Submitted: August 13, 2014
In this inspection action under 8 Del. C. § 220, a stockholder seeks books and records relating to events that are the subject of investigations at subsidiaries or divisions of a publicly traded company. The company argues the evidence on which the stockholder relies is not sufficient to state a credible basis to infer possible mismanagement or wrongdoing and that, even if the stockholder stated a proper purpose, the scope of the inspection demanded exceeds what is necessary and essential to accomplish that purpose. After trial on a paper record, I issued an oral report recommending that the Court find that the stockholder had stated a proper purpose for the inspection and that the Court therefore order inspection, but only as to a portion of the books and records sought in the demand. The company took exception to that draft report and the parties submitted briefs addressing those exceptions. What follows is my final report.
Except as noted, the following facts are not in dispute. On March 17, 2014, Oklahoma Firefighters Pension & Retirement System (the "Plaintiff") made a books and records demand (the "Demand") on Citigroup Inc. ("Citigroup") under 8 Del. C. § 220. Plaintiff is an Oklahoma-based retirement system that provides retirement allowances and other benefits to firefighters in Oklahoma. Citigroup is a Delaware corporation headquartered in New York, NY. Citigroup's shares are traded on the New York Stock Exchange and Plaintiff has been a stockholder of Citigroup since December 31, 2007.
The Demand sought to inspect books and records relating to recently-disclosed events involving two of Citigroup's wholly owned subsidiaries: Banco Nacional de Mexico, S.A. ("Banamex") and Banamex USA. Banamex is an indirect wholly-owned subsidiary of Citigroup and is one of Citigroup's largest consumer banks outside the United States. Citigroup purchased Banamex in 2001 and Banamex now accounts for approximately 10% of Citigroup's global profits. Citigroup's Co-President, Manuel Medina-Mora, also holds the title "Chairman, Mexico" and is charged with overseeing Citigroup's franchise in Mexico. Banamex's United States division, Banamex USA, is a Citigroup subsidiary based in California. Banamex USA provides retail banking and money-transfer services to customers in Mexico and the United States.
Plaintiff seeks eight categories of books and records for the stated purpose of investigating:
(a) mismanagement by the directors and/or officers of Citigroup in connection with the matters discussed in the grounds supporting th[e] demand …; (b) the possibility of breaches of fiduciary duty by directors and/or officers of Citigroup in connection with the matters discussed in the grounds supporting th[e] demand …; [and] (c) the independence and disinterest of the Board, and to determine whether a presuit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company.
The Demand recounted recent events at both Banamex and Banamex USA that Plaintiff contends form a credible basis from which the Court may infer possible mismanagement or wrongdoing. The grounds for Plaintiffs inspection generally may be divided into two categories: (1) the recent discovery of, and investigations into, fraud at Banamex, and (2) a money-laundering investigation at Banamex USA.
1. Allegations of fraud at Banamex
In February of this year, Citigroup publicly disclosed the recent discovery of fraud at Banamex. Citigroup's press release explained:
As of December 31, 2013, Citi, through Banco Nacional de Mexico ("Banamex"), had extended approximately $585 million of short-term credit to Oceanografia S.A. de C.V. ("OSA"), a Mexican oil services company, through an accounts receivable financing program. OSA has been a key supplier to Petróleos Mexicanos ("Pemex"), the Mexican state-owned oil company. Pursuant to the program, Banamex extended credit to OSA to finance accounts receivables due from Pemex. As of December 31, 2013, Banamex also had approximately $33 million in either outstanding loans made directly to OSA or standby letters of credit issued on OSA's behalf.
On February 11, 2014, Citi learned that OSA had been suspended from being awarded new Mexican government contracts. Upon learning of this suspension, Citi, together with Pemex, commenced detailed reviews of their credit exposure to OSA and of the accounts receivable financing program over the past several years. As a consequence of these reviews, on February 20, 2014, Pemex asserted that a significant portion of the accounts receivables recorded by Banamex in connection with the Pemex accounts receivable financing program were fraudulent and that the valid receivables were substantially less than the $585 million referenced above.
The $400 million difference between the accounts receivable recorded by Banamex and those found to be valid after Citigroup's review was charged to operating expenses. That charge required Citigroup to adjust downward both its fourth quarter and full year 2013 financial results by an estimated $235 million after tax. This adjustment lowered Citigroup's 2013 net income from $13.9 billion to $13.7 billion.
In April 2014, Citigroup announced that it had uncovered a second fraud at Banamex, although the scale of the fraud was comparatively small, involving less than $30 million in loans. Citigroup also disclosed that Banamex's indirect parent expected to reduce its first-quarter net profit by $112 million due to reserves it set aside in connection with the fraud. These reserves were in addition to Citigroup's reduction of its fourth quarter and full year 2013 financial results and stemmed from Citigroup's ...