Lieblein v. Ersek et al

BRIEF in Opposition to 102 MOTION to Dismiss the Verified Amended Consolidated Shareholder Derivative Complaint

D. Colo.August 1, 2016

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 14-cv-00144-MSK-KLM STANLEY LIEBLEIN, derivatively on behalf of THE WESTERN UNION COMPANY, CITY OF CAMBRIDGE RETIREMENT SYSTEM, and MARTA/ATU LOCAL 732 EMPLOYEES RETIREMENT PLAN, Plaintiffs, v. HIKMET ERSEK, JACK M. GREENBERG, DINYAR S. DEVITRE, RICHARD A. GOODMAN, BETSY D. HOLDEN, LINDA FAYNE LEVINSON, ROBERTO G. MENDOZA, SOLOMON D. TRUJILLO, and FRANCES M. FRAGOS TOWNSEND, Defendants, -and- THE WESTERN UNION COMPANY, a Delaware Corporation, Nominal Defendant. ______________________________________________________________________________ PLAINTIFFS’ OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS THE VERIFIED AMENDED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT ______________________________________________________________________________ Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 1 of 72 i TABLE OF CONTENTS PRELIMINARY STATEMENT .................................................................................................... 1 FACTUAL ALLEGATIONS ......................................................................................................... 6 I. WESTERN UNION MINIMIZES AML COMPLIANCE TO BOOST PROFITS ................. 6 A. Western Union’s Business ...................................................................................... 6 B. Defendants Know That Western Union’s AML Compliance System Is Legally Deficient .................................................................................................................. 8 II. DEFENDANTS RESIST IMPLEMENTATION OF EFFECTIVE AML COMPLIANCE .. 11 A. Defendants’ Hostility Towards Regulators And Court-Appointed Monitors ....... 11 B. Defendants’ Resistance To Effective AML Oversight Of Western Union Agents ................................................................................................................... 13 1. The Board Fails To Act In 2010 ............................................................... 14 2. The Board Fails To Act In 2011 ............................................................... 15 3. The Board Fails To Act In 2012 ............................................................... 17 4. The Board Fails To Act In 2013 ............................................................... 19 C. Management Deceives The Board About A Federal Criminal Money Laundering Investigation Naming Western Union As A “Target” ....................... 21 III. DEFENDANTS’ CONSCIOUS DERELECTION OF DUTY CAUSED SIGNIFICANT HARM..................................................................................................................................... 23 A. Western Union Is Forced To Accept An Extension Of The SWB Settlement ..... 23 B. Under Threat From Regulators, Western Union Implements Risk-Based AML Compliance, But Only For The Southwest Border ............................................... 24 C. Western Union Is Named A “Target” in Another Federal Criminal Money Laundering Investigation ...................................................................................... 26 ARGUMENT ................................................................................................................................ 27 IV. LEGAL STANDARDS .......................................................................................................... 27 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 2 of 72 ii A. The Motion To Dismiss Standard For Demand Futility ....................................... 27 B. The Three Different Types Of Oversight Claims Under Delaware Law .............. 28 V. DEMAND IS EXCUSED AS TO COUNT I ........................................................................... 32 A. Defendants Knowingly Violated Positive Law By Refusing To Adopt A Legally Required AML Compliance System ........................................................ 32 B. Defendants Face A Substantial Likelihood Of Liability For Consciously Disregarding A Known Duty To Act .................................................................... 33 1. Defendants Knew Western Union’s AML Compliance System Was Inadequate ................................................................................................. 33 2. Defendants Consciously Disregarded Their Responsibility To Implement Effective, Risk-Based AML Compliance ............................... 36 3. Defendants Mischaracterize The Allegations In The Complaint And Cite Inapposite Authority .................................................................. 41 C. Defendants Rely On Self-Serving Interpretations Of Unreliable And Incomplete Documents To Request Improper Inferences .................................... 45 1. Defendants Cannot Obtain Dismissal Based On Their Disputed Interpretations Of Disputed Documents Outside the Complaint .............. 45 2. Defendants Are Not Entitled To The Requested Inferences At The Pleading Stage ........................................................................................... 50 D. A Majority Of The Board Also Faces A “Substantial Likelihood” Of Liability By Virtue Of Their Specific Responsibilities At Western Union ......................... 55 1. Ersek Faces Liability As Western Union’s Chief Executive Officer ....... 55 2. The Committee Defendants Face A Substantial Likelihood Of Liability. 56 VI. DEMAND IS EXCUSED AS TO COUNT II ......................................................................... 61 CONCLUSION ............................................................................................................................. 63 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 3 of 72 iii TABLE OF AUTHORITIES Cases Andropolis v. Snyder, No. 05 CV 01563 EWN BNB, 2006 WL 2226189 (D. Colo. Aug. 3, 2006) ................... 42 Baldwin v. United States, No. 11-cv-02033-MSK-KLM, 2012 WL 2215680 (D. Colo. June 15, 2012) ............ 48, 49 Bank v. Allied Jewish Fed’n of Colorado, 4 F. Supp. 3d 1238 (D. Colo. 2013) ............................................................................ 46, 49 Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ................................................................................................. 28 Cal. Pub. Emps.’ Ret. Sys. v. Coulter, No. Civ.A. 19191, 2002 WL 31888343 (Del. Ch. Dec. 18, 2002) ................................... 50 City of Roseville Emps. Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378 (D. Del. 2010) .................................................................................. 59 Cunningham v. Bank of Am., No. 12-cv-03316-MSK-GPG, 2013 WL 2455945 (D. Colo. Apr. 3, 2013) ..................... 47 Decker v. Clausen, Civ. A. Nos. 10,684, 10,685, 1989 WL 133617 (Del. Ch. Nov. 6, 1989) ........................ 42 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) ............................................................................................... 36 Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007)........................................................................................... 42 Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999) ............................................................................................... 31 Gantler v. Stephens, 965 A.2d 695 (Del. 2009) ................................................................................................. 61 Gee v. Pacheco, 627 F.3d 1178 (10th Cir. 2010) ................................................................................. passim Grimes v. Donald, No. CIV. A. 13358, 1995 WL 54441 (Del. Ch. Jan. 11, 1995) ........................................ 43 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 4 of 72 iv Harris v. Carter, 582 A.2d 222 (Del. Ch. 1990)........................................................................................... 28 In re Abbott Depakote S’holder Deriv. Litig., No. 11 C 8114, 2013 WL 2451152 (N.D. Ill. June 5, 2013) ............................................ 50 In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d 795, 805 (7th Cir. 2003) .................................................................. 37, 41, 45, 52 In re Am. Apparel, Inc. S’holder Deriv. Litig., No. CV 10-06576 MMM (RCx), 2012 WL 9506072 (C.D. Cal. July 31, 2012) ............. 42 In re Am. Int’l. Grp. Consol. Deriv. Litig., 965 A.2d 763 (Del. Ch. 2009)............................................................................... 29, 30, 32 In re Baxter Int’l, Inc. S’holder Litig., 654 A.2d 1268 (Del. Ch. 1995)......................................................................................... 43 In re Caremark Intern. Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996)......................................................................... 28, 30, 41, 58 In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009)........................................................................................... 43 In re Countrywide Financial Corp. Deriv. Litig., 554 F. Supp. 2d 1044 (C.D. Cal. 2008) ............................................................ 3, 37, 41, 56 In re eBay, Inc., S’holders Litig., No. C.A. 19988-NC, 2004 WL 253521 (Del. Ch. Jan. 23, 2004)..................................... 33 In re General Motors Co. Deriv. Litig., C.A. No. 9627-VCG, 2015 WL 3958724 (Del. Ch. June 26, 2015) ................................. 42 In re Goldman Sachs Grp., Inc. S’holder Litig., No. CIV.A. 5215-VCG, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ....................... 30, 59 In re infoUSA, Inc. S’holders Litig., 953 A.2d 963 (Del. Ch. 2007)........................................................................................... 50 In re Intuitive Surgical S’holder Deriv. Litig., 146 F. Supp. 3d 1106 (N.D. Cal. 2015) ..................................................................... passim In re Lear Corp. S’holder Litig., 967 A.2d 640 (Del. Ch. 2008)........................................................................................... 42 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 5 of 72 v In re Limited., Inc. S’holders Litig., No. CIV.A. 17148-NC, 2002 WL 537692 (Del. Ch. Mar. 27, 2002) ............................... 30 In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479 (Del. Ch. May 31, 2011) .......................... passim In re Pfizer Inc. S’holder Deriv. Litig., 722 F. Supp. 2d 453 (S.D.N.Y. 2010)..................................................................... 3, 37, 41 In re SandRidge Energy, Inc. S’holder Deriv. Litig., 302 F.R.D. 628 (W.D. Okla. 2014) ................................................................................... 27 In re Tower Air, Inc., 416 F.3d 229 (3d Cir. 2005).............................................................................................. 38 In re Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267 (S.D.N.Y. 2006)......................................................... 4, 28, 37, 40, 41 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1970) ............................................................................................................ 27 Kenney v. Koenig, 426 F. Supp. 2d 1175 (D. Colo. 2006) .................................................................. 28, 42, 61 King v. Baldino, 648 F. Supp. 2d 609 (D. Del. 2009) .................................................................................. 43 La. Mun. Police Emps. Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012)...................................................................................... passim Maurras Revocable Trust v. Bronfman, Nos. 12 C 3395, 12 C 6019, 2013 WL 5348357 (N.D. Ill. Sept. 24, 2013) ..................... 42 Rales v. Blasband, 634 A.2d 927 (Del. 1993) ........................................................................................... 27, 28 Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179 (S.D.N.Y. 2000)........................................................................... 47, 48 Rich ex rel. Fuqi Int’l., Inc. v. Yu Kwai Chong, 66 A.3d 963 (Del. Ch. 2013)............................................................................................. 58 Rist v. Stephenson, No. CIV.A. 05-CV-02326-P, 2007 WL 2914252 (D. Colo. Oct. 1, 2007) ....................... 62 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 6 of 72 vi Rosenbloom v. Pyott, 765 F.3d 1137 (9th Cir. 2014) ................................................................................... passim Roth v. Jennings, 489 F.3d 499 (2d Cir. 2007).............................................................................................. 48 Sandys v. Pincus, C.A No. 9512-CB, 2016 WL 769999 (Del. Ch. Feb. 29, 2016) ....................................... 33 Seni v. Peterschmidt, No. 12-cv-00320-REB-CBS, 2014 WL 5812149 (D. Colo. Nov. 10, 2014) .................... 61 Shifrin v. Colorado, No. 09-cv-03040-REB-MEH, 2010 WL 2943348 (D. Colo. July 22, 2010) .................... 49 Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190 (10th Cir. 2013) ........................................................................................ 48 Stidham v. Peace Officer Standards & Training, 265 F.3d 1144 (10th Cir. 2001) .................................................................................... 6, 28 Stone v. Ritter, 911 A.2d 362 (Del. 2006) .......................................................................................... passim Tal v. Hogan, 453 F.3d 1244 (10th Cir. 2006) ........................................................................................ 48 Westmoreland Cnty. Empl Ret. Sys. v. Parkinson, 727 F.3d 719 (7th Cir. 2013) ..................................................................................... passim Wood v. Baum, 953 A.2d 136 (Del. 2008) ................................................................................................. 61 Statutes 1 Del. C. § 102(b)(7) ..................................................................................................................... 61 8 Del. C. § 141(e) .......................................................................................................................... 39 Rules Fed. R. Civ. P. 23.1 ....................................................................................................................... 27 Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 7 of 72 1 Co-Lead Plaintiffs City of Cambridge Retirement System and MARTA/ATU Local 732 Employees Retirement Plan (“Plaintiffs”) respectfully submit this Opposition to Defendants’ Motion to Dismiss Plaintiffs’ Verified Amended Consolidated Shareholder Derivative Complaint (Dkt No. 102) (the “Motion” or “MTD Br.”) filed by Defendants1 and nominal defendant The Western Union Company (“Western Union” or the “Company”). PRELIMINARY STATEMENT This derivative action seeks relief for harm that Western Union’s directors and Chief Executive Officer caused by refusing to implement legally required, risk-based AML compliance, including effective due diligence and controls over Western Union agents. The misconduct continued even though Defendants knew that they had a duty to implement effective AML compliance and knew that their failure to do so exposed Western Union to extreme regulatory risk, criminal prosecution, and criticism that the Company facilitates money laundering by people who commit heinous crimes. (¶¶57-64, 68-75);2 see also Motion to Dismiss Order dated March 31, 2016 (Dkt. No. 97) (“MTD Order”) at 13 (“WU’s Board knew of alleged defects in WU’s money laundering compliance activities and the need for remedial action”). The Court’s MTD Order dismissing this action without prejudice instructed Plaintiffs to focus their allegations on “[Western Union’s] attempts (if any) to reform itself from lax 1 “Defendants” are Dinyar S. Devitre, Hikmet Ersek, Richard A. Goodman, Jack M. Greenberg, Betsy D. Holden, Linda Fayne Levinson, Roberto G. Mendoza, Frances M. Fragos Townsend, and Solomon D. Trujillo. 2 References to “¶__” are to the corresponding paragraphs in the Verified Amended Consolidated Shareholder Derivative Complaint dated May 2, 2016 (the “Complaint”). Unless otherwise indicated, emphasis is added, citations and quotations are omitted, and capitalized terms herein have the same meaning as in the Complaint. