Lieblein v. Ersek et al

BRIEF in Opposition to 137 MOTION to Dismiss the Verified Second Amended Consolidated Shareholder Derivative Complaint

D. Colo.June 9, 2017

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 SECOND AMENDED CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT ______________________________________________________________________________ Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 1 of 70 i TABLE OF CONTENTS PRELIMINARY STATEMENT .................................................................................................... 1 FACTUAL ALLEGATIONS ......................................................................................................... 6 I. WESTERN UNION’S ADMITTED ILLEGAL CONDUCT IN ITS CORE BUSINESS .......................................................................................................................... 6 A. Western Union’s Extensively Regulated Money Transmittal Business ................. 6 B. Western Union’s Long History of Admitted Illegal Conduct ................................. 8 II. INDIVIDUAL DEFENDANTS CONSCIOUSLY PERPETUATED WESTERN UNION’S ILLEGAL CONDUCT .................................................................................... 10 A. Individual Defendants Consciously Allowed Management to Prevent and Delay AML Compliance at WUBS ...................................................................... 11 B. Individual Defendants Consciously Allowed Management to Prevent and Delay AML Compliance for the Southwest Border Region ................................. 13 C. Management Deceives the Board Regarding a Federal Criminal Money Laundering Investigation Naming Western Union as a “Target” ......................... 17 D. Under Threat from Regulators, Western Union Implements Risk-Based AML Compliance, But Only For the Southwest Border Region .................................... 19 E. Individual Defendants Reward Management’s Years of Obfuscation and Delay ..................................................................................................................... 21 III. INDIVIDUAL DEFENDANTS’ CONSCIOUS DERELECTION OF DUTY CAUSED SIGNIFICANT HARM ................................................................................... 22 A. Western Union Is Forced to Accept an Extension of the SWB Settlement .......... 22 B. Western Union Admits Criminal Responsibility for Willful Violations of AML Laws ............................................................................................................ 23 ARGUMENT ................................................................................................................................ 24 IV. LEGAL STANDARDS .................................................................................................... 24 A. The Motion to Dismiss Standard for Demand Futility ......................................... 24 B. Demand Futility Is Assessed As of the Filing of the First Amended Complaint . 26 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 2 of 70 ii C. The Three Different Types of Oversight Claims Under Delaware Law ............... 29 V. DEMAND WAS EXCUSED AS TO COUNT I ............................................................... 32 A. A Majority of the Board Faced Potential Liability for Refusing to Adopt a Legally Required AML Compliance System ........................................................ 32 B. A Majority of the Board Also Faced Potential Liability for Consciously Disregarding Their Known Duty to Act ............................................................... 35 C. Defendants Mischaracterize the Allegations in the Complaint and Cite Inapposite Authority ............................................................................................. 42 D. Defendants Improperly Rely on Self-Serving Interpretations of Unreliable and Incomplete Documents to Request Inferences in Their Favor .............................. 46 1. Defendants Cannot Obtain Dismissal Based on Their Disputed Interpretations of Disputed Documents Outside the Complaint ............... 47 2. Defendants Are Not Entitled to Their Requested Inferences at the Pleading Stage ........................................................................................... 52 E. A Majority of the Board Also Faces a “Substantial Likelihood” of Liability By Virtue of Their Specific Responsibilities at Western Union ................................ 54 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 ................................................................... 58 CONCLUSION ............................................................................................................................. 60 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 3 of 70 iii TABLE OF AUTHORITIES Page(s) Cases Andropolis v. Snyder, No. 05 CV 01563 EWN BNB, 2006 WL 2226189 (D. Colo. Aug. 3, 2006) ..........................42 Annuity & Ben. Fund v. Smith, No. 11000-VCG, 2016 WL 3223395 (Del. Ch. May 31, 2016) ..............................................29 Baldwin v. United States, No. 11-cv-02033-MSK-KLM, 2012 WL 2215680 (D. Colo. June 15, 2012) ...................50, 51 City of Roseville Emps. Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378 (D. Del. 2010) .........................................................................................58 Cunningham v. Bank of Am. N.A., No. 12-cv-03316-MSK-GPG, 2013 WL 2455945 (D. Colo. June 6, 2013) ............................50 Decker v. Clausen, Civ. A. Nos. 10,684, 10,685, 1989 WL 133617 (Del. Ch. Nov. 6, 1989) .........................35, 42 Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.2d 1017 (Del. 2015) ......................................................................................................26 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) ......................................................................................................54 Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007)............................................................................................35, 42 Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999) ......................................................................................................31 Gantler v. Stephens, 965 A.2d 695 (Del. 2009) ........................................................................................................59 Gee v. Pacheco, 627 F.3d 1178 (10th Cir. 2010) ...............................................................................5, 46, 49, 50 Grimes v. Donald, No. CIV. A. 13358, 1995 WL 54441 (Del. Ch. Jan. 11, 1995) ...............................................42 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 4 of 70 iv Gubricky v. Ells, No. 16-cv-2011-WJM-KLM, slip op. (D. Colo. June 7, 2017) ...............................................39 Harris v. Carter, 582 A.2d 222 (Del. Ch. 1990)..................................................................................................25 In re Abbott Depakote S’holder Deriv. Litig., No. 11 C 8114, 2013 WL 2451152 (N.D. Ill. June 5, 2013) ...................................................53 In re Am. Apparel, Inc. S’holder Deriv. Litig., No. CV 10-06576 MMM, 2012 WL 9506072 (C.D. Cal. July 31, 2012) ...............................42 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).......................................................................................... passim In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009)..................................................................................................42 In re Countrywide Fin. Corp. Deriv. Litig., 554 F. Supp. 2d 1044 (C.D. Cal. 2008) ...................................................................4, 37, 41, 57 In re Discover Financial Services Derivative Litigation, No. 12 C 6436, 2015 WL 1399282 (N.D. Ill. Mar. 23, 2015) ...........................................45, 46 In re GM 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., Civil Action No. 5215–VCG, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ...........................58 In re infoUSA, Inc. S’holders Litig., 953 A.2d 963 (Del. Ch. 2007)..................................................................................................53 In re Intuitive Surgical S’holder Deriv. Litig., 146 F. Supp. 3d 1106, 1116-19 (N.D. Cal. 2015) ....................................................3, 37, 41, 57 In re Lear Corp. S’holder Litigation, 967 A.2d 640 (Del. Ch. 2008)............................................................................................35, 42 In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479 (Del. Ch. May 31, 2011) ................................ passim Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 5 of 70 v In re Pfizer Inc. S’holder Deriv. Litig., 722 F. Supp. 2d 453 (S.D.N.Y. 2010) ............................................................................4, 37, 41 In re SAIC Inc. Deriv. Litig., 948 F. Supp. 2d 366 (S.D.N.Y. 2013) ......................................................................................45 In re SandRidge Energy, Inc. S’holder Deriv. Litig., 302 F.R.D. 628 (W.D. Okla. 2014) ..........................................................................................25 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, 26, 37, 41 In re Walt Disney Co Deriv. Litig., 731 A.2d 342 (Del. Ch. 1998), aff’d in part and rev’d in part sub nom., Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ........................................................................................28 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) .............................................................................................................24, 25 Kenney v. Koenig, 426 F. Supp. 2d 1175 (D. Colo. 2006) .........................................................................25, 42, 58 King v. Baldino, 648 F. Supp. 2d 609 (D. Del. 2009) .............................................................................43, 45, 46 La. Mun. Police Emps. Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013) ................................................................................................................................ passim Maurras Revocable Trust v. Bronfman, Nos. 12 C 3395, 12 C 6019, 2013 WL 5348357 (N.D. Ill. Sept. 24, 2013) ............................42 Melbourne Mun. Firefighters’ Pension Tr. v. Jacobs, C.A. No. 10872–VCMR, 2016 WL 4076369 (Del. Ch. Aug. 1, 2016) .............................39, 44 Rales v. Blasband, 634 A.2d 927 (Del. 1993) ..............................................................................................3, 25, 28 Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179 (S.D.N.Y. 2000) ........................................................................................50 Ratzlaf v. United States, 510 U.S. 135 (1994) .................................................................................................................27 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 6 of 70 vi Rich ex rel. Fuqi Int’l., Inc. v. Yu Kwai Chong, 66 A.3d 963 (Del. Ch. 2013)..............................................................................................36, 58 Rist v. Stephenson, No. CIV.A. 05-CV-02326-P, 2007 WL 2914252 (D. Colo. Oct. 1, 2007) ........................59, 60 Rosenbloom v. Pyott, 765 F.3d 1137 (9th Cir. 2014) ......................................................................................... passim Roth v. Jennings, 489 F.3d 499 (2d Cir. 2007)...............................................................................................49, 50 Seni v. Peterschmidt, No. 12-cv-00320-REB-CBS, 2014 WL 5812149 (D. Colo. Nov. 10, 2014) ...........................58 Shaev v. Baker, No. 16-cv-05541-JST, 2017 WL 1735573 (N.D. Cal. May 4, 2017) .............................. passim Shifrin v. Colorado, No. 09-cv-03040-REB-MEH, 2010 WL 2943348 (D. Colo. July 22, 2010) ...........................51 Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190 (10th Cir. 2013) ...............................................................................................49 Stidham v. Peace Officer Standards & Training, 265 F.3d 1144 (10th Cir. 2001) ...........................................................................................6, 25 Tilley v. Maier, 495 F. App’x 925 (10th Cir. 2012) ..........................................................................................49 U.S. Energy Corp. v. Nukem, Inc., 400 F.3d 822 (10th Cir. 2005) .................................................................................................27 United States v. Smith, 472 F.3d 752 (10th Cir. 2006) .................................................................................................27 Westmoreland Cnty. Empl Ret. Sys. v. Parkinson, 727 F.3d 719 (7th Cir. 2013) ........................................................................................... passim Wood v. Baum, 953 A.2d 136 (Del. 2008) ........................................................................................................58 Statutes Del Code Ann. tit. 8, § 141(e) ........................................................................................................40 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 7 of 70 vii Other Authorities Fed. R. Civ. P. 12 ...............................................................................................................47, 49, 50 Fed. R. Civ. P. 15 ...........................................................................................................................27 Fed. R. Civ. P. 23.1 ............................................................................................................24, 27, 34 Fed. R. Civ. P. 56 ...........................................................................................................................51 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 8 of 70 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 Second Amended Consolidated Shareholder Derivative Complaint (Dkt. 137) (the “Motion” or “MTD Br.”) filed by the Individual Defendants1 and nominal defendant The Western Union Company (“Western Union” or the “Company” and, collectively with the Individual Defendants, “Defendants”). PRELIMINARY STATEMENT This derivative action seeks relief for the harm that Western Union’s directors and Chief Executive Officer caused by sanctioning the Company’s refusal to implement an effective anti- money laundering (“AML”) compliance system. Individual Defendants knew that Western Union was legally required to implement an effective AML compliance system. (¶74.)2 Individual Defendants knew that the failure to implement an effective AML compliance system would facilitate money laundering by brutal criminals and expose the Company to the risks of criminal prosecution and revocation of essential business licenses. (¶¶56, 69, 71.) And Individual Defendants knew that Western Union’s AML compliance system was not effective and needed to be significantly improved in order to ensure that Western Union compliance with applicable laws. (¶¶72, 74.) Yet, Defendants did not ensure that Western Union complied with the law by implementing an effective AML compliance system. (¶¶11, 235-44.) For them, short-term profits 1 “Individual 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 Second Amended Consolidated Shareholder Derivative Complaint (Dkt. No. 132) (the “Complaint” or “SAC”). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 9 of 70 2 and the “client experience” were paramount while AML compliance was a business risk to be managed rather than a mandatory legal requirement to be met. (¶¶10, 67, 122, 263, 274, 293.) Western Union’s willful lawbreaking was known throughout the Company. (¶264; see also DPA3 ¶4(a).) It continued after the Court in Arizona appointed an external Monitor to ensure that Western Union would implement an effective AML compliance system for the Southwest border region. (¶¶71, 76, 262.) It continued after Individual Defendants knew that Western Union’s AML compliance system was legally deficient. (¶¶67, 71, 262.)4 And it continued after federal prosecutors in California and Florida informed Western Union that it was a “target” in two federal criminal investigations because they had substantial evidence linking Western Union to criminal money laundering. (¶¶101-02; 137-38.) The Complaint alleges in painstaking detail which directors were informed that Western Union failed to implement an effective AML compliance system, when they received that information, and who provided that information to them. (Complaint § V.E.) Despite this 3 “DPA” refers to the Deferred Prosecution Agreement dated January 18, 2017 between Western Union and the U.S. Department of Justice and the U.S. Attorney’s Offices for the Middle District of Pennsylvania, the Central District of California, the Eastern District of Pennsylvania, and the Southern District of Florida. The DPA is attached to and incorporated Complaint. (Dkt. 132-2; ¶254.) 4 See also Motion to Dismiss Order, dated March 31, 2016 (Dkt. 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 previously dismissing this action without prejudice instructed Plaintiffs to focus their allegations on “[Western Union’s] attempts (if any) to reform itself from lax 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.) The Court further characterized the relevant “story-line” as “whether [Western Union] has been able to identify its faults and what efforts it has made to overcome them.” Id. Plaintiffs have addressed each of Court’s concerns. See SAC (Dkt. 132), the redline showing the differences between the original complaint and the FAC (Dkt. 127), and the redline showing the differences between the FAC and SAC (Dkt. 133-1). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 10 of 70 3 information, Individual Defendants chose not to take immediate corrective action to ensure that the Company complied with the law and implement an effective AML compliance system. (¶¶85, 262.) In other words, the Complaint contains particularized allegations concerning the “who, what, where, when and how” of each Individual Defendant’s scienter. Rosenbloom v. Pyott, 765 F.3d 1137, 1150-51 (9th Cir. 2014) (applying Delaware law) (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”). Under Delaware law, no pre-suit demand is required of a derivative plaintiff where a reasonable doubt exists that “the directors are incapable of making an impartial decision regarding such litigation.” Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). Based on the detailed facts alleged in the Complaint, it strains credulity to believe that Individual Defendants could dispassionately and disinterestedly consider a pre-suit demand. Directors who consciously allow illegal conduct to continue despite stern governmental warnings and potentially draconian consequences for the Company and its shareholders cannot impartially consider a shareholder demand for action to correct harms resulting from those directors’ own acts and omissions. Indeed, courts around the country have held in cases without express admissions of wrongdoing by the company (which are present here), and facts far less egregious than this case, that the kind of particularized, detailed allegations concerning Board complicity and conscious inaction included in the Complaint excused a pre-suit demand.5 5 See Rosenbloom, 765 F.3d at 1150-51; Westmoreland Cnty. Empl. Ret. Sys. v. Parkinson, 727 F.3d 719, 729 (7th Cir. 2013) (applying Delaware law); Shaev v. Baker, No. 16-cv-05541-JST, 2017 WL 1735573, at *13 (N.D. Cal. May 4, 2017) (applying Delaware law) (“Wells Fargo”); In re Intuitive Surgical S’holder Deriv. Litig., 146 F. Supp. 3d 1106, 1116-19 (N.D. Cal. 2015) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 11 of 70 4 Recognizing that their own critical admissions and other detailed allegations in the Complaint doom dismissal, Defendants argue that, as matter of law, the Individual Defendants acted in good faith when they relied on management to fix Western Union’s defective AML compliance system and that they had no obligation to ensure the Company immediately complied with the law. (MTD Br. at 28-30, 35-38, 40-48, 50-55.) Defendants’ argument was expressly rejected in Massey Energy, 2011 WL 2176479. There, the current Chief Justice of the Delaware Supreme Court held that 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 managerial attitude suggestive of a desire to fight with and hide evidence from the company’s regulators.” Id. at *21. Here, the Complaint details the Company’s history of recidivism and its hostility towards regulators (¶¶65-67), the Individual Defendants’ admission that they knew by February 2010 that Western Union’s AML compliance needed to be substantially enhanced (¶¶71-74), and Western Union’s admission that from 2004 through December 2012, the Company continued to break the law by “willfully failing to implement and maintain an effective [AML] program that was designed to detect, report, and prevent criminals from using Western Union to facilitate their fraud, (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 Fin. Corp. Deriv. Litig., 554 F. Supp. 2d 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); La. Mun. Police Emps. Ret. Sys. v. Pyott, 46 A.3d 313, 351 (Del. Ch. 2012) (“Pyott”), rev’d on other grounds, 74 A.3d 612 (Del. 2013); In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479, at *18-*21 (Del. Ch. May 31, 2011) (“Massey Energy”). