Court Of Chancery Dismisses Complaint For R. 23.1 Failure Despite Corporation's Inadequate "Internal Controls" Attracting $50 million Fine
Stone, et al. v. Ritter, et al., C.A. No. 1570-N, 2006 WL 302558 (Del. Ch. Jan. 26, 2006).
This matter involved an attempt to institute a derivative proceeding against fifteen current and former director defendants of AmSouth Bancorporation for alleged failures of fiduciary duties through insufficient internal control systems to guard against statutory violations under the Bank Secrecy Act and the Anti-Money Laundering Regulations. The defendants filed a motion to dismiss and it was granted by the court for insufficiency of pleading under Chancery Court Rule 23.1.
On November 6, 2006, the Delaware Supreme Court affirmed this decision.
The origins of this action were rooted in defendants' custodial duties for two bank customers who were convicted as a result of their "ponzi scheme."
In order to substantiate their complaint, the court observed that the plaintiffs relied on a government report prepared by the United States Department of Treasury, Financial Crimes Enforcement Network. This report determined that the company did not file the suspicious-activity report as required. The court dismissed their complaint with prejudice under R.15 (aaa) because plaintiffs did not plead facts underlying the government's report's conclusions with particularity, with regard to defendants' oversight failures.
Further, the court observed that the plaintiffs had failed to demonstrate demand-futility by showing reasonable doubt on the directors' disinterestedness and on the validity of the transaction under the business judgment rule. Plaintiffs contended that their demand requirements should be excused because the directors "failed to exercise any business judgment and failed to make any good faith attempt to fulfill [the directors'] fiduciary duties "Plaintiffs claimed that the directors did not take any decisions on the internal controls, but intentionally disregarded their responsibilities after the two clients were investigated and convicted for their "ponzi scheme."