October 16, 2014

Litigation Department obtains with prejudice dismissal of shareholder derivative action against Citigroup Inc. directors relating to alleged manipulation of U.S. dollar LIBOR 

On October 14, Justice Jeffrey Oing of the Commercial Division of the New York Supreme Court issued an order in Zucker v. Rubin dismissing with prejudice breach of fiduciary duty claims against the Board of Directors of Citigroup Inc. for allegedly failing to prevent manipulation of the London Interbank Offered Rate, commonly known as LIBOR.  Willkie represented Citigroup’s independent directors in the lawsuit.

Plaintiff Lawrence Zucker filed suit in June 2011 against certain current and former directors of Citigroup, alleging that they must have known about, but nevertheless disregarded, a litany of news articles and other reports suggesting that Citigroup had conspired with other banks to suppress U.S. Dollar LIBOR.  According to the complaint, these media reports constituted “red flags” of wrongdoing that triggered a duty on the part of the Board to act.  Because the Board ignored those warnings, the plaintiff alleged, the directors faced a substantial likelihood of liability for breaching their duty of oversight and the plaintiff was therefore excused from his obligation to make a pre-suit demand.  Nearly two years later, plaintiff filed an amended complaint, adding allegations that Citigroup must have been engaged in rate manipulation because other banks had entered into settlements with various regulatory agencies around the world in which they admitted to wrongdoing and agreed to pay regulatory fines.  Defendants moved to dismiss.

In an unusual twist, during the period between plaintiff’s original and amended complaints, another Citigroup shareholder commenced a derivative action in the New York Supreme Court, Shaev v. Pandit, which also alleged that the directors of Citigroup were personally liable for failing to prevent LIBOR from being suppressed.  Unlike the Zucker action, however, the plaintiff in Shaev did not allege that she was excused from making a pre-suit demand on the Citigroup Board before filing suit.  Instead, she alleged that the demand requirement had no application at all under New York State banking law.  In January 2014, the court dismissed the Shaev complaint, reasoning that the plaintiff’s banking law theory was without merit and that, because the plaintiff had failed to plead demand futility, she lacked derivative standing to bring the suit.

In support of defendants’ motion to dismiss Zucker’s amended complaint, the Willkie team argued that he failed to plead demand futility with the particularity required by law and, independently, that Zucker was precluded from bringing suit because he, like Shaev, purported to sue on Citigroup’s behalf and thus was bound by the Shaev result. The court agreed, holding that Zucker had failed to plead facts sufficient to excuse demand and that, since the real party in interest in both cases was Citigroup, he was barred on the basis of res judicata and collateral estoppel from re-litigating claims that Shaev had already advanced and lost.

The case was handled by partners Mary Eaton, Todd Cosenza and Sameer Advani, and associates Zheyao Li, and Lars Hulsebus.

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