Citigroup headquarters in New York. Photo Credit: AP

The Delaware Court of Chancery on Monday dismissed a derivative suit seeking to hold the directors of Citigroup Inc. personally liable for massive losses the company suffered as a result of years of mismanagement and unchecked fraud and regulatory violations.

Vice Chancellor Sam Glasscock III dismissed the 215-page “ponderous omnibus” of a consolidated class complaint, which accused 23 current and former Citigroup directors of Caremark violations for failing to oversee internal controls and exposing it to billions of dollars in fines. According to the complaint, filed in March 2016, the Citigroup board had consciously ignored red flags for more than a decade that signaled serious problems with the company's internal compliance systems.

But Glasscock said that while the warning signs were evident, investors had failed to show that board members knew they were breaching their fiduciary duties to stockholders.

“The complaint makes it reasonably conceivable that the directors, despite these red flags, failed to take actions that may have avoided loss to the company. That is not the standard, however,” Glasscock wrote in an 82-page opinion. “To my mind, the allegations of the complaint, if true, fail to demonstrate scienter.”

Initially filed under seal, the complaint followed a combative books-and-records suit and pointed to a string of regulatory actions and internal documents that, they said, revealed a “history of numerous, widespread and systematic risks and legal compliance debacles” at the financial services company.

Much of the document had been initially redacted, but Glasscock last month ordered details of communications between Citigroup's management and its board be made public after The Wall Street Journal challenged the court's confidential treatment of parts of the filing.

In it, investors said directors had failed to implement a compliance system across all of its lines of business to prevent illegal conduct following the company's “near-death experience” in 2008, which resulted in a $300 billion federal bailout and government takeover. They opted not to make a demand that the board consider bringing its own, arguing that demand would have been futile because directors faced a high risk of personal liability for failing to prevent financial and reputation damage to the company.

The directors moved to dismiss the suit last summer on the grounds of demand futility, saying that the plaintiffs had to prove that the board had either “utterly failed” to implement a system of controls or “consciously failed to oversee its operation.”

“The complaint's overblown rhetoric notwithstanding,” they said, “neither species of Caremark liability has been adequately alleged here.”

The Caremark theory is widely considered the most difficult to prove under Delaware corporate law. And because the directors were contractually exculpated from liability for breaches of the duty of care, Glasscock noted that the plaintiffs faced the high bar of proving that the directors had acted in bad faith and with the knowledge the company was actually breaking the law.

“Nothing in the facts pled, considered individually or together, implies scienter on the part of the director defendants. The bad results the plaintiffs point to, in my view, do not imply bad faith,” Glasscock wrote. “No substantial likelihood of liability for any of the director defendants exists under the facts in the complaint and as gleaned from the documents cited therein, and, therefore, demand is not excused.”

Attorneys from both sides on Tuesday declined to comment on the ruling.

The plaintiffs were represented by Mark Lebovitch, David Wales and Alla Zayenchik of Bernstein Litowitz Berger & Grossman; Brian J. Robbins, Felipe J. Arroyo and Gina Stassi of Robbins Arroyo and Stuart M. Grant, Nathan A. Cook and Rebecca A. Musarra of Grant & Eisenhofer.

The 13 current directors were represented by Mary Eaton and Frank Scaduto of Willkie Farr & Gallagher and Donald J. Wolfe Jr., T. Brad Davey, Tyler J. Leavengood and Jay G. Stirling of Potter Anderson & Corroon.

The 10 former directors were represented by Brad S. Karp, Bruce Birenboim, Susanna Buergel, Jane B. O'Brien, Stephen P. Lamb and Meghan M. Dougherty, all of Paul, Weiss, Rifkind, Wharton & Garrison.

The case was captioned Oklahoma Firefighters Pension & Retirement System v. Corbat.