the Court takes judicial notice of the individuals elected to the
2003 board of directors.”).
Plaintiffs do not directly respond to defendants’ repeated emphasis on both the board
turnover that occurred between November 2007 and September 2009 and the actual composition
of the September 2009 board. They only shift their position on the size and membership of the
board. The Amended Complaint submitted in September 2009 specifically names fourteen
individuals as the members of the “current Board of Citigroup.” (Am. Compl. ¶ 233). In their
memorandum opposing dismissal, plaintiffs do not claim that the Amended Complaint correctly
L. Taylor, and William S. Thompson, Jr. See Citigroup Inc. Schedule 14A Proxy Statement dated Mar. 20, 2009
(“2009 Proxy”), at 20-26 (attached as Ex. 2 to Rosen Decl.), available at http://www.sec.gov/Archives/edgar/data/
831001/000095012309005032/y74865ddef14a.htm; Citigroup Inc. Form 8-K dated July 24, 2009 (“2009 8-K”)
(attached as Ex. 3 to Rosen Decl.), available at http://www.sec.gov/Archives/edgar/data/831001/
000114420409039400/v155773_8k.htm; Citigroup Inc. Schedule 14A Proxy Statement dated Mar. 12, 2010 (“2010
Proxy”), at 20-36; available at http://www.sec.gov/Archives/edgar/data/831001/000119312510055351/ddef14a.htm.
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Pandit joined the board in December 2007. See Citigroup Inc. Form 8-K dated Dec. 11, 2007, available at
http://www.sec.gov/Archives/edgar/data/831001/000114420407066977/v096976_8k.htm. Ricciardi was named to
the board in July 2008. See Citigroup Inc. Form 8-K dated July 25, 2008, available at http://www.sec.gov/Archives/
edgar/data/831001/000114420408041910/v120353_8k.htm. Grundhofer, O’Neill, Santomero, and Thompson were
elected to the board at the April 21, 2009 annual meeting. See 2009 Proxy at 16. And Collins, Joss, and Taylor
were named to the board in July 2009. See 2009 8-K; 2010 Proxy at 20.
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David departed in April 2008. See Citigroup Inc. Schedule 14A Proxy Statement dated Mar. 13, 2008 at 18
(attached as Ex. 1 to the Decl. of Richard Rosen dated Dec. 22, 2008, Dkt. No. 38). Derr, Hernandez Ramirez,
Rubin, and Thomas retired from the board in April 2009. See 2009 Proxy at 20.

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identifies the September 2009 board.6 Instead, they assert (incorrectly and without any citation)
that the Citigroup board contained thirteen members, five of whom are not even named. (Pls.’
Opp. at 10.) The Court does not credit plaintiffs’ inconsistent and incorrect assertions. See
Hirsch, 72 F.3d at 1095.
As set forth above, to avoid dismissal of the Amended Complaint, plaintiffs must show
that it would have been futile to have made a demand of the seventeen member board of
directors that existed in September 2009, when plaintiffs sought leave to amend their complaint
and submitted the Amended Complaint.
B. Plaintiffs have not adequately pled demand futility as to the September 2009
Citigroup board
In this case the governing standard for demand futility is that set forth by the Supreme
Court of Delaware in Rales v. Blasband, which requires plaintiffs to plead “particularized factual
allegations” that “create a reasonable doubt that . . . the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a demand.” 634
A.2d 927, 934 (Del. 1993). Rales applies, inter alia, “(1) where a business decision was made by
the board of a company, but a majority of the directors making the decision have been replaced;
[or] (2) where the subject of the derivative suit is not a business decision of the board.” Id. Most
of plaintiffs’ claims fall into the second category; the fiduciary duty, securities law, unjust
enrichment and insider trading counts do not concern specific business decisions of the Citigroup
board. See Citigroup Derivative, 2009 WL 2610746 at *4, *12. The remaining corporate waste

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They would be hard pressed to do so. Despite the several changes in the Citigroup board between
November 2007 and September 2009, the board membership alleged in the Amended Complaint is identical to that
alleged in the initial consolidated complaint. (See Am. Compl. ¶ 233; Cons. Compl. ¶ 103.) In fact, in seeking leave
to amend on September 18, 2009, plaintiffs argued the Amended Complaint demonstrated that “there is a reasonable
doubt that, as of November 4, 2007, the Board would not have exercised an independent interest in prosecuting
claims based on actions in which they were directly involved.” (Pls. Mem. in Supp. of Mot. to File Am.
Consolidated Compl. at 7 (emphasis added).) It is, of course, the September 2009 board, not the November 2007
board, that is relevant for purposes of evaluating whether seeking a demand on the board would have been futile.

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claims fall into the first Rales category. Though they concern specific board actions, namely the
approval of the repurchase of Citigroup stock in January and April 2007, (Am. Compl. ¶¶ 21921), and the retirement package granted departing CEO Prince on November 4, 2007, (id. ¶ 223),
the September 2009 Citigroup had a nine member majority that had joined the board since those
approvals.
To satisfy the Rales test, the complaint must contain particularized allegations that “give
rise to a reasonable doubt that a majority of the board can exercise ‘its independent and
disinterested business judgment in responding to a demand.’” Conrad v. Blank, 940 A.2d 28,
37 (Del. Ch. 2007) (emphasis added) (quoting Rales, 634 A.2d at 933); see In re INFOUSA, Inc.
S’holders Litig., 953 A.2d 963, 989-90 (Del. Ch. 2007) (“Plaintiffs must show that a majority . . .
of the board was incapable of considering demand.”). Plaintiffs argue that demand is futile
because eight members of the September 2009 board face a substantial likelihood of liability for
alleged misstatements contained in certain registration statements. Were the point valid – and
the Court expresses no opinion on that issue – it cannot overcome a simple, irrefutable arithmetic
fact: the eight directors who plaintiffs claim are not impartial do not constitute a majority of the
seventeen-person board. The Amended Complaint does not even identify the nine members of
the September 2009 board that joined it after November 2007, let alone contain particularized
factual allegations concerning their capacity to assess objectively a pre-suit demand. Plaintiffs,
therefore, have not met their burden of alleging with particularity that a reasonable doubt exists
that the majority of the September 2009 board could not have exercised independent and
disinterested business judgment in responding to a demand. The Amended Complaint must be
dismissed on that basis. See In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 121
n.36 (Del. Ch. 2009).

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III. CONCLUSION
For the foregoing reasons, it is hereby ordered that defendants' motion to dismiss the
First Amended Consolidated Derivative Action complaint is granted and the amended complaint
is dismissed with prejudice.
Dated: New York, New York
May 17,2011

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