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 12 of 70 5 money laundering, and structuring schemes” (¶254). Moreover, after initially contesting allegations that Western Union’s AML compliance system was legally deficient outside the Southwest Border region (Dkt. 102 at 44), Defendants’ latest brief has now abandoned this argument altogether. Defendants also ask the Court to adopt their self-serving interpretation of 123 extraneous documents and a 42-page appendix to dispute the veracity of the particularized allegations of the Complaint. (See MTD Br. at 24, Exs. A.1 – A.109, Appendix). This is improper. Even if Plaintiffs did not dispute the accuracy and completeness of the documents (and Plaintiffs do), it is improper at this stage to seek dismissal based on disputed factual interpretations of contested documents and to seek inferences in favor of the movants. 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).6 Defendants cannot obtain dismissal by presenting self-serving interpretations of incomplete, disputed, extraneous documents, and then seek inferences in their favor. If they have justifications for their conduct, they can present them at trial. Given the Complaint’s particularized allegations of Defendants’ conscious inaction in the face of their known duty to ensure that Western Union implement an effective AML compliance system, pre-suit demand was excused and the motion should be denied. 6 See also Rosenbloom, 765 F.3d at 1155 (reversing lower court because, among other things, “it repeatedly drew inferences in the Board’s favor”); 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”). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 13 of 70 6 FACTUAL ALLEGATIONS The following well-pled allegations from the Complaint must be accepted as true and viewed in the light most favorable to Plaintiffs as non-movants. Stidham v. Peace Officer Standards & Training, 265 F.3d 1144, 1149 (10th Cir. 2001). I. WESTERN UNION’S ADMITTED ILLEGAL CONDUCT IN ITS CORE BUSINESS A. Western Union’s Extensively Regulated Money Transmittal Business Criminal money laundering poses a threat to financial institutions and national security. (¶57.) As former 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 core business, the transfer of money through a network of agents and “front line associates” (“FLAs”), is heavily regulated under the Bank Secrecy Act of 1970 (“BSA”), as amended by the USA Patriot Act of 2001, and similar state laws. (¶58.) AML regulations govern Western Union’s compliance systems used to identify and prevent illegal money transfers and money laundering by criminals and terrorists, and required Western Union at all relevant times to:  Adopt a “risk-based” approach to AML compliance that accounts for heightened risk associated with transactions to or from certain geographies with certain characteristics;  Verify and maintain for five years customer identification and transaction information for any transfer of a certain magnitude, regardless whether the activity appears suspicious. Federal law requires such recording for transfers of more than $3,000, while parallel state laws impose similar requirements; Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 14 of 70 7  File “Currency Transaction Reports” (or “CTRs”) with the government for any transfer exceeding $10,000, regardless whether the activity appears suspicious; and  File “Suspicious Activity Reports” (or “SARs”) with the government for any transfer exceeding $2,000 when Western Union has reason to suspect that the transaction involves criminal proceeds or is intended to evade any AML law or regulation. (¶58.) The AML recording and reporting requirements applied equally to Western Union’s agents. (¶61.) Western Union has leverage over its agents and faces potential criminal and civil liability and the threat that essential business licenses will be revoked if Western Union agents violate AML laws using Western Union systems. (¶¶55-56.) Western Union’s Form 10-Ks, signed by Individual 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. (¶63.) Each Individual Defendant knew at all relevant times that Western Union was legally required to “conduct due diligence into and risk-based monitoring of their agents inside and outside the United States.” (¶61.) Effective AML compliance, including “risk-based” oversight over agents, increases the transaction costs, reduces sender-anonymity, and is expensive. (¶52.) As a result, money transmittal companies derive immediate and substantial profits by not implementing effective AML compliance. (Id.) Western Union charged higher fees and used higher monetary thresholds for recording and reporting customer information than competitors, encouraging customers willing to pay higher fees to hide their identity. (Id.) This business strategy boosted Western Union’s revenues and profits (as well as executive compensation), but came with a known risk of facilitating money laundering by human traffickers and other criminals. (¶¶52, 64.