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 8 of 72 2 supervision and inappropriate conduct with the help of a sponsor (the State of Arizona or the Monitor)” after the Company entered into the SWB Settlement (defined below) in February 2010. (MTD Order at 25 (emphasis in original).) Plaintiffs have followed the Court’s instruction. The Complaint alleges in painstaking detail which directors were informed that management was making no progress on improving Western Union’s AML compliance oversight of its agents (one of the Company’s biggest regulatory risks), when they received that information, and who provided that information to them. (Complaint § V.E.) Despite this information, the Board refused to take corrective action sufficient to ensure that the Company implement effective, risk-based due diligence and oversight of Western Union agents, which they knew was required by the Bank Secrecy Act. (¶85.) In other words, the Complaint contains particularized allegations concerning the “who, what, where, when and how” of each Defendant’s scienter. Rosenbloom v. Pyott, 765 F.3d 1137, 1150-51 (9th Cir. 2014) (demand excused “given the combination of non-conclusory facts alleged, [giving rise to] a reasonable inference of scienter—and thus conscious inaction—on part of the board”). The Complaint also details how Defendants were informed that the government and management continued to find numerous instances of AML noncompliance by Western Union agents. Defendants also knew that prosecutors named Western Union a “target” in two federal criminal money laundering investigations at opposite sides of the country after finding “substantial evidence” linking Western Union to criminal money laundering by Western Union agents. (¶¶101, 151, 245-253.) Meanwhile, as detailed in the Complaint, Defendants allowed management to maintain an adversarial relationship with Arizona and the Court-appointed Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 9 of 72 3 monitor, resulting in a lawsuit from Arizona and the Monitor seeking access to information necessary to improve Western Union’s AML compliance program. (¶¶77-79.) Based on the facts and circumstances detailed in the Complaint, Plaintiffs allege that a majority of the Board consciously allowed management to approach the implementation of an effective AML compliance system as a business risk to be managed rather than a legal requirement to be complied with in good faith. The Complaint alleges that Defendants were consciously involved in the decision to delay and undermine implementation of effective, risk- based due diligence and oversight over Western Union agents on the Southwest Border. The Complaint further alleges that, at a minimum, a majority of the Board consciously failed to act after learning that management was making no progress on “agent oversight” and other critical elements of an effective AML compliance system, even as they received “red flag” after “red flag” informing the directors that prosecutors and regulators were connecting Western Union to illegal money laundering by Western Union agents and continued to make regulatory findings that Western Union’s AML compliance oversight of its agents was legally deficient. (¶¶101, 151, 245-253.) Courts around the country have held that the kind of particularized, detailed allegations concerning Board complicity and conscious inaction included in the Complaint excused Plaintiffs from making a presuit demand and state a claim that should not be dismissed.3 3 See, e.g., Rosenbloom, 765 F.3d at 1150-51; La. Mun. Police Emps. Ret. Sys. v. Pyott, 46 A.3d 313, 351 (Del. Ch. 2012) (rev’d on other grounds) (“Pyott”); In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479 (Del. Ch. May 31, 2011); Westmoreland Cnty. Empl Ret. Sys. v. Parkinson, 727 F.3d 719, 729 (7th Cir. 2013) (applying Delaware law); In re Intuitive Surgical S’holder Deriv. Litig., 146 F. Supp. 3d 1106, 1116-19 (N.D. Cal. 2015) (applying Delaware law); In re Pfizer Inc. S’holder Deriv. Litig., 722 F. Supp. 2d 453, 461-62 (S.D.N.Y. 2010) (applying Delaware law);); In re Countrywide Financial Corp. Deriv. Litig., 554 F. Supp. 2d Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 10 of 72 4 Defendants argue that the Complaint should be dismissed for failure to make a presuit demand because they relied in good faith on management to improve Western Union’s AML compliance. According to Defendants, so long as management implemented internal AML reporting mechanisms and took some steps towards AML compliance, Defendants were justified in relying on management and had no obligation to ensure the Company complied with the law and made adequate progress on the implementation of Monitor recommendations. (MTD Br. at 27-33.) Defendants are wrong. In Massey Energy, Vice-Chancellor Strine of the Delaware Chancery Court (currently Chief Justice of the Delaware Supreme Court) explained that when, as here, “a company has a ‘record’ as a recidivist, its directors and officers cannot take comfort in the appearance of compliance . . . at the pleading stage, when the plaintiffs are able to plead particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non-compliance in fact and of a managerial attitude suggestive of a desire to fight with and hide evidence from the company’s regulators.” 2011 WL 2176479, at *21. The same is true here. Nor is it enough for directors to implement an internal reporting mechanism to escape liability and make presuit demand mandatory. Regardless of any internal reporting mechanism, directors of a Delaware corporation breach their fiduciary duties of good faith and loyalty if they consciously allow the Company to violate the law (Pyott, 46 A.3d at 340), or if they “fail to act 1044, 1060-64 (C.D. Cal. 2008) (applying Delaware law); In re Veeco Instruments, Inc. Sec. Litig., 434 F. Supp. 2d 267, 277-78 (S.D.N.Y. 2006) (applying Delaware law). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 11 of 72 5 in the face of a known duty to act.” Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). That is exactly what the Complaint alleges here. As a matter of law, Western Union’s certificate of incorporation cannot exculpate such breaches of the duties of good faith and loyalty. Stone, 911 A.2d at 367. Next, Defendants argue that this Court should adopt their self-serving interpretation of 131 extraneous documents and a 42-page appendix to dispute the veracity of the particularized allegations of the Complaint and to draw inferences in their favor. This is improper. Even if Plaintiffs did not dispute the accuracy and completeness of the documents (and they do), it is improper for this Court to make factual findings in favor of Defendants based on extraneous documents and to draw inferences in their favor on a motion to dismiss. See Gee v. Pacheco, 627 F.3d 1178, 1186-87 (10th Cir. 2010) (reversing dismissal where district court improperly relied on documents attached to a Rule 12(b)(6) motion and adopted defendants’ version of the facts); Rosenbloom, 765 F.3d at 1155 (reversing lower court because, among other things, “it repeatedly drew inferences in the Board’s favor, crediting [the company’s] reasonable interpretations of the factual allegations over Plaintiff’s reasonable interpretations of those same allegations”); Westmoreland, 727 F.3d at 729 (reversing lower court because its “focus on other hypothetical explanations for the defendants’ conduct improperly ignores the rule that any inferences reasonably drawn from the factual allegations of the complaint must be viewed in the light most favorable to the plaintiffs”). If Defendants have justifications for their conduct, they can present them at trial. They cannot obtain dismissal by presenting self-serving interpretations of incomplete, disputed, and extraneous documents, and then seek inferences in their favor. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 12 of 72 6 In sum, accepting the particularized allegations of the Complaint as true and drawing reasonable inferences in favor of Plaintiffs, the Complaint adequately alleges that Defendants (including a majority of the Board) consciously allowed management to violate the AML laws and put the Company at risk by refusing to implement legally required, effective AML compliance systems, including risk-based due diligence and oversight over Western Union agents. At a minimum, the well-pled facts and circumstances in the Complaint adequately allege that Defendants (including a majority of the Board) consciously failed to intervene when management was taking an aggressive attitude with regulators and the Monitor, and was purposefully delaying implementation of effective due diligence and oversight over Western Union agents. Thus, demand is excused and Defendants’ Motion should be denied. FACTUAL ALLEGATIONS The following well-pleaded allegations from the Complaint must be accepted as true and viewed in the light most favorable to Plaintiffs as nonmovants. Stidham v. Peace Officer Standards & Training, 265 F.3d 1144, 1149 (10th Cir. 2001). I. WESTERN UNION MINIMIZES AML COMPLIANCE TO BOOST PROFITS A. Western Union’s Business Western Union’s business is the worldwide transfer of money through a network of agents or “front line associates” (“FLAs”). (¶54.) Western Union agents are representatives of the Company who interact with customers and execute transfers using Western Union systems. (Id.) Western Union has leverage over its agents and is accountable for their misconduct. (¶55.) If agents do not follow Western Union instructions, the Company can terminate the relationship and deprive agents of significant revenues. (Id.) Moreover, despite Defendants’ suggestions Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 13 of 72 7 otherwise,4 government regulators hold Western Union accountable for its agents’ misconduct. (¶¶56, 63.) Western Union faces criminal and civil liability, as well as a threat that essential licenses will be revoked, if its agents violate the Bank Secrecy Act (the “BSA”) and parallel state AML laws while using Western Union systems. (¶56.) As Western Union has acknowledged in Form 10-Ks (signed by each individual Defendant), Western Union faces “[l]iabilities and loss of business resulting from a failure by [Western Union], [its] agents or their subagents to comply with the laws and regulations and regulatory or judicial interpretations thereof.” (Id.) Western Union charges higher fees for its services and has higher profit margins than its competitors. (¶¶50, 51.) In 2011, Western Union generated more than 60% of the entire industry’s profit while it only had an 18% market share. (¶51.) Western Union’s public filings make clear that its profit margin depends in part on keeping transaction and compliance costs low. (¶52.) Western Union uses higher monetary thresholds for recording and reporting customer information than competitors, decreasing the number of reportable transactions and lowering processing and AML compliance costs. (¶¶3, 52.) Western Union’s strategy of charging higher fees and using higher reporting thresholds boosts profits, but comes with the known risk of facilitating money laundering by criminals who are willing to pay higher transaction fees to hide their identity. (¶52.) Western Union’s business strategy—implemented by management and overseen by the Board—has also led to an adversarial relationship with law enforcement, particularly in Arizona (a key geography for 4 See, e.g., MTD Br. at 4 (“Most of these transfers are effectuated by ‘agents’ who are employed by independent businesses, not by Western Union.”), 8 (“The violations were not by WUFSI employees, nor was there a finding that anyone at WUFSI was actually aware of the violations at these 16 locations”) (emphasis in original). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 14 of 72 8 Western Union, representing 25% of outbound revenues). (¶¶4, 65, 68, 83.) For example, in 2009, Western Union sued the Arizona Attorney General to quash subpoenas seeking information needed to combat human trafficking. (¶68.) That same year, the Arizona Attorney General testified before the U.S. Senate Judiciary Committee that Western Union was “by far the largest provider of illicit money-movement services” and that “even though wire transfers are the coyote’s payment method of choice, Western Union still refuses to comply with subpoenas for vital data.” (¶¶69-70.) B. Defendants Know That Western Union’s AML Compliance System Is Legally Deficient Criminal money laundering poses a threat to financial institutions and national security. (¶57.) As then-U.S. Attorney General John Ashcroft explained, “behind every dollar of dirty money in need of laundering is a trail of victims—victims of violent crimes committed to settle drug wars; victims of terrorism; women and children trafficked into dangerous, degrading labor; and honest businessmen and women driven to bankruptcy by front operations for organized crime.” (Id.) As a result, Western Union’s business is heavily regulated under the BSA, as amended by the USA Patriot Act of 2001, and similar state laws. (¶58.) The BSA prohibits Western Union from transmitting more than $3,000 unless it verifies and records customer information. (Id.) The BSA also requires Western Union to submit to the government “currency transaction reports” for transfers exceeding $10,000 and “suspicious activity reports” for transfers exceeding $2,000 when Western Union has reason to believe that the transaction involves criminal proceeds or is intended to evade AML requirements. (Id.) Parallel state laws impose similar requirements at different monetary thresholds. (Id.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 15 of 72 9 Moreover, the BSA requires Western Union to adopt a “risk-based” approach to AML compliance, including risk-based oversight over its agents. (¶61.) A risk-based approach (as opposed to an “event-based” approach) is designed to detect and prevent criminal activity by ensuring effective agent oversight while accounting for heightened risks associated with transactions from certain geographies or with other certain characteristics. (¶¶6, 58.) Western Union’s Form 10-Ks, signed by all Defendants, note that the U.S. Treasury Department “has interpreted the BSA to require money transfer companies to conduct due diligence into and risk-based monitoring of their agents inside and outside the United States.” (¶61.) Western Union’s Form 10-Ks, signed by Defendants, acknowledge that noncompliance with AML laws and regulations is one of the most significant risks to the Company, exposing it to criminal prosecution and revocation of essential licenses. (¶¶53, 62-63.) Yet, Western Union never implemented companywide “risk-based” AML oversight over its agents, as required by the BSA. (¶¶67, 108, 210, 280.) Between 2002 and 2010, Western Union entered into five regulatory settlements with FinCEN (part of the U.S. Treasury Department) and regulators in New York, California, and Arizona. (¶65.) These regulators imposed fines and determined that Western Union lacked an effective AML compliance system. (Id.) For example, FinCEN determined in 2003 that Western Union was “willfully” failing to file SARs because the Company “failed to establish [suspicious activity] reporting procedures.” (Id.) California identified failures in Western Union’s “monitoring and compliance program to ensure that it and its agents complied with the [BSA].” (Id.) Arizona found in 2006 that Western Union “failed to adequately supervise” Western Union agents and, in 2008, that Western Union was still deficient in recording customer Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 16 of 72 10 identities, thereby facilitating illegal transaction structuring to avoid AML reporting requirements. (Id.) The Board was admittedly informed of these settlements. (¶67.) In 2002, 2003, 2006, and 2008, management promised to correct Western Union’s violation of AML laws and regulations, and implement effective AML compliance oversight over Western Union and its agents. (¶¶65-67.) In February 2010, Western Union entered into the SWB Settlement with Arizona, California, New Mexico, and Texas—the Company’s third consent agreement with Arizona in four years. (¶93.) Western Union admitted that it knew or should have known for at least four years that numerous Western Union agents in Arizona were engaged in money laundering violations that facilitated human trafficking. (¶¶71, 93.) The Company paid $94 million and management again promised to implement effective AML compliance. (¶¶5, 72.) Defendants admit that this settlement “triggered knowledge by the Board that WUFSI should improve its AML compliance.” (¶74; see also MTD Order at 13 (SWB Settlement “demonstrates that WU’s Board knew of alleged defects in WU’s money-laundering compliance activities and the need for remedial action”).) Any director acting in good faith who has been repeatedly informed that the company they oversee does not have effective AML compliance oversight over its agents as required by law, thereby allowing large-scale money laundering for heinous criminals to go undetected and exposing the Company to criminal prosecution, would immediately take aggressive steps to implement an effective AML compliance system. (¶75.) Moreover, any director acting in good faith who was informed by management in 2002, 2003, 2006, and 2008 that they would fix Western Union’s inadequate oversight over its agents, would not blindly rely on management’s Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 17 of 72 11 promises after admitting in 2010 that Western Union did nothing to stop widespread money laundering by numerous agents in Arizona over a prolonged period of time that facilitated money laundering by criminals who sell women and children into dangerous, degrading labor. (¶¶8, 68- 75, 85.) To the contrary, such a director would take aggressive steps to avoid any further delay in the implementation of effective “agent oversight” systems and would not allow management to continue its adversarial relationship with regulators and Court-appointed monitors. (¶¶75, 77.) Nor would such a director limit the implementation of legally required, risk-based AML compliance oversight over the Company’s agents to the specific geographic region where the Company is threatened with enforcement action. (¶¶227-229.) As alleged in the Complaint, Defendants did the exact opposite here. II. DEFENDANTS RESIST IMPLEMENTATION OF EFFECTIVE AML COMPLIANCE A. Defendants’ Hostility Towards Regulators And Court-Appointed Monitors The February 2010 Southwest Border Settlement (the “SWB Settlement”) required Western Union to accept a Court-appointed Monitor. (¶76.) The Monitor’s appointment letter made clear that Western Union was obligated to “facilitate [the Monitor’s] efforts to implement an effective risk-based AML compliance program.” (¶210.) Western Union represented that its directors, executives, and other employees would cooperate with the Monitor in the execution of his or her duties, and to provide the Monitor with “access to all files, books, records, personnel, transaction and other data, and facilities that fall within the scope of responsibilities of the Monitor.” (¶76.) Defendants knew that they could not, consistent with their duties, “go