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From Securities Regulation Daily, April 16, 2019

Western Union board wins dismissal of AML derivative complaint

By Anne Sherry, J.D.

The shareholders fell short of pleading under Caremark that Western Union officers and directors willfully failed to implement an anti-money-laundering compliance program.

A Tenth Circuit panel affirmed the dismissal of a derivative complaint against Western Union management stemming from anti-money-laundering failures. First holding that the appropriate standard of review was de novo, the appellate court determined that demand on the board would not have been futile. Any theory of the directors’ personal liability ultimately came down to a Caremark claim for lack of oversight, a notoriously difficult theory beyond the reach of the plaintiffs under the circumstances (City of Cambridge Retirement System v. Ersek, April 16, 2019, Phillips, G.).

The shareholders’ suit stemmed from alleged AML violations dating back to 2002. Western Union settled with federal regulators and state authorities, including subsequent settlements with Arizona after it struggled to remedy deficiencies in its recordkeeping, reporting, and monitoring practices. Western Union again failed to complete all of the proposals identified by its corporate monitors before the deadline it had set with Arizona, and federal investigations began to ramp up. In 2017, Western Union entered into a deferred prosecution agreement with federal prosecutors and a civil settlement with the FTC. The shareholders filed a second amended complaint, which the district court in Colorado dismissed, and the Tenth Circuit now affirmed.

De novo review is appropriate. The panel spent very little time deciding an issue of first impression in the circuit: what standard of review applies to Rule 23.1 dismissals for failure to plead demand futility. The opinion notes a circuit split trending towards de novo review over a discretionary standard. The panel agreed with that trend, reasoning that whether demand is futile depends on the legal sufficiency of the complaint’s allegations, which typically warrants de novo review. It accordingly held that Rule 23.1 dismissals are subject to de novo review.

Demand would not have been futile. On its de novo review, the appeals court came to the same conclusion as the district court: demand on the Western Union board was not excused as futile. Under the law of Delaware (the state of Western Union’s incorporation), the Rales test applied, requiring the plaintiffs to plead facts specific to each director demonstrating that at least half of them could not have exercised disinterested business judgment in responding to the demand. To be considered interested, a director must face a substantial likelihood of personal liability from the proposed lawsuit.

Ultimately, personal liability in the underlying suit would derive from the directors’ alleged lack of oversight, amounting to a Caremark claim, which that case itself called "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." To make a case under Caremark, a plaintiff must allege either that the board utterly failed to implement any system or controls or that it did implement a system or controls but consciously failed to monitor or oversee its operations.

The plaintiffs did not allege a complete failure to implement a reporting or information system or controls, nor could they given that most of the settlements Western Union entered into with authorities acknowledged its progress towards AML compliance. Instead, the shareholders argued that the board consciously failed to monitor the system or controls. Even here, they fell short: the court looked to Western Union’s board composition at the time the complaint was amended for the second time and, at best, the amended complaint alleged that a minority of directors risked personal liability.

The case is No. 17-1381.

Attorneys: Jeroen Van Kwawegen (Bernstein Litowitz Berger & Grossmann LLP) for City of Cambridge Retirement System. David F. Graham (Sidley Austin LLP) for Hikmet Ersek.

Companies: City of Cambridge Retirement System

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