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 15 of 70 8 B. Western Union’s Long History of Admitted Illegal Conduct Between December 2002 and October 2008, regulators throughout the United States cited Western Union for violating AML requirements, including the Company’s failure to implement effective AML compliance procedures. Each time, Western Union promised to implement an effective AML compliance program. For example:  December 2002: New York regulators find that Western Union failed to properly aggregate transactions of more than $10,000 for recording and reporting purposes when structured across multiple agents in violation of the BSA, USA PATRIOT ACT, and New York law. New York imposed an $8 million fine; Western Union admitted its affirmative legal obligation to implement an effective AML compliance program.  March 2003: federal regulators find that Western Union was “willfully” failing to file SARs because “Western Union failed to establish SAR reporting procedures that would reasonably assure that it could identify and properly report structured transactions.” Western Union paid a second fine and promised that “by June 30, 2003, all its money services business products [would] be subject to an effective system of review for reporting suspicious transactions under the [Bank Secrecy Act].”  August 2003: California regulators find failures in Western Union’s “monitoring and compliance program to ensure that it and its agents complied with the [Bank Secrecy Act],” including failures to timely file SARs and CTRs. Western Union promised again to develop an effective AML compliance program.  August 2006: Arizona regulators find that “Western Union [] fail[ed] to adequately supervise” its agents and, as a result, agents “fail[ed] to keep and preserve records that enable the Superintendent to determine compliance with applicable laws.” Western Union again promised to “implement and maintain” an AML compliance program.  October 2008: Arizona regulators find that Western Union was still deficient in recording customer identities for transactions of $1,000 or more. Arizona found that the violations could have supported revocation of Western Union’s license to conduct business in Arizona, representing approximately 25% of Western Union’s outbound consumer revenues. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 16 of 70 9 (¶65.) Defendants admit that “the Board was aware of [these] settlements.” (¶67.) Yet, the Company did not follow through on its promises to regulators and did not implement an effective AML compliance program. (Id.) In 2009, 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.” (¶69.) On February 11, 2010, Western Union entered into the SWB Settlement confirming that the Company did not follow through on its promises and did not implement an effective AML compliance program. Specifically, Western Union admitted that for a period of at least four years, the Company had reason to know that numerous Western Union agents in different locations were “knowingly engaged in a pattern of money laundering violations that facilitated human smuggling,” yet did not implement an effective AML compliance program. (¶71.) The Company paid $94 million and promised to work cooperatively with a Court-appointed Monitor to implement an effective AML compliance program for the Southwest Border region. (¶72.) The Individual Defendants admit that the February 2010 SWB Settlement “triggered knowledge by the Board that WUFSI should improve its AML compliance.” (¶74.) Yet, the Company again did not follow through on its promises to regulators and again did not implement an effective AML compliance program. (¶85.) Instead, the Board chose to do the opposite. On February 22, 2013, Western Union disclosed that it would not implement the Monitor’s recommendations for an effective AML compliance program by the July 31, 2013 deadline, and would have to entreat Arizona for an extension of the SWB Settlement. (¶192.) In January 2017, Western Union entered into the DPA and admitted that the Company again did not follow through on its promises to regulators. Specifically, Western Union admitted Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 17 of 70 10 that from 2004 through December 2012, the Company broke the law by “willfully failing to implement and maintain an effective [AML] program that was designed to detect, report, and prevent criminals from using Western Union to facilitate their fraud, money laundering, and structuring schemes.” (¶254.) Western Union admitted that during this eight-year time period, which ended almost three years after the SWB Settlement, the Company:  repeatedly identified Western Union Agent locations involved in or facilitating unlawful structuring but knowingly failed to take effective corrective action;  failed to adequately implement effective policies and procedures to discipline, suspend, terminate or take effective corrective action against Western Union Agent locations that repeatedly violated the BSA and other statutes or Western Union anti- money laundering or anti-fraud policies;  modified compliance reviews or results so that Agents with severe compliance failures would not face disciplinary action such as suspension or termination as required by Western Union policies or practices; and  failed to file SARs identifying Western Union Agents as suspicious actors. (¶262.) As the U.S. Attorney for the Southern