through the motions” or fail to make good faith efforts to ensure that Western Union would finally Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 18 of 72 12 implement effective AML compliance. (¶85.) From the outset, however, management informed the Board that the Monitor presented a “risk” to Western Union’s business model of higher fees and lower processing and AML compliance costs. (¶122.) Management also sought to prevent the Monitor’s access to information regarding WUBS money transfers—a material part of Western Union’s business. (¶¶50, 68-70, 77.) Excluding such transfers from effective AML compliance would create a significant loophole for criminals to launder illicit proceeds through business-to-consumer, consumer-to-business, and business-to-business transactions. (¶77.) Management’s refusal to provide WUBS information was inconsistent with Western Union’s unambiguous legal obligation to implement risk-based AML compliance oversight over Western Union’s agents. (Id.) After management denied the requests for access to WUBS data, the Monitor filed a motion with the Arizona court overseeing the SWB Settlement. (¶79.) The Arizona Attorney General joined in the motion. (Id.) Despite their known duties and admitted knowledge of Western Union’s repeated AML violations, Defendants sided with management in its dispute with regulators over providing access to critical information for an effective AML compliance system. (¶82.) Defendants never instructed management to work cooperatively with the Monitor or rebuked them for their hostility. (¶77, 81.) To the contrary, Defendants approved significant compensation during the dispute with the Monitor, including more than $31 million for Ersek from 2010 through 2013. (¶¶20, 103, 129, 179, 234.)5 5 Defendants have suggested that they acted in good faith because they only admitted that “WUFSI” needed to improve its AML compliance. (MTD Br. at 8-9.) Aside from the fact that Defendants are not entitled to the inference that only WUFSI had legally deficient AML compliance (infra at Sec. II.C.), Defendants’ parsing underscores their fundamentally improper approach to AML compliance, which is not a business risk to be managed but a legal requirement that must be followed and in good faith implemented to: (i) protect the Company Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 19 of 72 13 Defendants’ bid to withhold information from the Monitor failed. During a meeting on December 6 and 7, 2012, management informed the Board that it had lost the motion to exclude the Monitor and Arizona from WUBS. (¶174.) Management made clear that, as a result, Western Union “[would] be forced to react to the monitor’s recommendations that may involve significant changes to the Business Units internal systems and the client experience,” conceding that WUBS (like WUFSI) did not have an effective AML compliance system. (Id.) Meanwhile, Defendants had allowed management to perpetuate Western Union’s adversarial approach to the Arizona Attorney General and the Monitor for close to three years after the SWB Settlement. (¶7.) B. Defendants’ Resistance To Effective AML Oversight Of Western Union Agents The Board and management knew by 2010 that Western Union was legally required to implement risk-based monitoring over Western Union agents “inside and outside the United States,” as well as effective due diligence and oversight of its agents’ use of Western Union transmittal systems. (¶¶58-59, 61, 85, 111.) During the following years, management repeatedly informed Defendants that: (i) Western Union’s AML compliance system and agent oversight was deficient and (ii) management was making little progress on implementing the Monitor’s recommendations for an effective AML compliance system and agent oversight in the Southwest Border region. (¶¶73-74, 77-80.) Defendants did not take any affirmative steps to ensure that Western Union would implement effective, risk-based AML monitoring and oversight over its from criminal prosecution, draconian fines, and revocation of licenses; and (ii) detect and prevent money laundering by people who commit despicable crimes. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 20 of 72 14 agents. To the contrary, Defendants allowed management to drag its feet on implementing such a system in the Southwest Border area and to make no effort whatsoever to implement risk-based AML compliance oversight over Western Union agents outside the Southwest Border area. (¶¶85, 113, 242.) 1. The Board Fails To Act In 2010 At the February 24 and 25, 2010 Board Meeting, management informed Ersek, Devitre, Greenberg, Holden, Levinson, Mendoza, Miles, and von Schimmelmann that a “mystery shopping” test found that 27% of visited Western Union agents failed to meet AML compliance requirements. (¶¶88, 90.) Extrapolated to all Western Union agents, these findings would mean that more than 12,000 Western Union agents in the U.S. failed to meet compliance requirements. (¶90.) Despite knowing that Western Union needed to improve AML compliance oversight over its agents, Defendants took no action upon learning that thousands of Western Union agents were likely AML noncompliant, facilitating money laundering, and exposing the Company to extreme regulatory and enforcement risk. (¶¶74, 88, 91.) At the September 22 and 23, 2010 Board Meeting, management discussed with Ersek, Devitre, Greenberg, Holden, Levinson, Mendoza, Miles, and von Schimmelmann the Monitor’s recommendations for “greater control around FLA system sign-on (stricter passwords, using name, biometrics)” and the “need for criminal/credit background checks or FLAs.” (¶98.) These recommendations were critically important for ensuring that: (i) criminals would not qualify as Western Union agents with access to the Company’s money transmittal systems and (ii) persons using Western Union money transmittal systems were, in fact, approved agents. (Id.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 21 of 72 15 Defendants knew that Western Union had an affirmative legal obligation to “conduct due diligence into and risk-based monitoring of their agents inside and outside the United States.” (¶61.) Yet, when management opposed the Monitor’s recommendations on the technicality that the SWB Settlement “only contemplates use of E-verify for FLAs,” Defendants took no action. (¶¶85, 98.) Defendants did not instruct management to work cooperatively and in good faith with the Monitor to implement effective AML due diligence and controls over Western Union agents, treating AML compliance as a business risk to be managed rather than a legal boundary to be observed. (Id.) Two and a half years later, in February 2013, Western Union’s AML compliance system for the Southwest Border was still only in the “very early stages” for “agent oversight” and the “partnership oversight program.” (¶184.) 2. The Board Fails To Act In 2011 At the May 19 and 20, 2011 Board Meeting, management informed Ersek, Devitre, Greenberg, Holden, Levinson, Mendoza, Miles, and von Schimmelmann that Western Union suffered from a “[l]ack of meaningful reporting,” and that its reporting was “[e]vent-based reporting, not risk-based.” (¶108.) Management also noted that it could not reach agreement on “the Front Line Associate items” with Arizona and the Monitor. (¶¶108, 110.) Any director acting in good faith would demand immediate remedial action to correct these critical AML deficiencies. (¶108.) Defendants knew that systemic AML compliance failures exposed the Company to regulatory enforcement action and criticism that Western Union was facilitating illegal money laundering by brutal criminals. (¶¶11, 67, 264.) Yet, Defendants took no action. (¶111.) Two years later, in February 2013, Western Union’s AML compliance Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 22 of 72 16 for the Southwest Border was still only in the “very early stages” for “internal controls,” the “documentation of AML compliance policies and procedures,” and “agent oversight.” (¶184.) At the September 14-16, 2011 Board Meeting, management informed Ersek, Devitre, Greenberg, Holden, Levinson, Mendoza, Miles, and von Schimmelmann that more than 84% of the 157 riskiest Western Union agents on the U.S. side of the Southwest Border had findings of AML noncompliance. (¶116.) Thus, one and a half years after admitting that Western Union had reason to know that its agents in Arizona were engaged in a pattern of money laundering that facilitated human smuggling, management informed the Board that there were still at least 132 Western Union agents in the Southwest Border region who did not comply with AML requirements, exposing the Company to grave regulatory risk. (¶¶56, 71, 116.) Defendants did nothing to change management’s attitude towards AML noncompliance as a business risk that could be managed. (¶117.) Defendants also did nothing to determine whether management’s progress on the Monitor recommendations was adequate. (¶85.) At the December 9, 2011 Board Meeting, Holden informed the other members of the Board (Ersek, Devitre, Greenberg, Levinson, Mendoza, Miles, and von Schimmelmann) that management was making little progress on Monitor recommendations. (¶121.) Almost two years after entry in the SWB Settlement, a large majority of the Monitor’s recommendations remained outstanding, including 96% of AML compliance system recommendations that were due by June 30, 2012. (¶122.) Management also informed Defendants that a multi-state exam by Ohio, Texas, and Washington regulators found Western Union’s AML compliance “unsatisfactory,” including “inaccurate completion of [currency transaction reports],” Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 23 of 72 17 “incomplete information on Money Order logs completed by agents” and “inaccurate reporting of agents.” (¶123.) Defendants made no affirmative effort to ensure that management implement effective AML compliance. Defendants did not determine whether progress on the Monitor’s recommendations was adequate, whether management responded adequately to Monitor concerns regarding AML deficiencies, or whether management could be trusted to correct Western Union’s deficient AML compliance. (¶85.) Defendants also made no effort to understand why Western Union continued to have a deficient AML compliance system in Ohio, Texas, and Washington, or instruct management to implement legally required, risk-based due diligence and oversight over Western Union agents in Ohio and Washington (i.e., outside the Southwest Border region). (¶8.) To the contrary, Defendants allowed management to argue with regulators over the results of the examination. (¶124.) In other words, Defendants continued to allow management to treat AML compliance as a business risk to be managed by disputing regulatory findings of noncompliance rather than a legal boundary that Western Union was required to respect by implementing effective, risk-based due diligence and oversight over the Company’s agents. (¶125.) 3. The Board Fails To Act In 2012 At the February 23, 2012 Board Meeting, Holden informed other members of the Board (Ersek, Devitre, Greenberg, Levinson, Mendoza, Miles, and von Schimmelmann) that two years after entry in the SWB Settlement, 99% of the Monitor recommendations were outstanding. (¶134.) Despite Western Union’s history of noncompliance and the potential draconian penalties, Defendants did not request even an explanation as to why all but one percent of the Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 24 of 72 18 Monitor’s recommendations remained incomplete. (¶135.) Moreover, the Board still did not address management’s adversarial relationship with the Monitor, investigate whether management could be trusted to correct Western Union’s AML compliance problem, or engage directly with the Monitor to ensure that the AML compliance deficiencies were corrected. (¶85.) At the July 20, 2012 Board Meeting, Greenberg and Devitre informed Ersek, Goodman, Holden, Levinson, Mendoza, Miles, von Schimmelmann, and Trujillo that 91% of the Monitor’s recommendations were incomplete and that almost 50% of the recommendations were off track. (¶159.) The SWB Settlement was due to end only one year later. (¶113.) Any director acting in good faith would take affirmative steps to understand whether management’s progress on the Monitor recommendations was adequate and whether it could still be trusted to fix AML noncompliance. (¶85.) Despite knowing that they had a duty to oversee implementation of an effective AML compliance system, Defendants took no affirmative steps whatsoever. (¶¶58, 61, 74, 85.) At the September 13 and 14, 2012 Board Meeting, management informed Ersek, Devitre, Greenberg, Goodman, Holden, Levinson, Mendoza, Miles, von Schimmelmann, and Trujillo that it wanted to reduce the compliance budget for the Southwest Border region by over 43% from $30 million in 2012 to $17 million for 2013. (¶¶160-61.) Defendants knew that 90% of the Monitor’s recommendations remained outstanding and that the completion deadline was less than one year away. (¶162.) Any director acting in good faith would have demanded to know why management was making such slow progress and probe management on how a deep cut to the AML compliance budget could possibly be appropriate at that juncture. (¶¶85, 162, 165.) Again, Defendants took no such affirmative steps. Instead, Defendants continued to blindly rely Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 25 of 72 19 on management even though more than a decade of empty promises informed Defendants that management would not implement legally required, effective AML compliance oversight over Western Union agents unless it was forced to do so. (¶¶85-86.) At the December 6 and 7, 2012 Board Meeting, management informed Ersek, Devitre, Greenberg, Goodman, Holden, Levinson, Mendoza, Miles, von Schimmelmann, and Trujillo that “major components” of the Southwest Border program were at “significant” risk for July 2013 delivery, including: beneficial sender/receiver information, product controls and oversight, and various technology projects, including FLA controls. (¶172.) These were the same AML deficiencies that regulators identified more than a decade earlier. (¶¶65-67.) Management also informed the Board that Western Union lost its motion to exclude WUBS from the SWB Settlement. (¶174.) Despite learning that Western Union was on the verge of breaching its obligations under the SWB Settlement and had lost its court battle with the Arizona Attorney General and the Monitor, Defendants took no affirmative steps to: (i) address management’s adversarial relationship with the regulator and the Monitor; (ii) engage directly with the Monitor; (iii) determine whether Western Union was in breach of the SWB Settlement; or (iv) align management’s financial incentives with implementing effective AML compliance. (¶85.) 4. The Board Fails To Act In 2013 At the February 21, 2013 Board Meeting, management informed Ersek, Devitre, Greenberg, Goodman, Holden, Levinson, Mendoza, Miles, von Schimmelmann, and Trujillo that Western Union would miss the SWB Settlement deadline. (¶¶184-85.) Three years after the SWB Settlement, management reported that fixing “FLA Controls / Authentication” was “at a standstill”; the scope of work for resolving beneficial sender/receiver information AML Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 26 of 72 20 compliance issues was “still under evaluation”; progress regarding due diligence of agents was “slow”; Southwest Border progress for “internal controls” was only 10%; and the program was in the “very early stages” for the “partnership oversight” program, the “internal controls program,” documentation of AML compliance policies and procedures, and “agent oversight.” (¶¶183-185.) Management proposed an “executive level negotiation with the Monitor and Arizona to reframe the requirements to resolve the SWB Program”—essentially an attempt to talk the Monitor and Arizona out of requiring AML compliance beyond the partial effort to date. (¶186.) Defendants knew that management’s failure to implement basic elements of an effective AML compliance system for more than three years after the SWB Settlement exposed the Company to grave regulatory risk, including potential criminal prosecution and revocation of licenses. (¶192.) However, Defendants again took no steps to change management’s attitude towards AML noncompliance as a business risk or Western Union’s adversarial relationship with regulators. (¶¶85-86.) Incredibly, Defendants still took no steps whatsoever to determine whether management could be trusted to correct Western Union’s AML compliance program in the first place. (¶85.) At the May 29 and 30, 2013 Board Meeting, management informed Ersek, Devitre, Greenberg, Goodman, Holden, Levinson, Mendoza, Miles, and Trujillo that “major issues” were still “open,” including “FLA Authentication; Beneficial Sender and Receiver Information; Global Due Diligence and [know your Agent] (SWB and Latin America); [and] Risk Assessment.” (¶¶204-05.) The Board also learned that Deloitte would report to a new Monitor that “key areas” of Western Union’s AML compliance needed improvement, including: Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 27 of 72 21 (i) “Fundamental Risk Assessment document must be completed”; (ii) “US Agent Oversight”; and (iii) “Regulatory Reporting—enhance Suspicious Activity Reporting documentation/ decisions for all products and all business lines.” (¶206.) Defendants admittedly knew that state and federal regulators had identified the exact same AML compliance deficiencies ten years earlier. (¶65.) Yet, they still took no steps to determine whether management had adequately responded to Monitor recommendations for basic AML deficiencies, such as lack of control over agents and deficient recording and reporting of