In re Citigroup, Inc. Derivative Litigation

Court: Court of Chancery of the State of Delaware
Case Number: 12151-VCG
Judge: Vice-Chancellor Glasscock
Case Contacts: Mark Lebovitch, David Wales, David MacIsaac, Alla Zayenchik

Following an extensive investigation, including two trials pursuant to Section 220 to obtain books and records of Citigroup, on March 30, 2016, BLB&G filed a complaint in the Delaware Court of Chancery on behalf of Key West Municipal Fire Fighters & Police Officers’ Retirement Trust Fund (“Plaintiff”) and derivatively on behalf of Citigroup, Inc. (“Citigroup” or “the Company”) against certain current and former members of the Company’s board of directors (the “Board”) and senior officers (collectively, “Defendants”).  On April 14, 2016, BLB&G filed a supplemental complaint against Defendants (the “Complaint”).  The Complaint seeks to hold the Defendants accountable for long-running and sustained oversight failures resulting in the Company’s repeated failures to meet regulatory and legal compliance obligations, despite a series of red flags.    

Specifically, Defendants’ breaches have resulted in: i) failure to comply with anti-money laundering laws and regulations despite repeated regulatory investigations and consent orders; ii) significant fraud losses; iii) manipulation of foreign exchange benchmark rates resulting from criminally collusive activity; and iv) deceptive credit card practices that lasted over a decade.  As a result of these flagrant oversight failures, Citigroup and its public stockholders have suffered tremendous harm.     

With respect to Defendants’ failure to ensure compliance with the Bank Secrecy Act (“BSA”) and relevant anti-money laundering (“AML”) laws and regulations, Citigroup and/or its subsidiaries entered into consent orders with the Office of the Comptroller of the Currency (“OCC”) in April 2012, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Institutions (“CDFI”) in August 2012, and with the Board of Governors of the Federal Reserve (“FRB”) in March 2013.  In July 2015, over three years after the issuance of the OCC’s consent order, the FDIC determined that Citigroup “failed to implement an effective BSA/AML Compliance Program over an extended period of time” and fined Citigroup’s subsidiary Banamex USA $140 million for violations of and AML laws and regulations.

In February 2014, Citigroup revealed that it had suffered $400 million in fraud losses at its Mexican subsidiary Grupo Financiero Banamex S.A. de C.V. (“Banamex”).  The fraud arose out of an accounts receivables financing program with Oceanografía S.A. de C.V (“OSA”), a key supplier to Mexico’s state owned oil company Petroleos Mexicanos (“Pemex”).  Banamex extended loans to OSA without verifying the accuracy of receivables, the vast majority of which turned out to be fraudulent.  Citigroup took a $235 million post-tax writedown ($360 million pretax) on its fourth quarter and full-year 2013 earnings as a result of the fraud.    

In May 2015, Citigroup’s consumer banking subsidiary Citibank, N.A. entered into a criminal guilty plea for violations of federal anti-trust law and agreed to pay a criminal fine of $925 million arising out of its collusive efforts to manipulate foreign exchange (“FX”) benchmark rates which continued from at least December 2007 until at least January 2013.  Citigroup traders, who referred to themselves as “the Mafia” or the Cartel” used electronic chatrooms and messaging to conspire with traders at other firms and disclosed confidential client information in an effort manipulate benchmark foreign exchange rates.  Defendants allowed this misconduct to persist despite knowledge of the risk that manipulation of benchmark rates posed due to the heavily publicized LIBOR scandal and particularized knowledge of risk stemming from the disclosure of confidential client information by one of its traders in August 2011. According to regulatory orders, management was aware of, and even participated in the misconduct.  Four regulators, including the UK Financial Conduct Authority, the Commodities Futures Trading Commission (“CFTC”), the OCC, and the FRB fined Citigroup and its subsidiaries a combined $1.36 billion in connection with the FX rate manipulation.  All told, in light of the criminal fine, the civil monetary penalties, and at least one private civil settlement of $394 million, the FX misconduct has cost Citigroup $2.679 billion to date.      

In July 2015, the Consumer Financial Protection Bureau (“CFPB”) and the OCC entered consent orders against certain Citigroup subsidiaries for improper credit card practices relating to add-on products spanning over a decade from at least 2000 until at least 2013.  During that time, Citigroup’s subsidiaries charged customers for services that i) they did not receive; ii) they did not give their informed consent to receive; iii) they did not know they could refuse; and/or iv) that were not in their financial best interest. Citigroup’s subsidiaries were ordered to pay $700 million in restitution and $70 million in civil penalties as a result of this misconduct.

Consistently, regulators found that Citigroup and its subsidiaries failed to implement appropriate internal controls to detect and prevent the various practices described above.  Accordingly, with the benefit of confidential company documents obtained through two separate Section 220 actions and trials over the past two years, Plaintiff filed the Complaint to hold Defendants accountable for their breaches of duty to the Company.    

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