A Citigroup Inc. shareholder has hit a dead end in a lawsuit alleging that the bank didn’t properly investigate its bets on collateralized debt obligations (CDOs).
In a ruling issued on Thursday, the New York Supreme Court Appellate Division, First Department affirmed the dismissal of a shareholder derivative suit brought by Citi investor Stanley Lerner. He alleged that Citi’s former directors—including former CEO Charles Prince and former CFO Gary Crittenden—didn’t take seriously his request for an investigation into the CDO assets, and therefore are liable for breach of fiduciary duty. The First Department disagreed, writing that Citi’s one-man committee-led investigation was sufficient.
The ruling is a win for a trio of law firms—Cravath Swaine & Moore, Paul Weiss Rifkind Wharton & Garrison and Wachtell Lipton Rosen & Katz. Cravath represented Citi’s outside directors. Prince, Crittenden and other Citi executives tapped Paul Weiss. Wachtell represented Citi, a nominal defendant. Cravath partner Richard Clary argued for all the defendants at the First Department, squaring off against Richard Greenfield of Greenfield & Goodman.
Citi wrote down more than $8 billion in subprime assets in late 2007. In December of that year, Lerner made a formal demand that Citi’s board of directors sue senior management for breach of fiduciary duty and waste of corporate assets. Citi formed a “committee,” consisting of a single outside director, to investigate Lerner’s demand. In September 2010, Citi’s board informed Lerner that it was denying his demand for a suit.
Lerner, who is represented by Greenfield & Goodman and Cuneo Filbert & LaDuca, brought suit in June 2010. He alleged that the one-man committee was a “sham in its inception.” Lerner essentially double-downed on his argument, asserting that the board’s unwillingness to investigate his breach of fiduciary duty claims was itself a breach of fiduciary duty.
New York Supreme Court Justice Bernard Fried tossed the case in May 2012. As we reported here, he ruled that the board “acted in an informed manner, independently and in good faith.”
In addition to upholding that finding, Thursday’s decision rejected an argument by Lerner that Citi’s refusal of his demand entitled him to discovery. As our affiliate the New York Commercial Litigation reported, the First Department held that New York courts should follow Delaware law, which is that a shareholder plaintiff isn’t entitled to discovery following denial of a presuit demand.