beneficial sender/receiver information. (¶85.) C. Management Deceives The Board About A Federal Criminal Money Laundering Investigation Naming Western Union As A “Target” On September 22, 2010, management informed Ersek, Greenberg, Holden, Miles, and von Schimmelmann that a large Western Union agent in California was the subject of a criminal money laundering investigation. (¶¶100-101.) Coming on the heels of the SWB Settlement, any director acting in good faith would instruct management to provide additional information and to keep the Board informed. (¶¶101-102.) If Defendants had done so, they would have learned that the U.S. Attorneys’ Office for the Central District of California (the “USAO-CDCA”) was investigating a Western Union agent which transmitted $65.7 million between January 2009 and February 2010—more than any other Western Union agent in the United States. (¶101.) The scope of the illegal structuring by Western Union’s agent was breathtaking. According to a sworn affidavit of FBI special agent Joseph Nieblas, Brinks armored cars stopped twice a day Monday through Friday and once a day during the weekend. (¶138.) A whistleblower at this agent informed Western Union’s compliance department that she had sent more than $100 million in Western Union transfers over a four-year period and regularly handled large amounts of cash with instructions to falsify the transferee’s identification. (¶101.) Any Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 28 of 72 22 reasonably effective AML compliance system would have identified structuring of this scope and magnitude. (¶139.) But Western Union admittedly did not have effective AML compliance. (¶¶73-74.) On March 20, 2012, the USAO-CDCA informed management that it had substantial evidence linking Western Union to the commission of a federal crime and that Western Union was named as a “target” in the investigation. (¶137.) It is inconceivable that management was somehow unaware that the USAO-CDCA named Western Union a “target” in this criminal money laundering investigation. (¶140.) However, during the first meeting of the Governance Committee (charged with overseeing legal compliance) after the government’s announcement, management did not inform the committee members that Western Union was named a target. (Id.) Nor did management inform the Board or any Board committee at any other time during 2012 that the government had “substantial evidence linking Western Union to the commission of a crime” and named Western Union a “target” in a criminal investigation. (¶¶142-151.) Documents that Western Union produced in response to a request for books and records pursuant to DGCL § 220 (the “220 Documents”) and Form 10-Ks signed by Defendants suggest that the Board first became aware that the federal government named Western Union a “target” in a criminal investigation when they signed the Form 10-K on February 22, 2013. (¶151.)6 6 Defendants ask the Court to infer that the Board knew in May 2012 that the USAO-CDCA named Western Union as a “target” because it was included in Western Union quarterly filings (MTD Br. at 3, 11, 30-31), and because management purportedly informed the Board that Western Union was a target in the USAO-CDCA investigation. (MTD Br. at 31, 31 n.17.) Defendants are not entitled to either inference, given that none of the Defendants other than Ersek signed Western Union’s quarterly filings with the SEC and, moreover, given the absence of any reference to that effect in the 220 Documents. (¶¶140-151.) Nor does the requested inference even help them. If Defendants knew as early as May 2012 that the government had Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 29 of 72 23 There is no indication anywhere that Defendants held management accountable for withholding critically important information from the Board for a period of almost one year. To the contrary, at the end of 2013, Defendants again approved millions of dollars in management compensation, including a record $8.7 million for Ersek. (¶234.) III. DEFENDANTS’ CONSCIOUS DERELECTION OF DUTY CAUSED SIGNIFICANT HARM A. Western Union Is Forced To Accept An Extension Of The SWB Settlement Defendants’ conscious failure to ensure timely implementation of the Monitor’s recommendations for an effective AML compliance system forced the Company into a weak bargaining position with Arizona when the Company missed the July 31, 2013 deadline. (¶¶235- 244.) The Arizona Attorney General—needlessly antagonized by management during the dispute over the scope of the SWB Settlement – made clear that Arizona could pursue criminal action if it determined that Western Union had committed a willful and material breach of the SWB Settlement. (¶¶192, 243.) On January 31, 2014, Western Union accepted amendments to the SWB Settlement that extended the Monitor’s oversight by three years, through June 2017. (¶¶237-238.) In addition, the Amended SWB Settlement required Western Union to provide Arizona, California, New Mexico, and Texas with full transaction data relating to all transactions sent to or from all substantial evidence linking Western Union to criminal money laundering and that Western Union was a putative defendant in a criminal action, Defendants had an even more poignant duty to ensure that management was making adequate progress on implementing the Monitor’s recommendations, changing management’s adversarial relationship with regulators, and correcting Western Union’s admittedly deficient AML compliance. However, Defendants refused to take any action despite their known duty to protect the Company. (¶¶85-56.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 30 of 72 24 locations within the Southwest Border in amounts of $500 or more (i.e., well below the statutory minimum applicable to compliant money transmitters) until February 2019. (¶238.) The extension and expansion of the SWB Settlement was a direct result of the Board’s conscious failure to properly oversee management in complying with the SWB Settlement. (¶¶235-244.) This has cost Western Union millions of dollars in expenses that would have been avoided if Defendants had acted in good faith. (¶¶236, 240.) B. Under Threat From Regulators, Western Union Implements Risk-Based AML Compliance, But Only For The Southwest Border On July 17, 2013, Western Union’s Chief Compliance Officer, Barry Koch (“Koch”), informed Ersek, Greenberg, and Miles about a draft risk assessment for the Southwest Border (the “SWB-RA”). (¶¶207, 210.) This was two weeks before the SWB Settlement was supposed to end and while Western Union was imploring the Arizona Attorney General not to declare a material breach and to grant an extension. (¶192.) Koch explained that the Monitor’s engagement letter back in 2010 already stated that Western Union was required to “facilitate [the Monitor’s] efforts to implement an effective, risk-based AML compliance program.” (¶210.) On October 11, 2013, Koch briefed Ersek, Devitre, Greenberg, Goodman, Holden, Levinson, Mendoza, Miles, von Schimmelmann, Trujillo, and Townsend on the SWB-RA. (¶224.) Koch informed them that an AML risk assessment is the “foundational document upon which its risk-based AML compliance program is based,” that it allows management to make informed decisions regarding appropriate measures and controls to mitigate AML risk, and that development of an AML Risk Assessment is a “regulatory expectation.” (Id.) The SWB-RA that Koch presented to the Board explained that geographic areas with “Very High” risk levels of money laundering required “[i]mmediate attention” so that Western Union could “prevent and/or Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 31 of 72 25 detect [money laundering/terrorist financing].” Moreover, Koch made clear to Defendants that failure to address “Very High” risk geographic areas “could lead to [Western Union] facing imminent, significant regulatory violations. That would, in turn, materially impact the business model and its long-term viability, and expose the institution to reputation, legal, regulatory, and compliance risk.” (¶¶210-212, 224-226.) Defendants knew that the SWB-RA was limited to the Southwest Border region. (¶226.) Defendants also knew that Western Union was legally required to adopt risk-based AML compliance oversight over all Western Union agents, that regulators expected Western Union to develop AML risk assessments, that the federal government had named Western Union a target in a criminal money laundering investigation, and that Western Union would be at risk of imminent regulatory enforcement action in “Very High” areas outside the Southwest Border region if Western Union did not identify those areas and implement effective AML compliance. (¶¶228-29.) The Board again took no steps to ensure that Western Union was complying with its AML obligations. Despite the known regulatory expectation, Defendants did not instruct management to develop an AML risk assessment for any other area, leaving management without a foundation to make informed decisions regarding appropriate measures and controls to mitigate AML risk. (¶260.) Despite the known and extreme risk to the Company, Defendants also never inquired whether there are other “Very High” risk areas that expose Western Union to AML violations and regulatory scrutiny. (¶228.) Review of publicly available information on the FinCEN and DEA websites reveals seven other “Very High” risk regions in the United States: Northern California, Chicago, most of New York, parts of New Jersey, Southern Florida, Puerto Rico, and Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 32 of 72 26 the U.S. Virgin Islands. (¶229.) Because Defendants remained consciously inactive, the Board never adopted a foundational risk assessment for those “very high risk” areas and still does not have risk-based AML due diligence and oversight of all of its agents in the U.S. (Id.) C. Western Union Is Named A “Target” in Another Federal Criminal Money Laundering Investigation In March 2014, the U.S. Attorney’s office in the Southern District of Florida (the “USAO-SDFL”)—a “Very High” risk money laundering area—informed Western Union that it was a “target” in a second federal money laundering investigation (the “USAO-SDFL Investigation”). (¶¶245-253.) Federal prosecutors on opposite sides of the country have substantial evidence linking Western Union to illegal money laundering. (¶246.) The USAO-SDFL Investigation covers an extensive period, numerous Western Union agents inside and outside the United States, and implicates Defendants directly. (¶247.) On February 19, 2016, Western Union disclosed that the USAO-SDFL Investigation now covers the period 2007 through the present and involves dozens of Western Union agents spanning three continents. (¶251.) Moreover, the government served a grand jury subpoena for “Board meeting minutes and organization charts” from January 1, 2007 to November 27, 2013, making clear that the investigation includes the role of a majority of the Board concerning Western Union’s compliance with mandatory AML laws, including its AML compliance oversight over Western Union agents. (¶247.) This investigation could have been avoided if Defendants had in good faith ensured that Western Union implemented an effective, companywide AML compliance system when management promised to do so more than a decade earlier. (¶252.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 33 of 72 27 ARGUMENT IV. LEGAL STANDARDS A. The Motion To Dismiss Standard For Demand Futility “[T]he purpose of the derivative action [is] to place in the hands of . . . shareholder[s] a means to protect the interests of the corporation from the misfeasance and malfeasance of ‘faithless directors and managers.’” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1970). To stand in the corporation’s shoes, a shareholder must state with particularity the reasons why demand is futile and therefore excused. Fed. R. Civ. P. 23.1. In this regard, Delaware law provides several tests for determining whether demand was excused before commencing a derivative action.7 See Rosenbloom, 765 F.3d at 1149-50. At their core, these tests ask whether “the directors are incapable of making an impartial decision regarding such litigation.” Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993); In re SandRidge Energy, Inc. S’holder Deriv. Litig., 302 F.R.D. 628, 643 (W.D. Okla. 2014) (“Rales . . . requires that the plaintiff allege particularized facts establishing a reason to doubt that ‘the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.’”). “Delaware’s demand futility law does not require [plaintiff] to ‘plead particularized facts sufficient to sustain a judicial finding[,] nor must [the complaint] demonstrate a reasonable probability of success.” Westmoreland, 727 F.3d at 727 (quoting Pyott, 46 A.3d at 356). Rather, demand is excused if “pleaded facts rais[e] at least a reasonable doubt” that the directors face a “potential for liability [that] is not ‘a mere threat’ but instead may rise to ‘a substantial 7 Demand futility is governed by Delaware law because Western Union is incorporated in Delaware. Kamen, 500 U.S. at 96-97. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 34 of 72 28 likelihood.’” Rales, 634 A.2d at 936; Kenney v. Koenig, 426 F. Supp. 2d 1175, 1182 (D. Colo. 2006) (assessing whether plaintiffs “[pled] with particularity facts creating a reasonable doubt that a majority of the board members face a substantial likelihood of liability”). Thus, considering the well-pled allegations together (as they must be), the Motion “should not be granted unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Stidham, 265 F.3d at 1149; Harris v. Carter, 582 A.2d 222, 229 (Del. Ch. 1990). Moreover, “[t]he requirement of factual particularity does not entitle a court to discredit or weigh the persuasiveness of well-pled allegations.” Pyott, 46 A.3d at 351. “As is the case with all motions to dismiss, plaintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged.” In re Veeco Instr. Inc. Sec. Litig., 434 F. Supp. 2d 267, 274 (S.D.N.Y. 2006) (citing Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000)); see also Rosenbloom, 765 F.3d at 1141 (reversing lower court dismissal that “drew inferences against [p]laintiffs rather than in their favor”). B. The Three Different Types Of Oversight Claims Under Delaware Law In Delaware, “[a] breach of fiduciary duty claim that seeks to hold directors accountable for the consequences of a corporate trauma is known colloquially as a Caremark claim.” Pyott, 46 A.3d at 340. “Because it is safe to say that non-sociopathic directors never consciously choose for the entity they oversee to suffer a disaster, a Caremark claim contends that the directors set in motion or ‘allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in doing so they violated a duty to be active monitors of corporate performance.’” Pyott, 46 A.3d at 340 (quoting In re Caremark Intern. Inc. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 35 of 72 29 Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)). Delaware law recognizes that most of the decisions of a corporation, acting through human agents, are not subject of director attention and that without a connection to the board, a corporate calamity will not lead to director liability. Id. (citing Stone, 911 A.2d at 373). In Pyott, the Delaware court explained that, under Delaware law, there are three ways in which a derivative plaintiff can plead a sufficient connection between the corporate trauma and the board. First, a plaintiff can allege with particularity “actual board involvement in a decision that violated positive law.” Id. Of course, “sophisticated and well-advised individuals do not customarily confess knowing violations of law” and a derivative plaintiff can therefore satisfy its burden by “plead[ing] facts and circumstances sufficient for a court to infer that the directors knowingly violated positive law.” Id. at 341 (citing In re Am. Int’l. Grp. Consol. Deriv. Litig., 965 A.2d 763, 777, 795 (Del. Ch. 2009)). Second, a plaintiff can allege with particularity that the board “consciously failed to act after learning about evidence of illegality—the proverbial ‘red flag.’” Id. As the Delaware court explained, “[a] plaintiff might plead, for example, that the directors ignored ‘red flags’ indicating misconduct in defiance of their duties.” Id. In this regard, there is no question that “a board that fails to act in the face of such information makes a conscious decision, and the decision not to act is just as much of a decision as a decision to act.” Id. Third, a plaintiff can connect directors to illegality by focusing on their obligation to adopt internal reporting systems that are reasonably designed to provide timely, accurate information to allow management and the board to reach informed judgments concerning the corporation’s compliance with law. Id. If a corporation suffers losses proximately caused by Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 36 of 72 30 illegal conduct and the directors failed in good faith to ensure the existence of an internal reporting system, then there is a sufficient connection between the illegal conduct and board level action or inaction to support liability. Id. (citing Caremark, 698, A.2d at 970). Here, the Complaint pleads particularized facts that satisfy both the first and the second kind of oversight claim for a majority of the Board.8 Specifically, the Complaint pleads facts and circumstances sufficient to infer that a majority of the Board was actually involved in the decision to delay and undermine the Company’s compliance with the known legal obligation to implement effective, risk-based AML compliance oversight over Western Union agents. (See, e.g., ¶¶57-64, 68-87.) The Complaint also pleads particular facts that a majority of the Board consciously failed to act after learning that Western Union violated AML laws by failing to implement effective AML compliance. (¶85; see also Complaint § V.E.) Defendants knew that Western Union was required to have effective, risk-based AML compliance oversight over Western Union agents and, admittedly, that Western Union needed to improve AML compliance. (¶¶57-65.) The Complaint alleges a slew of red flags informing Defendants that they were failing to act in the face of their known duty to act, including that: (i) management was adversarial with regulators and the Court-appointed Monitor; (ii) management was not making progress on implementing effective, risk-based AML oversight over Western Union agents; (iii) regulators continued to assert that Western Union’s AML compliance was unsatisfactory and legally deficient; (iv) years 8 When a board has an “an even number of directors, plaintiffs meet their burden of demonstrating the futility of making demand on the board by showing that half of the board was either interested or not independent.” In re Limited, Inc. S’holders Litig., No. CIV.A. 17148-NC, 2002 WL 537692, at *7 (Del. Ch. Mar. 27, 2002); In re Goldman Sachs Grp., Inc. S’holder Litig., No. CIV.A. 5215-VCG, 2011 WL 4826104, at *7 n.75 (Del. Ch. Oct. 12, 2011) (same). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 37 of 72 31 after admitting that Western Union’s AML compliance needed to be improved, the Company still did not have effective AML compliance with respect to such basic elements as beneficial sender/receiver information; and (v) despite the known regulatory expectation and the risk to Western Union, management did not develop a foundational risk assessment for any region outside the Southwest Border. (¶¶57-64, 65, 68-87; see also Complaint § V.E.) These claims sound in the duties of loyalty and good faith and, contrary to Defendants’ arguments (see MTD. Br. at 6-7), cannot be exculpated by Western Union’s certification of incorporation. See Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (exculpation only if “the factual basis for [the] claim “solely implicates a violation of the duty of care”—not loyalty or good faith) (emphasis in original); Rosenbloom, 765 F.3d at 1150 (9th Cir. 2014) (“where directors fail to act in the face of a known duty to act, [they demonstrate] a conscious disregard for their responsibilities and fail[] to discharge the non-exculpable fiduciary duty of loyalty in good faith.”). Notably, the Complaint does not allege that the Board failed to adopt internal reporting systems (i.e., the third type of Caremark claim). To the contrary, Defendants have admitted (and the 220 Documents confirm) that they were intimately aware of Western Union’s noncompliance with its AML obligations and the fact that numerous Western Union agents were facilitating brutal criminals in laundering illicit proceeds through Western Union agents using Western Union systems. (¶¶65, 71, 86, 136-140, 226, 245-253.) Thus, cases involving a board’s failure to implement reporting mechanisms or a board’s lack of knowledge of illegality (i.e., the third type of oversight claim) are inapposite. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 38 of 72 32 V. DEMAND IS EXCUSED AS TO COUNT I A. Defendants Knowingly Violated Positive Law By Refusing To Adopt A Legally Required AML Compliance System When a plaintiff pleads particularized facts “sufficient for a court to infer that the directors knowingly violated positive law,” demand is futile. Pyott, 46 A.3d at 341 (citing In re Am. Int’l. Grp. Consol. Deriv. Litig., 965 A.2d 763, 777, 795 (Del. Ch. 2009)). Here, the Complaint alleges with particularity that a majority of the Board has known: (i) since 2010 that a “risk-based” AML compliance system is required by law; (ii) since May 2011 that Western Union’s AML compliance was not meaningful or “risk-based”; and (iii) throughout the monitorship that management’s progress was so slow and recalcitrant that Arizona had to threaten a material breach. (See supra at ¶¶7-24.) Nevertheless, Defendants knowingly condoned Western Union’s failure to comply with a positive law—the BSA’s requirement of a “risk-based” AML compliance system, including risk-based oversight over Western Union’s agents inside and outside the United States. Western Union still, to this day, lacks a legally mandated, risk-based AML compliance program in any geography other than the Southwest Border, including in seven other “Very High” risk geographies, exposing the Company to imminent threats to its entire business model. The Board’s conscious decision to allow Western Union to operate without an effective AML compliance system violated the AML laws and has rendered the Company complicit in money laundering for the world’s most dangerous criminals for over a decade. The well-pled inference that a majority of the Board knowingly decided to flaunt this requirement of the BSA excused demand and precludes dismissal. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 39 of 72 33 B. Defendants Face A Substantial Likelihood Of Liability For Consciously Disregarding A Known Duty To Act Directors of a Delaware corporation breach their fiduciary duties when they fail to act in the face of a known duty to act. As the Delaware Supreme Court explained in Stone: Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. 911 A.2d at 370 (Del. 2006). Here, the Complaint pleads more than enough to establish that Defendants consciously disregarded a known duty to act. 1. Defendants Knew Western Union’s AML Compliance System Was Inadequate Six of the twelve directors at the time that the amended Complaint was filed—Ersek, Greenberg, Holden, Levinson, Mendoza, and Miles—were members of the Board since 2010. (¶¶20-30; see MTD Br. at 5).9 Each of these directors has admitted knowing of the regulatory settlements going back to 2002. Each of these directors also knew that Western Union’s AML compliance system was inadequate, that they had a duty to implement risk-based AML compliance oversight over Western Union agents, and that failure to discharge this duty would expose Western Union to criminal prosecution for facilitating illegal money laundering. Given management’s refusal to develop, implement, and monitor such a system over many years, the 9 Miles is not a defendant but is included in the Court’s demand futility analysis because, like the other Board members who served since 2006, he could not disinterestedly consider demand. See, e.g., In re eBay, Inc., S’holders Litig., No. C.A. 19988-NC, 2004 WL 253521, at *2-5 (Del. Ch. Jan. 23, 2004) (finding demand futility because, inter alia, the nondefendant directors were disabled); Sandys v. Pincus, C.A No. 9512-CB, 2016 WL 769999, at *2 (Del. Ch. Feb. 29, 2016) (same). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 40 of 72 34 Board could not discharge its fiduciary duties of good faith and loyalty by simply relying on management. Specifically, a majority of the Board knew the following: 1. AML risk is among the most significant risks facing Western Union. Noncompliance by Western Union or its agents can lead to criminal prosecution, revocation of essential licenses, and put the business model at risk. (¶¶52-63, 89, 93, 96, 167.) 2. Western Union entered five agreements with four different regulators from 2002 through 2008 to settle AML violations, paying millions of dollars in fines, acknowledging that it failed to properly monitor agent AML compliance, and promised implementing effective AML compliance, which it never did. (¶¶65-67.)10 3. The Arizona Attorney General testified in 2009 before the Senate that Western Union was “by far the largest provider of illicit money-movement services.” (¶¶69-70.) 4. In 2010, in connection with the SWB Settlement, Western Union paid $94 million, admitted that its agent AML oversight was inadequate, and accepted a Court-appointed Monitor to improve AML compliance. (¶¶5, 71-72, 76, 93.) 5. Western Union was in violation of the BSA requirement that financial institutions implement “risk-based,” rather than “event-based” AML compliance systems and agent oversight. (¶¶6, 58-59, 61, 108.) Western Union still does not have legally required, due diligence and risk-based oversight over Western Union agents outside the Southwest Border. (¶¶228-229.) 6. Agent noncompliance with AML requirements was widespread and prolonged. In February 2010, 27% of sampled agents failed AML compliance tests (implying 12,000 noncompliant Western Union agents nationwide). In September 2011, 84% of the Company’s high-risk agents on the Southwest Border had compliance deficiencies. And in July 2013, 8% of the high-risk agents on the Southwest Border had “confirmed instances of Human Smuggling.” (¶¶90, 116, 214.) 7. Ohio, Texas, and Washington rated Western Union’s AML compliance “unsatisfactory” in December 2011. Management intended to challenge the finding rather than fix the AML deficiencies. (¶¶123-24.) 10 Plaintiffs respectfully disagree with the Court’s observation that the pre-2010 red flags are largely irrelevant. (MTD Order at 12-13, 25; see MTD Br. at 2, 7, 12, 19-21.) These red flags are important because Defendants were admittedly informed about them and they show that Defendants and Western Union did not start on a clean slate in 2010. Thus, as early as 2010, Defendants were on notice that Western Union’s AML compliance had been legally deficient for a prolonged period around the country, drawing criticism from state and federal regulators, and exposing the Company to grave regulatory risk. (¶¶65-67.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 41 of 72 35 8. The Monitor raised deficiencies in critical elements of Western Union’s AML compliance, including inadequate “agent oversight” and beneficial sender/received information throughout the monitorship. (¶¶96, 110, 123, 169, 172-73.) 9. Management’s progress on the Monitor’s AML compliance recommendations was glacial. (See, e.g., ¶¶9, 113-34, 144, 147, 158, 161-72, 184, 195-202, 238.) 10. Management fought the Monitor on access to WUBS data necessary to assess Western Union’s AML compliance risk, treating the Monitor as a “risk,” causing the Monitor and the Arizona Attorney General to bring a lawsuit. (¶¶77-79, 98-99, 122.) The Monitor and Arizona prevailed. (¶¶7-8, 78-82, 168, 174, 181.) 11. Several monitors resigned during the program period following the SWB Settlement. (¶¶181-82, 187, 237.) 12. By October 2012, Defendants knew that the July 2013 completion date for SWB Settlement was in grave risk (¶¶163-65, 168, 172), and as of December 2012, “major components” were still at risk (¶172). Yet, management wanted to slash the compliance budget 43%. (¶161.) 13. By February 20, 2013, Defendants knew that Western Union would miss the July 2013 deadline, that the Monitor’s agent oversight recommendations were “at a standstill,” and that internal controls, agent oversight, and documentation of AML compliance policies and procedures were at “very early stages.” (¶¶183-88.) 14. By February 2013, Defendants knew that Western Union was a target in the USAO- CDCA criminal money laundering investigation and that the government had “substantial evidence” linking the Company itself to crimes. (¶151.) 15. Western Union was forced to agree to: (i) extend the monitorship until December 31, 2017; (ii) all the Monitor’s new recommendations and timetables; and (iii) provide transaction data to Arizona, California, New Mexico, and Texas, well below the statutory reporting threshold, through 2019. (¶¶237-38.) 16. Western Union is named a target in the USAO-SDFL criminal money laundering investigation, implicating Western Union agents in three continents and Board conduct. (¶¶245-53.) 17. Western Union still does not have a foundational risk assessment for geographic areas outside the Southwest Border, despite the fact that ignoring “Very High” risk areas exposes the Company to extreme regulatory risk and puts Western Union’s business model at risk. (¶¶7-8, 228-29.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 42 of 72 36 These red flags, taken together, informed Defendants of pervasive flaws in Western Union’s AML compliance system, giving rise to a duty to take affirmative steps to ensure implementation of legally required, effective AML compliance. 2. Defendants Consciously Disregarded Their Responsibility To Implement Effective, Risk-Based AML Compliance Demand is excused when a complaint raises a reasonable doubt that the board responded in good faith to red flags of widespread, continued illegality. Ultimately, this is a fact question that cannot be decided against Plaintiffs at the pleading stage in light of the detailed allegations in the Complaint. See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208 (Del. 1993) (“a fairly pleaded claim of good faith/bad faith raises essentially a question of fact which generally cannot be resolved on the pleadings or without first granting an adequate opportunity for discovery”). Rather, the only question on the Motion is whether Plaintiffs raise a reasonable doubt of good faith. See Rosenbloom, 765 F.3d at 1153 (“[A]t this stage of the case we must make reasonable inferences for Plaintiffs, not against them—and it is reasonable to infer that the data repeatedly presented to Allergan’s board [suggesting pervasive off-label marketing] support a finding of scienter.”). Here, the Complaint alleges that a majority of the Board consciously failed to act when they learned that management was fighting with the Arizona Attorney General and the Monitor and not timely implementing a legally required AML compliance system, including risk-based oversight over Western Union agents. Courts around the country have found that, when the complaint alleges particularized allegations showing that a majority of the board knew of Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 43 of 72 37 systemic regulatory compliance problems at the corporation and failed to respond to “red flags” of noncompliance in good faith, demand is excused.11 In re Massey Energy Co. is instructive. There, plaintiffs alleged that management “fostered a business strategy expressly designed to put coal production and higher profits over compliance with the law” and caused the company to “take an openly aggressive attitude with the [Mine Safety and Health Administration].” Id. Moreover, plaintiffs alleged that the independent directors “did not make a good faith effort to ensure that Massey complied with its legal obligations” and did not “respond to numerous red and yellow flags by aggressively correcting the management culture at Massey that allegedly put profits ahead of safety.” Id. “[I]nstead of using their supervisory authority over management to make sure that Massey genuinely changed its culture and made mine safety a genuine priority, the independent directors are alleged to have done nothing of actual substance to change the direction of the company’s real policy.” Id. Reviewing these allegations, Vice Chancellor Strine—now Chief Justice of the Delaware Supreme Court—found that “there seems little doubt that a faithful application of the plaintiff-friendly pleading standard would preclude dismissal . . . at the pleading stage.”12 11 See Massey Energy, 2011 WL 2176479, at *19; Rosenbloom, 765 F.3d at 1151-59; Westmoreland, 727 F.3d at 729; Pfizer, 722 F. Supp. 2d at 461-62; Intuitive Surgical, 146 F. Supp. 3d at 1116-19; Countrywide Financial, 554 F. Supp. 2d at 1060-64; Veeco, 434 F. Supp. 2d at 277-78. 12 See also Westmoreland, 727 F.3d at 727 (excusing demand where plaintiffs alleged that “directors knowingly steered [the company] on a course that was all but certain to prompt the FDA to take enforcement action under the 2006 Consent Decree”); In re Abbott Labs. Deriv. S’holders Litig., 325 F.3d 795, 805 (7th Cir. 2003) (excusing demand where the board knew of persistent regulatory violations from several FDA inspections finding related violations at the company’s facilities over the course of about six years, and failed to act in good faith) (applying Illinois law, which follows Delaware); Pfizer, 722 F. Supp. 2d at 460 (excusing demand because complaint discussed “large number of reports to the board from which it may be reasonably Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 44 of 72 38 Similarly, the Complaint here alleges that management pursued a business strategy that put higher profits over AML compliance and openly took an aggressive attitude with regulators and the Monitor. (¶¶10, 64, 77-80.) Moreover, the Complaint alleges that a majority of the directors did not make good faith efforts to ensure that Western Union complied with its AML obligations under the law, and did not respond in good faith to numerous red flags by correcting the direction of Western Union’s policy of putting profit over AML compliance. (¶85.) See Massey Energy, 2011 WL 2176479, at *20; see also In re Tower Air, Inc., 416 F.3d 229, 239 (3d Cir. 2005) (“Lives are on the line . . . [t]he officers’ alleged passivity in the face of negative maintenance reports seems so far beyond the bounds of reasonable business judgment that its only explanation is bad faith”).13 Moreover, Massey Energy refutes Defendants’ argument that the Board could, in good faith, passively rely on management presentations giving the appearance of efforts given the particularized facts in the Complaint that Defendants were informed of a troubling continuing pattern of AML noncompliance. (MTD Br. at 28-29.) As the Delaware court explained: when a company has a ‘record’ as a recidivist, its directors and officers cannot take comfort in the appearance of compliance . . . at the pleading stage, when the plaintiffs are able to plead particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non-compliance in fact and of a inferred that they all knew of Pfizer’s continued misconduct and chose to disregard it”); Intuitive Surgical, 146 F. Supp. 3d at 1118 (excusing demand where, inter alia, “Plaintiff has provided sufficient allegations to show that the board received repeated FDA warnings about off-label marketing and failure to comply with reporting regulations. These warnings, provided from 2001 to 2013, constitute a red flag that Intuitive was acting improperly.”). 