District of Florida stated: “Western Union, the largest money service business in the world, had admitted to a flawed corporate culture that failed to provide a checks and balances approach to combat criminal practices.” (¶259.) Today, Western Union still does not have an effective, risk-based AML compliance program throughout the United States and still has not implemented company-wide “risk-based” AML oversight over its agents as required by the BSA. (¶¶210, 294.) II. INDIVIDUAL DEFENDANTS CONSCIOUSLY PERPETUATED WESTERN UNION’S ILLEGAL CONDUCT The Individual Defendants admittedly knew in February 2010 that Western Union’s AML compliance system was legally deficient, exposing the Company to criminal prosecution for facilitating illegal money laundering. (¶¶61-63, 71, 74, 89-90.) Any director acting in good faith Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 18 of 70 11 who has been informed that his or her company is knowingly facilitating money laundering by human traffickers would immediately take affirmative steps to ensure compliance with the law by implementing an effective, risk-based AML compliance system. (¶75.) Any director acting in good faith who acknowledged his or her personal knowledge of each and every term of the SWB Settlement and responsibility for bringing Western Union into compliance could not blindly rely on management assurances that they could be trusted to implement an effective AML compliance system in 2010. (¶¶73-74.) To the contrary, such a director would take immediate, affirmative steps to ensure that management avoided any further delay, including by removing financial incentives to delay, and that management would work cooperatively with AML regulators and Court-appointed monitors. (¶¶75-76.) The Individual Defendants did the exact opposite here. A. Individual Defendants Consciously Allowed Management to Prevent and Delay AML Compliance at WUBS The SWB Settlement required Western Union to accept a Court-appointed Monitor. (¶76.) The Monitor’s February 2010 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 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.) Individual 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 finally implemented effective AML compliance systems. (¶85.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 19 of 70 12 However, from the outset, management made clear to the Board that it viewed the Court- appointed Monitor as a risk to Western Union’s “client experience”—including higher AML reporting thresholds, higher transaction fees and lower compliance costs—rather than a resource for ensuring that Western Union implement effective AML compliance and stop facilitating criminal money laundering. (¶¶93, 98, 122, 174.) Management refused to provide the Monitor with access to information concerning consumer-to-business, business-to-consumer, and business- to-business transfers from its WUBS subsidiary. (¶77.) Management claimed that the Company had only agreed to provide access to information about consumer-to-consumer transfers from its WUFSI subsidiary. (Id.) This created a significant loophole for criminals to launder illicit proceeds through business-to-consumer, consumer-to-business, and business-to-business transactions. (Id.) Even if a literal interpretation of the SWB Settlement could support this narrow interpretation, management’s refusal to cooperate with the Monitor was contrary to Western Union’s legal obligation to implement an effective, risk-based AML compliance program. (Id.)7 This was no trivial matter for any director serious about ensuring Western Union would stop knowingly facilitating money laundering by brutal criminals. (¶70.) Moreover, the Board had ample opportunity to intervene and instruct management to comply with the Monitor’s request. This Board, however, did the exact opposite. After management denied the requests for access to WUBS data, the Monitor filed a motion with the Arizona court overseeing the SWB Settlement. 7 Defendants argue that they only admitted that “WUFSI” needed to improve its AML compliance. (MTD Br. at 8-9.) 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 met to protect the Company from criminal and civil liability, including revocation of critical licenses. This is especially true when the Company has a history of being a recidivist violator of the law. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 20 of 70 13 (¶79.) The Arizona Attorney General joined in the motion. (Id.) Despite its admitted knowledge of Western Union’s systematic AML violations and facilitating criminal money laundering, the Board sided with management in its refusal to provide critical AML information to the Monitor. (¶82.) The Individual Defendants’ bid to withhold information from the Monitor delayed implementation of a risk-based AML compliance program for the Southwest Border region by at least three years. (¶¶210, 227, 236.) During meetings on December 6 and 7, 2012, management informed the Board that they had lost the motion to exclude the Monitor and Arizona regulators from WUBS. (¶174.) Management stated 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.) B. Individual Defendants Consciously Allowed Management to Prevent and Delay AML Compliance for the Southwest Border Region The Board also supported management’s delay of implementing effective AML