Plaintiff shareholders brought suit against current and former Citigroup directors for breaches of fiduciary duty for failing to properly monitor and manage the risks Citigroup faced from its exposure to subprime assets. Citigroup sustained large losses from its involvement with collateralized debt obligations and, specifically, residential mortgage backed securities. Plaintiffs did not contest that Citigroup had procedures and controls in place to monitor risk, but cite general statements from public documents that reflected the worsening conditions in the financial markets as “red flags” that should have put management on notice of financial danger. The Court, applying the business judgment rule, held that the Plaintiffs did not meet the requirements for pleading demand futility because they failed to plead particularized facts that raised a reasonable doubt that the director defendants acted in good faith. Plaintiffs failed to specify how the board’s oversight mechanisms were inadequate or how the director defendants knew of any inadequacies. Furthermore, the general “red flags” cited were merely conclusory and did not state a claim for relief under the Caremark doctrine. The Court also rejected Plaintiffs’ claims for violation of the directors’ duty to disclose, but allowed a claim of corporate waste regarding executive compensation to proceed. This decision was compared to the Court’s recent holding in American International Group, Inc. Consolidated Derivative Litigation, where it recognized allegations sufficient to support an inference that AIG executives were aware of wrongdoing and failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct. Oversight duties under Delaware law are not designed to subject directors to personal liability for failure to predict the future and to property evaluate business risk.