13 Although Tower Air was not a derivative action, the Third Circuit Court of Appeals conducted an expansive analysis of the protections afforded directors by Delaware’s business judgment rule. Id. at 238-42. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 45 of 72 39 managerial attitude suggestive of a desire to fight with and hide evidence from the company’s regulators. Massey, 2011 WL 2176479 at *21. The same is true here. Massey Energy also refutes Defendants’ argument that, pursuant to DGCL § 141(e), they cannot act in conscious disregard of their duties so long as they relied on management. (MTD Br. at 28-29.) DGCL § 141(e) provides that a director is only protected if they rely “in good faith” upon management. Here, the Complaint alleges that Defendants were repeatedly informed that management could not be relied upon in good faith, as it was willfully or recklessly failing to implement a legally required, risk-based AML compliance program. Thus, the Board’s continued blind reliance on management was a conscious disregard of its own duty to intervene and hold management accountable, and DGCL § 141(e) provides no shelter. See Massey Energy, 2011 WL 2176479, at *21; Stone, 911 A.2d at 370 (“Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their dut[ies] . . .”). The Ninth Circuit’s decision in Rosenbloom is also instructive. There, plaintiffs alleged that management implemented a business strategy to illegally market Botox for off-label purposes. See 765 F.3d at 1142. Plaintiffs there also alleged that the board “either adopted plans premised on illegal conduct or made a conscious decision not to take action even when faced with ‘red flags’ of wrongdoing.” Id. at 1144. Moreover, the plaintiffs alleged that the Allergan board was alerted to the wrongful conduct because: (i) Botox was an important product that the board monitored closely; (ii) the board received data linking revenues to illegal activity; (iii) the FDA had repeatedly sent letters warning the company its promotional activities and materials were misleading and improper under the Food Drug & Cosmetic Act; and (iv) the violations Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 46 of 72 40 found by the FDA over several years were “unquestionably of significant magnitude and duration.” Id. at 1152-54. Taking the allegations together, the Ninth Circuit concluded that the complaint created a “reasonable inference of inaction” and held that demand was excused. Id. at 1154 (reversing demand decision by lower court). The detailed allegations of the Complaint support the same result here. Transmitting money is Western Union’s only product and is closely monitored by the Board. (¶¶3, 5, 18, Complaint § V.E.) Just like the Allergan board, the Western Union Board knew that complying with the law (here by implementing effective, risk-based AML compliance oversight over Western Union agents) would decrease revenues and operating profits. (¶272.) Numerous regulators imposed consent decrees, Western Union paid more than $100 million in fines because it did not have an effective AML compliance system, and Western Union was named a “target” in two federal criminal investigations linking the Company to money laundering. (¶65, 72, 245-253.) In Veeco Instruments, a case which also supports a finding that demand was excused, plaintiffs alleged that board members were aware of a pattern of violations of the federal export laws due to, among other things, multiple internal reports of these violations. 434 F. Supp. 2d at 272. Plaintiffs asserted that presuit demand upon the audit committee would have been futile because, inter alia, the committee “abdicated its responsibility to monitor legal compliance and investigate whistleblower claims relating to the Company’s allegedly flagrant, systematic and repeated violations of export control laws.” Id. at 277-78. The court agreed because Veeco Instruments was “not a case where the directors had ‘no grounds for suspicion’ or were ‘blamelessly unaware of the conduct leading to the corporate liability,’” but rather a situation Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 47 of 72 41 where the complaint adequately alleged that the directors consciously permitted known violations to occur. Id. The same is true here. The directors were regularly informed that Western Union did not have an effective AML compliance system, as required by the BSA, and that as a result, Western Union agents could facilitate criminal money laundering. In re Countrywide Financial also strongly supports a finding that demand was excused. 554 F. Supp. 2d at 1044. Countrywide arose from allegations of excessive risk exposures caused by nonadherence to loan underwriting standards—matters that, as here, “implicate a fundamental part of the Company’s business” and were “at the very core of [the] business model.” Id. at 1081, 1082 n.42. Further, the Countrywide complaint cited evidence reflecting “a widespread Company culture that encouraged employees” to perpetuate the problem. Id. at 1081-82. Similarly, the Complaint here details how management’s financial incentives encouraged management to perpetuate Western Union’s AML problem. (¶¶47-48, 106, 129, 179, 234.) Massey Energy, Rosenbloom, Veeco, Countrywide, Westmoreland, Abbott Labs., Pfizer, and Intuitive Surgical all support denial of Defendants’ motion. By contrast, Defendants have not cited a single case granting a motion to dismiss where the complaint contains detailed and particularized allegations that a majority of the board failed to act in the face of a known duty to act. 3. Defendants Mischaracterize The Allegations In The Complaint And Cite Inapposite Authority Defendants argue that under Delaware law they face no liability so long as Western Union had some AML compliance and management took some steps towards AML compliance, no matter how inadequate (MTD Br. at 15-18) (citing Caremark). This argument misconstrues Delaware law and is based on a distortion of the Complaint. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 48 of 72 42 As discussed above, Delaware law recognizes several types of oversight claim, including: (i) claims for knowingly violating the law; (ii) claims for failing to act in the face of a known duty to act; and (iii) claims for failing to adopt internal reporting mechanisms and, therefore, board ignorance and a systematic failure to exercise oversight. See MTD Br. at 28-29. Seeking to avoid liability, Defendants pretend that the Complaint alleges the third type of oversight claim and ignore the other two types of Caremark claims. Thus, each of Defendants’ cited cases include a finding or a concession by plaintiffs that the fiduciaries did not know or have reason to know of any illegal conduct.14 In the last round of briefing, Defendants cited similarly inapplicable cases predicated on board ignorance of wrongdoing.15 14 See Stone, 911 A.2d at 364 (“plaintiffs acknowledge that the directors neither ‘knew [n]or should have known that violations of law were occurring,’ i.e., that there were no ‘red flags’ before the directors”); Kenney, 426 F. Supp. 2d at 1183 (finding no red flags putting the board on notice of accounting irregularities); Desimone v. Barrows, 924 A.2d 908, 914 (Del. Ch. 2007) (“Because the complaint is devoid of any facts suggesting a rational inference that any members of the . . . board, much less a majority, knew about the [options backdating alleged, plaintiff] has failed to create a reasonable doubt about the . . . board’s ability to impartially consider a demand”); In re General Motors Co. Deriv. Litig., C.A. No. 9627-VCG, 2015 WL 3958724, at *14-17 (Del. Ch. June 26, 2015) (demand was not excused because the board was concededly unaware of ignition switch failures and had not “utterly failed to implement” board reporting for safety issues and monitored the same). 15 See, e.g., Andropolis v. Snyder, No. 05 CV 01563 EWN BNB, 2006 WL 2226189, at *12-14 (D. Colo. Aug. 3, 2006) (no red flags putting the board on notice that management was abusing access to the corporate plane and expense accounts); In re Lear Corp. S’holder Litig., 967 A.2d 640, 648-53 (Del. Ch. 2008) (no factual support for inference that board knowingly wasted corporate assets by approving a merger agreement with a termination fee because, plaintiffs allegations notwithstanding, the board had no reason to know stockholders would vote down the deal); Decker v. Clausen, Civ. A. Nos. 10,684, 10,685, 1989 WL 133617, at *3 (Del. Ch. Nov. 6, 1989) (no red flags putting parent board on notice of misconduct at a specific subsidiary); Maurras Revocable Trust v. Bronfman, Nos. 12 C 3395, 12 C 6019, 2013 WL 5348357, at *5-6 (N.D. Ill. Sept. 24, 2013) (no red flags putting board on notice of systemic illegality in the company’s debt collection practices); In re Am. Apparel, Inc. S’holder Deriv. Litig., No. CV 10- 06576 MMM (RCx), 2012 WL 9506072, at *25 (C.D. Cal. July 31, 2012) (no red flags putting board on notice that it was violating Department of Homeland Security practices, or even that Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 49 of 72 43 However, no fair reading of the Complaint supports the conclusion that this is a case about Defendants’ failure to implement an internal reporting mechanism to funnel information up to senior management and the board, or that Defendants were “blamelessly unaware” of Western Union’s ongoing AML violations and deficient AML compliance system. Indeed, if Defendants’ argument were accepted, the mere act of creating committees and implementing internal monitoring mechanisms would absolutely immunize directors from even the prospect of demand futility. That is not the law in Delaware. The Massey Energy decision refutes this very point. There, the directors similarly pointed to “evidence that the Massey Board was involved in considering safety issues,” “had taken steps to improve the company’s safety record,” and “w[as] actually heartened by some metrics of Massey’s improved safety performance.” 2011 WL 2176479, at *20.16 The Delaware court made clear, however, that such arguments would be relevant “at a trial when a crucial issue would be the state of mind of each individual defendant,” but that at the pleading stage “they are of little moment in light of the particularized those “practices” were more than recommendations); Grimes v. Donald, No. CIV. A. 13358, 1995 WL 54441, at *9-11 (Del. Ch. Jan. 11, 1995) (no factual support for inference that the agreements authorized by the board impermissibly abdicated directorial authority); In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 123-24, 128 (Del. Ch. 2009) (allegations based on public documents generally describing worsening conditions across the financial sector were insufficient to put the board on notice of misconduct at the company); King v. Baldino, 648 F. Supp. 2d 609, 626 (D. Del. 2009) (no red flags “demonstrating that the Board was aware of the actions of the alleged ‘principal wrongdoers’” in a 19-page complaint consisting largely of multi-page quotations from public news sources); In re Baxter Int’l, Inc. S’holder Litig., 654 A.2d 1268, 1268-69, 1271 (Del. Ch. 1995) (no red flags putting the board on notice that the salesforce was continuously and systematically overcharging the Veterans Administration for products). 16 Massey Energy had a somewhat unusual procedural posture—a ruling denying plaintiffs’ preliminary injunction motion to halt Massey’s merger with Alpha Resources Inc.—allowing defendants to present an evidentiary record. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 50 of 72 44 facts pled by the plaintiffs” that directors knowingly failed to discharge “their duty to try to make sure that the company complied with its legal obligations.” Id.; see also Pyott, 46 A.3d at 357- 58 (demand excused, noting that “sadly, sophisticated corporate actors at times engage in illegal behavior and attempt to hide their misconduct with the appearance of legal compliance”); Rosenbloom, 765 F.3d at 1158-59 (demand excused, observing that “it is plausible to conclude that such a board might publicly pay lip service to regulations while more quietly urging its officers to push marketing efforts to the regulatory breaking point in an effort to dramatically improve profits”). The same is true here. Defendants absurdly argue that the Complaint does not plead that the Board received red flags that management failed to implement an effective AML compliance system and was hostile to critical recommendations of the Court-appointed Monitor. (MTD Br. at 18; 26-27.) Any fair reading of the Complaint shows detailed allegations about numerous red flags that were brought to the Board’s attention, including that there was no progress on the implementation of effective AML compliance oversight over Western Union agents, that Western Union would not meet its obligations under the SWB Settlement, and that Western Union was named a “target” in two federal criminal money laundering investigations at opposite sides of the country. (¶¶77, 161, 164, 173, 184, 186, 245-253.) Furthermore, Defendants protestations notwithstanding (MTD Br. at 2-3, 5, 8), Plaintiffs do not allege that Defendants “deliberately permitted” any specific AML violation by one or more Western Union agents to occur, and do not seek to hold Defendants liable for the bad acts of any particular agent. Thus, Defendants are wrong to suggest that denying their Motion would somehow require the members of the Western Union Board to insure all misconduct at Western Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 51 of 72 45 Union and its thousands of agents with 100% success or face liability. (MTD Br. at 43.) Defendants’ arguments again rest on a distortion of the Complaint, which seeks to hold Defendants liable—after discovery and trial—for their failure to ensure that management implement and effective, risk-based AML compliance system as required by law. C. Defendants Rely On Self-Serving Interpretations Of Unreliable And Incomplete Documents To Request Improper Inferences In their bid for dismissal, Defendants ask the Court to adopt their interpretation of disputed and incomplete documents to infer that: (i) all Defendants acted in good faith; and (ii) management was not adversarial with the Arizona Attorney General or hostile to the Monitor’s critically important recommendations. (MTD Br. at 21-27.) This is inappropriate at the pleading stage. See Gee, 627 F.3d at 1186-87 (reversing dismissal where district court improperly relied on documents attached to a Rule 12(b)(6) motion and adopted defendants’ version of the facts); Rosenbloom, 765 F.3d at 1155 (reversing lower court because, among other things, “it repeatedly drew inferences in the Board’s favor, crediting [the company’s] reasonable interpretations of the factual allegations over Plaintiff’s’ reasonable interpretations of those same allegations”); Westmoreland, 727 F.3d at 729 (reversing lower court because its “focus on other hypothetical explanations for the defendants’ conduct improperly ignores the rule that ‘any inferences reasonably drawn from the factual allegations of the complaint must be viewed in the light most favorable to the plaintiffs’”) (citing Abbott Labs., 325 F.3d at 803). 1. Defendants Cannot Obtain Dismissal Based On Their Disputed Interpretations Of Disputed Documents Outside the Complaint Defendants have submitted 131 exhibits along with their motion—a number that must be a record in this District for a motion to dismiss. Defendants rely on their own interpretation of Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 52 of 72 46 these documents to argue that Defendants acted in good faith when they continued to blindly rely on management to correct Western Union’s deficient AML compliance system during more than a decade of consent decrees, lawsuits seeking to limit law enforcement access to information needed to combat human trafficking, payment of $94 million to settle allegations of AML noncompliance facilitating human trafficking, two federal criminal money laundering investigations naming Western Union as a target, and repeated reports that management made little or no progress on critical elements of the AML compliance program for the Southwest Border while it was fighting with the Monitor, thereby exposing the Company to the risk that Arizona would determine Western Union was in “material breach” and pursue criminal action. (MTD Br. at 21-25.) Defendants cite the general precept that “the Court may consider ‘any external documents that are referenced in the Amended Complaint and whose accuracy is not in dispute.’” (MTD Br. at 4 n.1) (citing Bank v. Allied Jewish Fed’n of Colorado, 4 F. Supp. 3d 1238, 1240 (D. Colo. 2013).) Moreover, Defendants grossly overstate the degree to which the Court can consider these documents, most importantly because Plaintiffs do dispute the accuracy and completeness of the documents relied on by Defendants. As noted in the Complaint, Defendants produced incomplete documents with demonstrably improper redactions in response to the DGCL § 220 demand. (¶¶94 n.2; 156 n.3.) Defendants routinely removed pages of information from management presentations to the Board and its committees, without any indication what the pages contained or why they were withheld.17 Additionally, Defendants redacted highly 17 For example, in producing the September 15, 2011 “Global Compliance—Board Report,” Defendants produced the cover page and page 10 of the presentation. Nothing else. See Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 53 of 72 47 material, non-privileged information.18 Defendants cannot unilaterally doctor a record and then ask this Court to interpret that doctored record in their favor to dismiss the Complaint. See Gee, 627 F.3d at 1186-87 (reversing dismissal where district court improperly relied on documents attached to a Rule 12(b)(6) motion and adopted defendants’ version of the facts). Even if Defendants’ 220 Documents were complete and accurate (and they are not), Defendants still could not rely on these extraneous documents to rebut well-pled allegations in the Complaint and reasonable inferences for Plaintiffs therefrom. Defendants submit a 42-page appendix providing their interpretation and characterization of the extraneous exhibits, citing Cunningham v. Bank of Am., No. 12-cv-03316-MSK-GPG, 2013 WL 2455945 (D. Colo. Apr. 3, 2013) (quoting Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179, 184 (S.D.N.Y. 2000)), Declaration of Jeffrey A. Berens in Support of Plaintiffs’ Opposition to Defendants’ Motion to Dismiss (“Berens Decl.”), Exhibit A. What do the other pages say? How many pages were there in total? 