Stone v. Ritter

911 A.2d 362 (Del. 2006)

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Nature of the Case

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Facts

P owned AmSouth common stock 'at all relevant times.' AmSouth is a Delaware corporation with its principal executive offices in Birmingham, Alabama. AmSouth's wholly-owned subsidiary, AmSouth Bank, operated about 600 commercial banking branches in six states throughout the southeastern United States and employed more than 11,600 people. AmSouth and Amsouth Bank paid $40 million in fines and $10 million in civil penalties to resolve government and regulatory investigations pertaining principally to the failure by bank employees to file SARs, as required by the federal BSA. The government investigations arose from an unlawful 'Ponzi' scheme operated by Hamric, II, and Nance. In August 2000, Hamric, then a licensed attorney, and Nance, then a registered investment advisor with Mutual of New York, contacted an AmSouth branch bank in Tennessee to arrange for custodial trust accounts to be created for 'investors' in a 'business venture.' Nance had convinced more than forty of his clients to invest in promissory notes bearing high rates of return, by misrepresenting the nature and the risk of that investment. AmSouth agreed to provide custodial accounts for the investors and to distribute monthly interest payments to each account upon receipt of a check from Hamric and instructions from Nance. The scheme was discovered in March 2002, when the investors did not receive their monthly interest payments. Hamric and Nance were indicted on federal money-laundering charges, and both pled guilty. AmSouth was advised that it was the subject of a criminal investigation. AmSouth agreed to pay a $40 million fine. AmSouth failed to file SARs in a timely manner. In neither the Statement of Facts nor anywhere else did anyone ascribe any blame to the Board or any individual director. A Cease and Desist Order required AmSouth to (among other things) engage an independent consultant 'to conduct a comprehensive review of the Bank's AML Compliance program and make recommendations, as appropriate, for new policies and procedures to be implemented by the Bank.' KPMG Forensic Services ('KPMG') performed the role of independent consultant and issued its report on December 10, 2004 (the 'KPMG Report'). FinCEN and the Federal Reserve jointly assessed a $10 million civil penalty against AmSouth for operating an inadequate anti-money-laundering program and for failing to file SARs. Fin-CEN found that 'AmSouth violated the suspicious activity reporting requirements of the Bank Secrecy Act,' and that 'since April 24, 2002, AmSouth has been in violation of the anti-money-laundering program requirements of the Bank Secrecy Act.' If found that AmSouth's program lacked adequate board and management oversight,' and that 'reporting to management for the purposes of monitoring and oversight of compliance activities was materially deficient.' AmSouth neither admitted nor denied Fin-CEN's determinations in this or any other forum. P sued Ds, and the chancery court dismissed the derivative complaint under Del. Ch. Ct. R. 23.1. P appealed.