A Delaware court's recent ruling may have given banking boards protection, at least temporarily, from shareholder lawsuits involving suspicious-activity reports.
On Jan. 26 the state's Court of Chancery dismissed a shareholder suit brought in August against 15 current and former directors of AmSouth Bancorp, including C. Dowd Ritter, the Birmingham, Ala., company's chairman, chief executive, and president.
The suit, Stone et al. v. Ritter et al., claimed the board breached its fiduciary duty by failing to institute sufficient internal controls to guard against violating the Bank Secrecy Act and anti-laundering regulations.
In October 2004, AmSouth agreed to pay federal authorities $50 million of fines to settle charges that it had committed "systemic and serious" violations by failing to file SARs. The shareholder suit sought to force the board to repay AmSouth for the settlement's costs.
In granting the board's request to dismiss the suit, Chancellor William B. Chandler 3d ruled that the plaintiffs failed to make a valid case that the board consciously ignored "red flags" before the fine.
It was insufficient for the shareholders to base their case solely on a report by the Financial Crimes Enforcement Network and the hefty fines AmSouth paid, Chancellor Chandler wrote in his ruling. "This case is not about a board's failure to carefully consider a material corporate decision that was presented to the board. This is a case where information was not reaching the board because of ineffective internal controls."
In most cases, Delaware law requires shareholders to take up any issues with the company directly before going to court. Seth Rigrodsky, a partner at Milberg Weiss Bershad & Schulman LLP of New York, who filed the suit, had argued that such an effort would have been futile.
A spokesman for the $52.6 billion-asset AmSouth would not discuss the ruling. Attempts to reach Mr. Rigrodsky, the lawyer at Milberg Weiss in New York who filed the suit, were unsuccessful.
David Tulchin, a partner at Sullivan & Cromwell LLP and the lead lawyer for AmSouth's board in the case, said in an interview Wednesday that Milberg Weiss has filed an appeal to the Delaware Supreme Court. However, the ruling gives boards some breathing room for now, he said.
"We hope the law firms will get the idea that there isn't money to be made in these cases," he said.
Attorneys not involved in this case agreed that the ruling could benefit corporate boards.
Jeffrey Taft, a partner in the Washington office of Mayer Brown Rowe & Maw LLP, said in a Monday interview that the ruling should have "a beneficial effect" for other banking companies, because it should act as a deterrent.
Robert Serino, a lawyer at Buckley Kolar LLP in Washington and a former deputy chief counsel at the Office of the Comptroller of the Currency, said the ruling "shows that the court isn't going to allow people to simply throw an allegation by Fincen on the court to create a case."
AmSouth is not the only banking company to have been assessed fines recently over such issues.
In October 2004, after the Federal Reserve Board discovered risk-management problems in its correspondent banking and dollar-clearing practices, Union Bank of California avoided a fine by agreeing to develop a written anti-laundering program.
A spokeswoman for the $36 billion-asset San Francisco bank (which is mostly owned by Mitsubishi UFJ Financial Group Inc.) said that it avoided fines, and that it is not facing any shareholder litigation tied to the settlements.
In November, Bank of New York Co. Inc. agreed to pay $38 million to avoid prosecution for alleged Bank Secrecy Act violations. A spokesman for the $102 billion-asset company said Tuesday that its board is not facing any shareholder lawsuits, and that he was unaware of the AmSouth litigation.
In December, ABN Amro Holding NV, the parent of the $110 billion-asset LaSalle Bank Corp. in Chicago, agreed to pay $80 million of fines for anti-laundering deficiencies. A LaSalle spokesman said he could not discuss the implications of the AmSouth case.
Like most of the companies that settle disputes with regulators, AmSouth did so without admitting wrongdoing.
H. Rodgin Cohen, the chairman of Sullivan & Cromwell, said Wednesday that the Delaware court's ruling could extend beyond SARs and end the "simplistic analysis" that boards are liable if a company violates a regulation and pays a fine. Such rulings "will hopefully discourage such litigation," he said.
But Peter Djinis, a former Fincen executive who runs his own law firm in McLean, Va., said he does not think the ruling will discourage shareholders from suing companies that have regulatory issues.
Shareholders could avoid a dismissal if they introduce "specific information" beyond regulatory action showing that a board was aware of problems and either ignored them or took insufficient action, Mr. Djinis said.
