City of Cambridge Ret. Sys. v. Ersek
| Decision Date | 16 April 2019 |
| Docket Number | No. 17-1381,17-1381 |
| Citation | 921 F.3d 912 |
| Parties | CITY OF CAMBRIDGE RETIREMENT SYSTEM; MARTA/ATU Local 732 Employees Retirement Plan, derivatively on behalf of the Western Union company, Plaintiffs - Appellants, and Stanley Lieblein, Plaintiff, v. Hikmet ERSEK; Jack M. Greenberg; Dinyar S. Devitre; Richard A. Goodman ; Betsy D. Holden; Linda Fayne Levinson; Roberto G. Mendoza; Solomon D. Trujillo; Frances M. Fragos Townsend; the Western Union Company, a Delaware corporation, nominal defendant, Defendants - Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Jeroen Van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP, New York, New York (David J. MacIsaac of Bernstein Litowitz Berger & Grossmann LLP, New York, New York; Jeffrey A. Berens of Berens Law LLC, Denver, Colorado; and Michael I. Fistel, Jr. of Johnson Fistel LLP, Marietta, Georgia, with him on the briefs), for Plaintiffs-Appellants.
David F. Graham of Sidley Austin LLP, Chicago, Illinois (Hille R. Sheppard of Sidley Austin LLP, Chicago, Illinois; and Holly Stein Sollod and Christina Gomez of Holland & Hart LLP, Denver, Colorado, with him on the brief) for Defendants-Appellees.
Before MATHESON, PHILLIPS, and McHUGH, Circuit Judges.
In this shareholder-derivative action, Shareholders of The Western Union Company aver that several of Western Union’s Officers and Directors breached their fiduciary duties to the company by willfully failing to implement and maintain an effective anti-money-laundering-compliance program (AML-compliance program), despite knowing of systemic deficiencies in the company’s AML compliance. The Shareholders didn’t make a pre-suit demand on Western Union’s Board of Directors to pursue this litigation, and the district court found no evidence that such demand would have been futile. The district court thus dismissed the case, reasoning that the Shareholders’ obligation to make a pre-suit demand on the Board was not excused. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
Western Union is a public Delaware corporation that facilitates electronic money transfers through a sprawling international network of about 550,000 "agents"—individuals and entities that serve as storefronts where customers can send or receive funds—located in over 200 countries and territories. Appellants’ App. vol. 4 at 854–55, ¶ 14. Western Union’s primary business flows through Western Union Financial Services, Inc. (WUFSI), a wholly-owned subsidiary which facilitates consumer-to-consumer money transfers. Western Union also offers business-to-business and business-to-consumer transfers through another wholly-owned subsidiary, Western Union Business Solutions.
Given its vulnerability to criminal exploitation, the money-transmittal industry is heavily regulated. Under the Bank Secrecy Act of 1970 (BSA), 31 U.S.C. §§ 5311 – 5332, financial institutions—including "money services businesses" like Western Union1 —must implement and maintain effective AML-compliance programs. See id. § 5318(h)(1). At a minimum, these programs must provide for internal controls to guard against money laundering, for monitoring and independent compliance testing, and for personnel training. See 31 U.S.C. § 5318(h) ; 31 C.F.R. § 1022.210. A money-services business with foreign agents must also adopt risk-based approaches to cross-border transactions to help "guard against the flow of illicit funds." 69 F.R. 74439, 74440 (Dec. 14, 2004). Finally, financial institutions must maintain records and file reports on transmittals that exceed certain amounts or are "relevant to a possible violation of law or regulation." 31 U.S.C. § 5318(g)(1). "Structuring" or breaking transactions into smaller denominations to avoid the BSA’s recordkeeping and reporting requirements is a crime. Id. § 5324.
Regulators have long monitored Western Union’s compliance with these requirements. Between 2002 and 2006, when Western Union became a public company, WUFSI entered into four settlement agreements concerning alleged AML violations with federal regulators and state authorities in Arizona, California, and New York. Without admitting liability, WUFSI promised to remedy deficiencies in its recordkeeping, reporting, and monitoring practices. Yet WUFSI struggled to achieve these objectives, and in 2008, it reached a second settlement with Arizona regarding alleged recordkeeping violations. A third settlement with Arizona followed in 2010: the Southwest Border Agreement (SBA).
