(CN) – A Manhattan federal judge dismissed a shareholder derivative action against Citigroup, saying Delaware law requires the plaintiffs to first demand that the board of directors take legal action.
U.S. District Judge Sidney H. Stein gave the shareholders until Sept. 14 to amend their complaint.
The plaintiffs claimed that the directors “cannot act objectively in considering a pre-suit demand because the directors are not independent from individuals who are interested in this action.”
Citigroup invested heavily in risky subprime mortgages in the mid-2000s, according to five consolidated complaints. When the housing market collapsed in 2006 and 2007, the company was “forced to take billion-dollar write-downs on its mortgage-related holdings, and as a result, Citigroup’s stock price precipitously declined,” the shareholders claimed.
The class said Citigroup ignored “red flags” in the subprime housing market, and failed to ensure that the company’s financial reporting was “thorough and accurate.”
Shareholders sued for securities fraud, inside trading and breach of fiduciary duty without first demanding that the board sue. They cited a conflict of interest, saying the directors hold positions in other companies that do business with Citigroup.
But Judge Stein said the plaintiffs “offer no explanation of how such alleged ‘conflicts’ would render the directors unable to evaluate a pre-suit demand objectively.”
They also made “scattered allegations” that the directors share business and personal ties, Stein said.
“Plaintiffs make a handful of allegations about the November 2007 directors in an effort to show that their ‘personal and business relationships are rife with conflicts,'” the judge wrote.
“Not one of those allegations, however, demonstrates the kind of bias necessary to create a reasonable doubt that a director is dominated by or beholden to individuals interested in this action.”
Five lawsuits against Citigroup were consolidated into one, naming current and former officers and directors as defendants, including Charles O. Prince, Citigroup’s former CEO and board chairman.