In Oklahoma Firefighters Pension & Retirement System v. Citigroup, C.A. No. 9587-ML (Del. Ch. Aug. 13, 2014), a stockholder sought books and records related to a company’s board of directors and senior management regarding certain public investigations of two of the company’s wholly owned subsidiaries. Citigroup Inc. argued that the stockholder failed to demonstrate a nexus between the subsidiaries’ wrongdoing and the board or senior management, and therefore failed to show a credible basis to infer possible mismanagement or wrongdoing. The master in chancery disagreed with the company’s argument and recommended the court find that the stockholder stated a proper purpose for the inspection.
In Oklahoma Firefighters, the plaintiff stockholder, pursuant to 8 Del. C. Section 220, sought to inspect the parent company’s books and records related to one subsidiary’s fraud and an investigation into alleged money laundering with respect to another subsidiary. In February, the company publicly disclosed its discovery of fraud related to approximately $585 million of short-term credit extended by the first subsidiary through an accounts receivable financing program. Under the program, the subsidiary extended credit to finance accounts receivable due from the client’s primary customer. When that customer discontinued its business with the subsidiary’s client, the company reviewed its credit exposure and learned that the accounts receivable were overstated by approximately $400 million. The $400 million difference between the recorded and actual accounts receivable was charged to operating expenses and required the company to make a downward adjustment of its financial results by an estimated $235 million after tax. The adjustment lowered the company’s 2013 net income from $13.9 billion to $13.7 billion.
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