18 For example, on July 19, 2012, management informed six directors—Ersek, Goodman, Greenberg, Levinson, Mendoza, and Miles—during a meeting of the Audit Committee that the Monitor also found “[v]arious deficiencies in the documentation of policies and procedures” for AML compliance. (¶154; Berens Decl., Exhibit B at 267.) This information is undoubtedly responsive to the DGCL § 220 demand, confirms Plaintiffs’ allegation that directors were informed about basic deficiencies in Western Union’s AML compliance program two and a half years after the monitorship began, and is not privileged. Later that same day, management showed nine directors—Ersek, Goodman, Greenberg, Levinson, Mendoza, Miles, Devitre, Holden, and von Schimmelmann—the identical slide during a meeting of the Governance Committee. (¶¶155-56; Berens Decl., Exhibit C at 285.) This time, however, Defendants redacted the information that these directors were informed that the Monitor had reported deficiencies in the documentation of Western Union’s AML policies and procedures, thereby leaving Defendants free to argue that Devitre, Holden, and von Schimmelmann remained ignorant of this basic problem. This redaction is far from an isolated incident. In fact, Defendants riddled their DGCL § 220 production with “confidentiality” and “nonresponsive” redactions so extensive that it rendered many documents inscrutable. See, e.g., Berens Decl., Exhibit D. And given that, in at least one instance, Defendants deliberately redacted inculpatory information for no reason but to keep it from Plaintiffs, all of their redactions are suspect. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 54 of 72 48 and Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1192 (10th Cir. 2013) for the proposition that this Court can review documents that are referenced in the Complaint to determine whether they are consistent with the allegations and that “the documents control.” (MTD Br. at 10 n.5.) Defendants ignore that this principle applies only when the issue before the Court is whether the document contains misrepresentations or omissions—i.e., where the fact that a statement (or lack thereof) was made is the focus of the inquiry. See Roth v. Jennings, 489 F.3d 499, 510-11 (2d Cir. 2007) (“the cited discussion in Rapoport concerned a fraud claim alleging that a prospectus failed to disclose certain facts. These cases fall squarely within the principle that the contents of the document are controlling where a plaintiff has alleged that the document contains, or does not contain, certain statements . . . [but] such documents may properly be considered only for ‘what’ they contain, ‘not to prove the truth of their contents’”). But that is not the relevant inquiry here. Rather, Defendants rely on their appendix and extraneous exhibits to dispute the veracity of the detailed particularized allegations of the Complaint and to seek inferences in their favor. This is patently improper. See Gee, 627 F.3d at 1186-87 (reversing dismissal where district court improperly relied on documents outside the complaint and adopted defendants’ version of the facts to “refute [plaintiff’s] factual assertions and effectively convert the motion to one for summary judgment without notice to [plaintiff]”); Baldwin v. United States, No. 11-cv-02033-MSK-KLM, 2012 WL 2215680, at *2 (D. Colo. June 15, 2012) (on a motion to dismiss, documents outside of the complaint “may only be considered to show their contents, not to prove the truth of matters asserted therein”) (citing Tal v. Hogan, Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 55 of 72 49 453 F.3d 1244, 1264 n.24 (10th Cir. 2006)); Shifrin v. Colorado, No. 09-cv-03040-REB-MEH, 2010 WL 2943348, at *4 (D. Colo. July 22, 2010) (same).19 For example, Defendants cite Western Union’s Form 10-Ks to argue that Western Union has devoted “very significant resources” to its compliance functions, including AML compliance, and spent $100 million in 2012 and $150 million in 2013 on compliance and regulatory programs. (MTD Br. at 5.) It would be improper for this Court to accept Defendants’ interpretation of the Form 10-K and to grant Defendants the requested inference in light of the detailed allegations in the Complaint that Western Union did not have an effective AML compliance system in 2012 and 2013. See Gee, 627 F.3d at 1186-87. Defendants also quote a recital from the SWB Settlement stating that Western Union developed and implemented an effective AML compliance program and had made “extensive compliance efforts.” (MTD Br. at 9 (citing Ex. O).) Again, it would be improper for this Court to accept Defendants’ self-serving interpretation of this extraneous document given the exhaustive particularized factual allegations that Western Union did not have an effective AML compliance system, including mandatory risk-based due diligence and oversight over Western Union agents. See Baldwin, 2012 WL 2215680, at *2; Shifrin, 2010 WL 2943348, at *4. In sum, Plaintiffs dispute Defendants’ characterizations and interpretations of the extraneous documents and the appendix that they have submitted in support of dismissal. Defendants can make those arguments and urge their self-serving interpretations after discovery at trial. At this time, it would be improper for the Court to credit Defendants’ interpretation of 19 Bank is equally inapposite. There, unlike here, the court considered plaintiff’s own statements in court documents that she herself drafted, acknowledging that one of the defendants was not her “employer” as required per the cause of action asserted. See id. at 1240, 1242. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 56 of 72 50 the limited universe of incomplete and improperly redacted documents to contradict particularized allegations of the Complaint. 2. Defendants Are Not Entitled To The Requested Inferences At The Pleading Stage Defendants ask this Court to draw a number of inferences in their favor that are contradicted by the detailed allegations of the Complaint. (MTD Br. at 7-8, 10-11, 21-25, 33-36, 37-42.) For example, Defendants ask this Court to find that management was not “adversarial” to the Monitor and the Arizona Attorney General. (MTD Br. at 25; see also id. at 2, 21-27.) Relatedly, Defendants ask for the inference that management was somehow justified in denying the Monitor’s access to WUBS because the Monitor was unreasonably expanding the scope of the monitorship. (See MTD Br. at 2, 9, 21-27.) However, Defendants are not entitled to such inferences at the pleading stage given the particularized allegations in the Complaint detailing the lawsuits and conflicts with Arizona and the Monitor. See Westmoreland, 727 F.3d at 729 (district court’s “focus on other hypothetical explanations” posited by defendants’ reversible error).20 20 See also Rosenbloom, 765 F.3d at 1141, 1145 n.4, 1155 (holding that lower court “improperly drew inferences against Plaintiffs rather than in their favor” and rejecting defendants’ contrary explanation of documents cited in the complaint); In re Abbott Depakote S’holder Deriv. Litig., No. 11 C 8114, 2013 WL 2451152, at *8 (N.D. Ill. June 5, 2013) (rejecting defendants’ interpretation of a document because “at [the pleading] stage the Court is required to make all reasonable inferences in favor of the non-moving party”) (applying Illinois law, which follows Delaware); Pyott, 46 A.3d at 351 (even when a complaint “contains numerous particularized factual allegations from which inferences reasonably could be drawn in favor of either the plaintiffs or defendants,” for purposes of a motion to dismiss, “the plaintiffs receive the benefit of all reasonable inferences.”); In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 996-97 (Del. Ch. 2007) (court draws inferences from DGCL § 220 materials in favor of the plaintiffs facing a 12(b)(6) motion); Cal. Pub. Emps.’ Ret. Sys. v. Coulter, No. Civ.A. 19191, 2002 WL 31888343, at *11 (Del. Ch. Dec. 18, 2002) (“Although Defendants and [Plaintiff] offer, unsurprisingly, Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 57 of 72 51 Defendants also ask the Court to parse the regulatory settlements from 2002 through 2008 to conclude that the conduct at issue there was somehow qualitatively different than the conduct at issue in the SWB Settlement. (MTD Br. at 7-8, 7 n.3, 20 n.10.) Again, Defendants are asking for an inference that is contradicted by the detailed allegations of the Complaint, including the findings of the regulators who imposed those regulatory settlements in the first place.21 Moreover, this is precisely the kind of defendant-friendly inference that the Ninth Circuit Court of Appeals highlighted in Rosenbloom as constituting reversible error. 765 F.3d at 1155-56.22 Defendants ask this Court to infer that they acted in good faith and that the claims at most sound in negligence. (MTD Br. at 2, 9-11, 16, 20, 27-30, 33, 37-42.) For example, Defendants highlight their resumes (MTD Br. at 6) and point to disclaimers in the “whereas” clauses of the regulatory settlements to argue that Western Union was never judicially adjudicated to be liable for the AML violations at issue. (MTD Br. at 7-8.) Again, Defendants’ arguments are contrary to the detailed allegations of the Complaint, including payment of multimillion-dollar fines, different views about the correct construction of the directors’ plan, I decline to rule on construction of the agreement on a motion to dismiss.”). 21 As alleged in the Complaint, the 2003 California settlement found that Western Union’s “monitoring and compliance program to ensure that it and its agents complied with the [Bank Secrecy Act]” was flawed. (¶65.) In 2006, Arizona similarly found that “Western Union [] fail[ed] to adequately supervise” its agents. (Id.) 22 In reaching this decision, the Ninth Circuit found reversible error because the district court had parsed the prior FDA warning letters and credited the inference to defendants that, because the conduct addressed was superficially distinct, the board might not have realized that ongoing off- label marketing was occurring. Rosenbloom, 765 F.3d at 1158-59. Defendants here ask the Court for precisely the same inference when they argue that the regulatory settlements dated 2002 through 2008 address different misconduct and therefore are irrelevant. (MTD Br. at 19- 21.). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 58 of 72 52 damning admissions of Western Union agent complicity with human smuggling and illegal money laundering, Defendants’ acknowledgment that Western Union is legally required to implement effective, risk-based AML oversight over its agents, and Defendants’ own admission that they knew that Western Union needed to improve AML compliance. See Abbott Labs., 325 F.3d at 808-809 (demand excused where directors knowingly dragged their feet fixing compliance problems identified by the FDA); Massey Energy, 2011 WL 2176479 at *21 (refusing to infer good faith in the face of “particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non-compliance”). Defendants also seek an inference that they acted in good faith because they relied on management “updates” signaling “improvements” and “progress” throughout the monitorship. (MTD Br. at 37.) But, this argument cannot prevail here, given the extensive red flags discussed above, raising a pleading stage inference that management was not in good faith developing and implementing an adequate AML compliance program. See Id. at 32-34. The Delaware court expressly rejected this argument in Massey Energy, noting that the argument that directors had actually “taken steps to improve the company’s safety record” and were “involved in considering safety issues” were relevant at trial to determine the directors’ state of mind, but not at the pleading stage given particularized allegations that directors knowingly failed to discharge their duties. 2011 WL 2176479, at *20. Defendants also seek an inference that they acted in good faith because they believed until the very end that the SWB Settlement would be completed by the July 2013 deadline. (MTD Br. at 10-11, 37-42.) Again, Defendants’ requested inference is inconsistent with the detailed allegations of the Complaint, showing that management regularly informed the Board Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 59 of 72 53 that critical aspects of the Monitor’s recommendations for an effective AML compliance system either made no progress of being implemented or were severely lagging. As the Massey Energy court explained, Defendants’ argument that management was making slow progress because of the “dynamic” nature of regulatory environments can be presented at trial—but cannot rebut well-pled allegations that management was not complying with the Monitor in good faith. See 2011 WL 2176479, at *20 (noting that defendants can present at trial that Massey’s level of violations was increasing because regulators had stepped up enforcement efforts). Next, Defendants argue that they acted in good faith because they probed management and asked follow-up questions on Western Union’s compliance deficiencies. (MTD Br. at 33- 36.) Besides being inconsistent with the detailed allegations of the Complaint (see, e.g., ¶¶124, 162, 212, 229), Defendants’ argument underscores their unwillingness to hold management accountable for pervasive AML compliance problems. Directors who merely ask follow-up questions and probe management are not acting in good faith when they know: (i) that the company’s AML compliance system must be improved; (ii) failure to improve AML compliance system exposes the Company to extreme risk, including criminal prosecution, for facilitating money laundering by brutal criminals who commit heinous crimes; (iii) management brought lawsuits against the regulator and is fighting in court to limit the scope of the Monitor’s recommendations for an effective AML compliance program; and (iv) management is making no progress on key elements of an effective AML compliance system. See Massey Energy, 2011 WL 2176479, at *19 (directors breach their duty of loyalty and good faith when they “did not make a good faith effort to ensure that Massey complied with its legal obligations” and did not “respond to numerous red and yellow flags by aggressively correcting the management culture at Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 60 of 72 54 Massey that allegedly put profits ahead of safety”). These “questions” and purported probing are also absent from the 220 Documents. At most, Defendants are able to point to vague assertions that a “discussion” ensued. Without a discovery record of what information was disclosed to the Board, what the Board said in response, etc., no defendant-friendly inference can be drawn from these documents. Defendants also seek an inference that they must have acted in good faith because the Company retained outside consultants. (MTD Br. at 10, 27-28, 35-36, 40.) Again, Defendants will have ample opportunity to make that argument following discovery at trial. At this time, nothing is known about when these consultants were retained, who retained them, what their scope of work was, and whether they were independent from management. See Rosenbloom, 765 F.3d at 1141 (reversing dismissal because lower court “improperly drew inferences against Plaintiffs rather than in their favor” and rejecting defendants’ contrary explanation of documents cited in the complaint). Finally, Defendants seek an inference that they believed in good faith that Western Union’s AML compliance system was adequate, and that there was no need for a risk assessment for the seven “Very High” regions other than the Southwest Border because Western Union already has some compliance procedures in those areas. (MTD Br. at 44.) But, that argument does not square with the well pled allegations that Defendants knew that Western Union had an obligation to implement risk-based due diligence and oversight over Western Union agents outside the Southwest Border; that Ohio, Washington, and Texas regulators rated Western Union’s AML compliance “unsatisfactory”; that Western Union is named a target in two federal criminal money laundering investigations (including one investigation that is outside the Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 61 of 72 55 Southwest Border region); and that failure to pay AML attention to “Very High” risk areas may result in grave consequences to Western Union. Moreover, the Complaint alleges that the Board knows how to address these known risks to satisfy its known duty: instruct management to adopt a “foundational,” risk-assessment for areas outside the Southwest Border. Given these particularized allegations, Defendants lacked good faith in restricting the SWB-RA to one “Very High” risk region. D. A Majority Of The Board Also Faces A “Substantial Likelihood” Of Liability By Virtue Of Their Specific Responsibilities At Western Union A majority of the Board faces a substantial likelihood of liability due to its heightened knowledge of and assumed responsibility for Western Union’s AML compliance failures by virtue of the directors’ individual roles at the Company. 