The SBA centered on violations that occurred between 2003 and 2007 at 16 agent locations in the Southwest Border region—Arizona and the area within 200 miles north and south of the United States–Mexico border. WUFSI admitted that it had "reason to know" that agents at these locations had "knowingly engaged in a pattern of money laundering violations that facilitated human smuggling from Mexico into the United States through Arizona." Appellants’ App. vol. 8 at 1933, ¶ 4. To remedy these violations, the SBA imposed a $ 94 million fine and mandated that WUFSI work with a court-appointed monitor to improve its AML compliance in the Southwest Border region. The SBA set a July 2013 completion deadline for this endeavor.
Three monitors served between 2010 and 2013, recommending a bevy of improvements to WUFSI’s AML-compliance program. Western Union struggled to keep apace of these mounting proposals, implementing just 18 of (then) 80 proposals by September 2011, 33 of 98 proposals by October 2012, and 54 of 98 proposals by April 2013. In July 2013—at the end of the initial monitorship—Western Union management advised the Board of Directors that certain improvements were "at a standstill." Id. vol. 3 at 777–78, ¶¶ 184–85. Management also reported the disturbing news that, in the first quarter of 2013, 28 of 335 high-risk agents in the Southwest Border region had "confirmed instances of Human Smuggling." Id. at 786, ¶ 214.
When Western Union failed to complete all the monitors’ proposals by the July 2013 deadline, Arizona threatened to declare a willful and material breach of the SBA. Instead, recognizing their "mutual goal" that Western Union develop and maintain an effective AML-compliance program, the parties negotiated an amended SBA, extending the monitorship through December 2017. Id. vol. 8 at 1986. The Amended SBA also mandated more rigorous recordkeeping and reporting practices for transactions in the Southwest Border region.
As these events unfolded, numerous federal investigations into Western Union’s AML compliance began to ramp up. In 2012, the U.S. Attorney’s Office for the Central District of California named Western Union a "target" in an investigation into a California agent arrested for structuring transactions worth $ 65.7 million. Id. vol. 3 at 763, ¶ 137. Also in 2012, the Federal Trade Commission (FTC) began investigating Western Union’s possible facilitation of fraudulent money transfers. Two years later, in 2014, the U.S. Attorney’s Office for the Southern District of Florida named Western Union a target in an investigation into allegations of money laundering by agents in Central America. Meanwhile,2 the U.S. Attorney’s Offices for the Eastern and Middle Districts of Pennsylvania started investigating Western Union for anti-fraud and AML violations.
Against this backdrop, various Shareholders filed five derivative actions in 2014 alleging that certain of Western Union’s Directors had caused the company to willfully violate AML laws and regulations. In 2015, the district court consolidated these actions, and the Shareholders filed a consolidated complaint, asserting violations of the Securities Exchange Act of 1934, breaches of fiduciary duties, and Delaware common-law claims. The Directors moved to dismiss under Rule 23.1 of the Federal Rules of Civil Procedure, arguing that the Shareholders had failed to plead facts sufficient to show the futility of making a pre-suit demand on the Board to pursue litigation. The court granted the motion but gave the Shareholders leave to amend. Accordingly, on May 2, 2016, the Shareholders filed a first amended complaint (FAC), asserting two breach-of-fiduciary-duties claims. The Directors again moved to dismiss for failure to plead demand futility.
While that motion was pending, on January 19, 2017, Western Union entered into a deferred prosecution agreement (DPA) with the U.S. Department of Justice and the U.S. Attorney’s Offices for the Central District of California, Southern District of Florida, and Eastern and Middle Districts of Pennsylvania. The DPA alleged that, between 2004 and 2012, Western Union had willfully failed to implement an effective AML-compliance program and take corrective action against agents engaged in fraud, money laundering, and structuring schemes. Western Union admitted these allegations, accepted responsibility, and agreed to penalties and conditions in exchange for having criminal charges dismissed after three years. That same day, Western Union also announced a settlement with the FTC in a related consumer-fraud enforcement action.
In light of these developments, the district court granted the Shareholders leave to amend their pleading. Accordingly, on March 17, 2017, the Shareholders filed a second amended complaint (SAC), adding 13 paragraphs addressing the settlement agreements. On April 21, 2017, the Directors filed a renewed motion to dismiss for failure to plead demand futility, which the district court granted on September 29, 2017. This appeal followed.
The Shareholders concede that they made no pre-suit demand on Western Union’s Board of Directors to pursue this litigation. Thus, we need decide only whether such demand would have been futile. We first address the standard of review applicable to Rule 23.1 dismissals before considering the legal sufficiency of the Shareholders’ demand-futility allegations.
Our circuit has yet to decide what standard of review applies to dismissals...
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