Virginia Federal District Court Dismisses Shareholder Derivative Action Related to Credit Card Issuer’s Settlements with OCC, CFPB

On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct.  First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.


Federal Court Allows Shareholder Suit Alleging Concealment of Mortgage-Related Risks to Proceed

On July 11, the U.S. District Court for the Southern District of New York declined to dismiss the majority of the claims brought by a putative class alleging that a national bank, certain of its current and former officers and directors, multiple underwriters, and the bank’s third-party accounting auditor, deliberately concealed the bank’s reliance on an electronic registry system and its exposure to MBS loan repurchase claims. Pa. Pub. Sch. Employee’s Ret. Sys. v. Bank of Am. Corp. No. 11-733, 2012 WL 2847732 (S.D.N.Y. Jul. 11, 2012). In this case, a state retirement system alleges on behalf of similarly situated shareholders that the bank misrepresented that it had “good title” to loans even though multiple courts had blocked the bank’s attempts to foreclosure based on the bank’s use of an electronic registry system. The court, in declining to dismiss these claims, held that the use of the registry system “clouded” the bank’s ownership of many loans, thereby causing the bank to publish misleading shareholder information. The court also declined to dismiss allegations that the defendants misstated or omitted the bank’s exposure to repurchase claims. Further, claims that the bank misled investors about its internal controls also survived. Several other claims, including certain claims against the directors and officers were dismissed without prejudice, while other certain other claims against the defendants were dismissed with prejudice.

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