1. Ersek Faces Liability As Western Union’s Chief Executive Officer Ersek faces even greater likelihood of liability (and therefore was disabled from considering a demand), given that he has been a senior executive since 1999, spent several years as COO, and has been the Company’s CEO (and a Board member) since 2010. (¶269.) Thus, Ersek knew of every red flag available to the other Defendants (and more), and knew how short the Board was falling in its duty to implement an effective system. (¶¶270-71.) Ersek had direct managerial responsibility for Western Union, direct information about Western Union’s legally deficient AML compliance system, and a managerial “duty to act.” (Id.) Executives responsible for compliance at Western Union, including the Chief Compliance Officer and the General Counsel, reported directly to Ersek. (Id.) Ersek also attended nearly every Board, Audit Committee, Governance Committee, and Compliance Committee meeting between 2010 and 2014. (¶20.) Nevertheless, Ersek did not implement an effective AML Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 62 of 72 56 compliance system. Indeed, he had a strong motive not to do so, given the $48.3 million in compensation he received from 2010 through 2015. (¶20.) Much of Ersek’s compensation was incentive-based and derived from Western Union’s revenue and operating profit: metrics that would decrease if Western Union adopted an adequate AML compliance program. (Id.) And, pursuing the claims alleged could result in Ersek’s termination, and, therefore, would be antithetical to his financial interest. (¶273.) Ersek consciously violated AML legal obligations and disregarded his duties by resisting implementation of an effective, risk-based AML compliance system, and therefore he could not impartially consider demand. Massey Energy, 2011 WL 2176479, at *18 (demand on CEO excused in part due to his “intensive role in . . . management”). 2. The Committee Defendants Face A Substantial Likelihood Of Liability The members of each of the Governance, Audit, Compliance, and Compensation Committee Defendants assumed heightened obligations to ensure AML compliance, received additional information showing that the Company’s AML compliance was inadequate, and consciously refused to make a good faith effort to correct the pervasive and prolonged state of AML noncompliance. Thus, the Committee Defendants face even greater likelihood of liability, disabling them from considering a demand). See, e.g., In re Countrywide, 554 F. Supp. 2d at 1063-64 (demand was excused where board committee memberships with oversight responsibilities suggested “deliberate recklessness in the face of [] warning signs”); In re Intuitive Surgical, 146 F. Supp. 3d at 1120-21 (inferring from charter responsibilities that Audit and Compensation Committee members were disabled from considering demand due to heightened knowledge of and responsibility for compliance deficiencies). Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 63 of 72 57 a) The Audit And Governance Committees In the years leading up to the SWB Settlement, and during the monitorship, Devitre, Holden, Levinson, and Miles were voting members on the Governance Committee (¶¶21, 24, 25, 30), and Devitre, Goodman, Levinson, Mendoza, and Miles were voting members on the Audit Committee (¶¶21-23, 25, 26, 30.) Ersek served as a nonvoting member on both committees, and Greenberg observed (though not a member). (¶¶20, 23.) Each of these directors attended all or most Governance and Audit Committee meetings during their respective tenures. (¶¶20-26, 30.) Each of these directors was privy to all the red flags discussed above at Section V.B.1. Each of these directors also knew that, by virtue of their committee memberships, that they had assumed heightened responsibility for Western Union’s AML compliance.23 The detailed allegations in the Complaint show that the Governance and Audit Committees received extensive information during those meetings showing that Western Union’s AML compliance was deficient, giving rise to an even greater duty to promote regulatory compliance at Western Union. (See, e.g., ¶¶101, 113, 119, 131, 137, 143-44, 149, 154, 164, 167-69, 195, 190-91, 198, 202, 220.) Nevertheless, the Governance and Audit Committees failed to implement an effective AML compliance system, and these directors face an increased likelihood of liability. 23 Specifically, the Governance Committee was responsible for overseeing AML compliance “efforts” and reporting to the Audit Committee. (¶¶42-43.) The Audit Committee had “a special obligation to ‘assist the Board in fulfilling its oversight responsibility with respect to . . . the Company’s compliance with legal and regulatory requirements.’” (¶40.) It was tasked with “[c]onsulting with management . . . regarding procedures to insure compliance with laws and regulations to which the Company [was] subject, . . . review[ing] and direct[ing] the investigation of possible violations of law,” and taking “remedial steps . . . if such violations are detected.” (Id.) Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 64 of 72 58 The Governance Committee was also responsible for appointing directors to the various committees and evaluating performance. (¶¶42-43.) Despite the persistent compliance violations, the Governance Committee repeatedly assigned the same individuals to the Governance and Audit Committees, revealing that these committee members were not interested in changing Western Union’s culture of noncompliance with AML requirements. (¶¶283, 285- 86, 310(e).) Indeed, the Governance Committee appointed the nascent Compliance Committee with a majority of directors who had been complicit in Western Union’s disastrous AML compliance program for a decade as members of the Audit and Governance Committees. (Id.) The failure to change the composition of committees responsible for AML compliance evinces conscious disregard for correcting the Company’s AML compliance in violation of the duties of loyalty and good faith. See Stone, 911 A.2d at 370.24 b) The Compensation Committee Goodman, Holden, Levinson, Mendoza, and Trujillo served on the Compensation Committee and attended all or most of its meetings. (¶¶22, 24-26, 28.) The Compensation Committee’s decisions following the SWB Settlement in February 2010 were made with contemporaneous knowledge of all the red flags (see supra Section V.B.1.) showing that Western Union’s AML compliance was inadequate and a cultural change was necessary to 24 Defendants argue that Plaintiffs’ appointment allegations are conclusory and dependent on Plaintiffs’ other claims. (MTD Br. at 49 (citing Del. Code Ann. tit. 8, § 141(c)(1)).) But having been made aware of the “obvious and problematic occurrences, that support an inference that [Western Union’s] directors knew that there were material weaknesses in [Western Union’s internal policies] and failed to correct such weaknesses[,]” Defendants were obligated to take remedial action. See Rich ex rel. Fuqi Int’l., Inc. v. Yu Kwai Chong, 66 A.3d 963, 983 (Del. Ch. 2013). Defendants knew from Western Union’s sustained and systemic failure to comply with the SWB Settlement that refusing to replace those responsible could not possibly comply with their fiduciary obligations. Stone, 911 A.2d at 370; Caremark, 698 A.2d at 971. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 65 of 72 59 correct Western Union’s compliance function. (¶¶71-75, 113, 116, 119, 122, 131, 134, 158, 162, 169, 184, 198, 202.) The committee’s members were responsible for “review[ing] and approv[ing] corporate goals and objectives relevant to the compensation of the CEO and other executive officers, evaluat[ing] the performance of [management] in light of those goals and objectives, and set[ting] the compensation and other benefits for [management] based on this evaluation.” (¶295.) Any director acting in good faith to ensure that management implement an effective AML compliance system required by law would include this as a “corporate goal and objective” in compensating management. Despite having contemporaneous knowledge of all the red flags discussed above, the Compensation Committee refused to do so. Instead, the Compensation Committee exacerbated Western Union’s compliance deficiencies by continuing to grant large compensation packages based heavily on revenue and profit targets that would be jeopardized by effective AML compliance. Thus, the Compensation Committee continued to incentivize management to violate the law, just as it had for a decade. (¶¶106, 129, 179, 234, 296-97.) Defendants’ cited cases are clearly inapposite. Unlike In re Goldman Sachs Grp., Inc., S’holder Litig., 2011 WL 4826104, at *19-23, Plaintiffs do not allege, without more, that the Board breached its fiduciary duties by granting performance-based compensation incentivizing short-term over long-term goals. Nor do Plaintiffs allege, as in City of Roseville Emps. Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378, 396 (D. Del. 2010), that large compensation packages themselves support an inference of scienter. Rather, Plaintiffs allege that the Compensation Committee members had a known duty to act to promote legal and regulatory compliance, and had a means to do so by aligning compensation to legality. Plaintiffs allege a Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 66 of 72 60 multi-year string of red flags showing board knowledge that executives were intentionally or recklessly violating regulations in a way that improved their performance under the incentive compensation plans. But, part and parcel with the Board’s broader failure to take affirmative steps to achieve regulatory compliance, the Compensation Committee preserved the status quo and perpetuated Western Union’s state of AML noncompliance. See Stone, 911 A.2d at 370. c) The Compliance Committee In 2013, Western Union belatedly formed the Compliance Committee (at Arizona’s demand), which absorbed responsibilities previously belonging to the Governance Committee. (¶44.) Devitre, Greenberg, Miles, and Townsend served as the Compliance Committee’s voting members. (¶¶21, 23, 27, 30.) Ersek is a nonvoting member and Trujillo observes (though not a member). (¶¶20, 28.) Each of these six directors attended all or most Compliance Committee meetings since 2013. (¶¶20-1, 23, 27-28, 30.) Each was privy to all the red flags discussed above at Section V.B.1. And each of these directors knew they were required to “[r]eview the Company’s compliance programs and policies relating to [AML] laws, including establishing procedures to be apprised of material investigations or other material matters that may arise in relation to such laws.” (¶44.) But, the committee refused to implement adequate risk-based oversight over agents outside the Southwest Border, despite their acknowledged legal requirement. In fact, Western Union still lacks a risk-based compliance program in many “Very High” risk jurisdictions across the country, showing that the Compliance Committee failed to act in good faith. * * * Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 67 of 72 61 Because the Committee Defendants assumed specific duties under the charters, knew even more about Western Union’s deficient AML compliance, were present for years of meetings where compliance failures were discussed, and nevertheless failed to discharge their duties in good faith, their conscious inaction even more culpable. (See ¶¶57-75, 85.) Demand is, therefore, excused as to the Committee Defendants.25 VI. DEMAND IS EXCUSED AS TO COUNT II In Count II, Plaintiffs assert that Ersek, in his capacity as CEO, breached his fiduciary duties. (¶¶313-319.) The only difference between Count I and Count II is (i) that Ersek had even more knowledge of Western Union’s AML compliance failures by virtue of his role as CEO and (ii) this claim cannot be exculpated under Western Union’s corporate charter pursuant to DGCL § 102(b)(7). See Gantler v. Stephens, 965 A.2d 695, 709 n.37 (Del. 2009) (“[T]here currently is no statutory provision authorizing comparable exculpation of corporate officers.”). Count II is based on the exact same approval of a business plan based in part on AML noncompliance, the exact same duty to act, the exact same conscious inaction, and the exact same failure to implement an effective AML compliance system. It also alleges the exact same harm to the Company. 25 Defendants will likely reply that Plaintiffs seek to hold the Committee Defendants liable solely due to their committee memberships. Not so. Plaintiffs have pled with particularity that the Committee Defendants: (i) were privy to all the red flags available to the Board generally (see Section V.B.1. above); (ii) were exposed to additional red flags of systemic AML compliance at the various committee meetings (see ¶¶71-75, 113, 116, 119, 122, 131, 134, 158, 162, 169, 184, 198, 202); and (iii) had heightened compliance responsibilities pursuant to the various committee charters. (¶¶40-49.) Thus, cases where committee members were found not to be aware of red flags (like Wood v. Baum, 953 A.2d 136 (Del. 2008), Seni v. Peterschmidt, No. 12-cv-00320- REB-CBS, 2014 WL 5812149 (D. Colo. Nov. 10, 2014), Kenney, 426 F. Supp. 2d 1175) are inapposite. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 68 of 72 62 Defendants argue Plaintiffs’ claims of breach of fiduciary duty against Ersek in his capacity as CEO should nevertheless be dismissed because “there is nothing that incapacitates [the Board] from considering a demand to bring an action against [Ersek].” (MTD Br. at 49.) This argument is nonsense. Because the misconduct supporting the breach of fiduciary duty clams in Count II is identical to the misconduct supporting the breach of fiduciary duty claims in Count I, any investigation into Ersek’s misconduct necessarily involves an investigation into the misconduct of the Board. As a result, if the Court finds the alleged facts raise a reasonable doubt that the directors were capable of making an impartial decision regarding Count I, it should similarly find demand was also futile with respect to Count II. Defendants’ reliance on Rist v. Stephenson, No. CIV.A. 05-CV-02326-P, 2007 WL 2914252 (D. Colo. Oct. 1, 2007) is misplaced. There, plaintiffs alleged that the company’s chairman breached his fiduciary duties through illegal insider trading. Id., 2007 WL 2914252, at *4. There were no allegations that the outside directors participated in the insider trading or were aware of any red flags suggesting that the insider trading was occurring. Id. It is unsurprising that the court dismissed the insider trading claim for failure to plead demand futility, as that claim was premised entirely on alleged misconduct that was factually distinct from any misconduct alleged against the outside directors. Id. Here, by contrast, a majority of the Board participated with Ersek in refusing to take affirmative steps to develop and implement a legally required AML compliance system, despite the knowledge of the red flags described in the Complaint. (¶¶274-281.) Thus, Ersek and a majority of the Board face a substantial likelihood of liability for the exact same conduct and demand was excused. Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 69 of 72 63 CONCLUSION For the reasons set forth above, the Motion should be denied in its entirety. Dated: August 1, 2016 Respectfully submitted, BERENS LAW LLC /s/ Jeffrey A. Berens Jeffrey A. Berens 2373 Central Park Boulevard, Suite 100 Denver, CO 80238 Tel: (303) 861-1764 Fax: (303) 395-0393 jeff@jberenslaw.com Local Counsel for Lead Plaintiffs JOHNSON & WEAVER, LLP Frank J. Johnson 600 West Broadway, Suite 1540 San Diego, CA 92101 Tel: (619) 230-0063 frankj@johnsonandweaver.com Counsel for Lead Plaintiffs BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP Mark Lebovitch Jeroen van Kwawegen Edward G. Timlin David MacIsaac 1285 Avenue of the Americas New York, NY 10019 Tel: (212) 554-1400 markl@blbglaw.com jeroen@blbglaw.com edward.timlin@blbglaw.com david.macisaac@blbglaw.com Counsel for Lead Plaintiffs BOTTINI & BOTTINI, INC. Francis A. Bottini, Jr. Albert Y. Chang 7817 Ivanhoe Avenue, Suite 102 La Jolla, CA 92037 Tel: (858) 914-2001 Fax: (858) 914-2002 fbottini@bottinilaw.com achang@bottinilaw.com Additional Counsel for Plaintiffs KAHN SWICK & FOTI, LLC Melinda A Nicholson 206 Covington Street Madisonville, LA 70477 Tel: (504) 455-1400 Fax: (504) 455-1498 melinda.nicholson@ksfcounsel.com Additional Counsel for Plaintiffs Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 70 of 72 64 HACH ROSE SCHIRRIPA & CHEVERIE LLP Frank R. Schirripa 185 Madison Avenue New York, NY 10016 Tel: (212) 213-8311 Fax: (212) 779-0028 fs@hachroselaw.com Additional Counsel for Plaintiffs Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 71 of 72 65 CERTIFICATE OF SERVICE I hereby certify that on August 1, 2016, I electronically filed the foregoing with the Clerk of Court using the CM/ECF system, which will send notification of such filing to the e-mail addresses denoted on the Court’s Electronic Mail Notice List. /s/ Jeffrey A. Berens Jeffrey A. Berens BERENS LAW LLC 2373 Central Park Boulevard, Suite 100 Denver, CO 80238 (303) 861-1764 (Telephone) (303) 395-0393 (Facsimile) jeff@jberenslaw.com Case 1:14-cv-00144-MSK-KLM Document 109 Filed 08/01/16 USDC Colorado Page 72 of 72