Submitted: January 22, 2015
Michael J. Barry, Esquire, Nathan A. Cook, Esquire, and Justin K. Victor, Esquire of Grant & Eisenhofer, P.A., Wilmington, Delaware, Attorneys for Plaintiff.
Stephen P. Lamb, Esquire and Meghan M. Dougherty, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware; Brad S. Karp, Esquire, Bruce Birenboim, Esquire, Susanna M. Buergel, Esquire, and Caitlin E. Grusauskas, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York; and Jane B. O'Brien, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, Attorneys for Defendant.
NOBLE, Vice Chancellor
Plaintiff seeks to inspect certain books and records of Defendant Citigroup Inc. ("Citigroup" or the "Company") in order to investigate possible mismanagement and breaches of fiduciary duty by Citigroup's directors and officers in connection with events at two of Citigroup's subsidiaries. Citigroup argues that Plaintiff has not established a credible basis to infer possible mismanagement or wrongdoing by the Company's fiduciaries. Further, assuming that Plaintiff has stated a proper purpose, Citigroup contends that the scope of inspection demanded is overbroad.
On June 27, 2014, this case was tried on a paper record before a Master in Chancery. The Master issued a draft bench report recommending that the Court find that Plaintiff has stated a proper purpose for inspection, but narrowing the scope of documents sought by Plaintiff's demand.
Citigroup took timely exceptions to the draft report. After the parties briefed those exceptions, the Master issued her final report and recommendation (the "Final Report"), confirming her conclusion that Plaintiff had established a proper purpose for inspection. She did, however, again narrow the scope of documents that she deemed Plaintiff should be entitled to inspect.
On October 7, 2014, Citigroup filed its Notice of Exception to the Master's Final Report. The parties briefed Citigroup's exceptions and presented argument before this Court. This is the Court's ruling on the Company's exceptions.
Citigroup, a Delaware corporation, is a diversified financial services holding company headquartered in New York, New York. Its businesses provide a range of financial products, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management. Plaintiff Oklahoma Firefighters Pension & Retirement System has held Citigroup stock since December 31, 2007.
On March 17, 2014, Plaintiff made a written demand (the "Demand") on Citigroup pursuant to 8 Del. C. § 220 ("Section 220"). The Demand sought books and records relating to recently-disclosed adverse events involving two of Citigroup's subsidiaries: Banco Nacional de Mexico, S.A. ("Banamex") and Banamex USA. More specifically, Plaintiff aims to investigate a recent fraud at Banamex (the "Banamex fraud") and Banamex USA's compliance with the Bank Secrecy Act (the "BSA") and anti-money laundering ("AML") requirements under federal laws and banking regulations.
A. The Banamex Fraud
Banamex, an indirect wholly-owned Citigroup subsidiary, is one of the Company's largest foreign consumer banks, accounting for approximately 10% of the Company's global profits. Citigroup views Banamex as "an integral part of [Citigroup's] global network and a source of great pride . . . ." "Banamex is . . . subject to the same risk, control, anti-money-laundering and technology standards and oversight which are required throughout the [Company]." Citigroup's Co-President, Manuel Medina-Mora, holds the title of "Chairman, Mexico" and oversees Citigroup's Mexican business.
On February 28, 2014, Citigroup disclosed that a recent fraud had been discovered at Banamex:
As of December 31, 2013, Citi, through [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 those 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 Banamex fraud caused Citigroup to adjust downward its fourth quarter and full year 2013 financial results by $235 million after tax. Citigroup's net income fell from $13.9 billion to $13.7 billion. Citigroup's Chief Executive Officer ("CEO"), Michael Corbat, described the Banamex fraud as "significant" and suggested that "the impact to [Citigroup's] credibility [would be] hard to calculate." The Company fired at least twelve employees, including four high-ranking executives in Mexico.
Moody's Investors Service ("Moody's") downgraded its ratings for Banamex to "reflect the severity of the fraud revealed in March and the subsequent revelations about the deficiencies in Banamex's risk management and auditing functions that permitted this fraud to occur." Moody's questioned whether structural and cultural ...