compliance and risk-based oversight over Western Union agents at WUFSI. For example, management informed the Board in September 2010 that it opposed the Monitor’s recommendations for “greater control around FLA system sign-on (stricter passwords, user name, biometrics)” and the “need for criminal/credit background checks for 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 approved agents. (Id.) Yet, the Board chose to remain passive and allow management to delay implementing these AML compliance Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 21 of 70 14 recommendations. (¶¶98, 111.) Three years later, in May 2013, management told the Board that “[m]ajor issues” were still “open includ[ing]/relat[ing] to . . . FLA Authentication.” (¶205.) In July 2013, when the Monitor-oversight was supposed to end, management told the Board that “FLA Controls / Authentication” was “at a standstill.” (¶¶184-85.) The same type of Board-condoned delay occurred with respect to other critical aspects of any effective AML compliance program, including oversight over Western Union agents, internal controls, documentation of Western Union’s AML compliance policies, and the formulation of a foundational risk assessment for the Southwest Border region: Status as of February 2010 Status as of February 2013 Agent oversight Legally inadequate (¶¶91, 111) Development efforts still in the “very early stages” (¶¶184, 206) Internal reporting and controls Legally inadequate (¶¶109-11) Overall SWB progress is 10%. Development efforts still in the “very early stages” (¶184) Documentation of AML compliance policies Legally inadequate (¶154) Development efforts still in the “very early stages” (¶184) Risk Assessment Nonexistent (¶206) Nonexistent (¶206) Meanwhile, management informed the Board that it was making little progress with implementing the Monitor’s AML compliance recommendations and that the Company continued to be at risk. (¶¶88-226.) For example, in February 2010, management informed the Board that 27% of a sample of 1,014 Western Union agents in the U.S. (i.e., 213 agents) failed to meet AML compliance requirements. (¶90.) Based on these findings, Western Union retrained 188 agents (18.5% of the sample). If these results were extrapolated to Western Union’s 45,000 agents in the U.S., more than 12,000 Western Union agents in the U.S. failed to meet AML compliance Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 22 of 70 15 requirements, with more than 8,000 Western Union agents needing to be retrained. (Id.) In September 2011, management informed Individual Defendants 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 trafficking, 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, thus exposing the Company to grave regulatory risk. (¶¶56, 71, 116.) At the same meeting, management informed the Board that only 18 out of the 80 recommendations (22.5%), including just 8.7% of the system recommendations due in nine months, were complete. (¶116.) In December 2011, management informed the Board that Western Union’s deficient AML compliance was not limited to the Southwest Border region. Specifically, management informed the Board of a “Multi-State exam report” into Western Union’s compliance in Ohio, Texas, and Washington that “issued . . . an unsatisfactory rating.” (¶123.) Management explained that the report found “inaccurate completion of [currency transaction reports], failure by agents to post signage, incomplete information on Money Order logs completed by agents and inaccurate reporting of agents.” (Id.) In February 2012, the chair of the Governance Committee informed the Board that two years after the SWB Settlement, 99% of the Monitor recommendations were outstanding. (¶134.) Management also notified the Board of “internal reorganization plans for the Corporation’s compliance department in an effort to increase its effectiveness.” (Id.) Thus, despite a decade of AML violations and two years passing since the SWB Settlement, the Board learned that basic Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 23 of 70 16 changes necessary for an effective AML compliance function were still merely in the planning stages. (Id.) In December 2012, management informed the Board that “[m]ajor components” of the Southwest Border program were at “significant” “risk for July 2013 delivery,” including:  “Beneficial Sender / Receiver Information – Team to perform transactional analysis to identify gaps and determine scope of compliance remediation . . .  Global Due Diligence – Work continues to progress slowly and is unlikely to be completed by January 2013. Relationship issues persist . . .  Product Controls and Oversight . . . [and]  Various technology projects[, including] FLA controls.” (¶172.) In other words, the AML compliance weaknesses remained outstanding almost three years into the monitorship, would not be completed by the deadline, and involved precisely the same recording and reporting problems that first netted Western Union consent agreements over a decade earlier. (¶65, 173.) In July 2013, management informed the Board that during a Q1 2013 spot check of 335 high-risk agents in the Southwest Border region, 28 (or over 8%) had “confirmed instances of Human Smuggling.” (¶214.) In sum, management repeatedly informed Individual Defendants that: (i) Western Union’s AML compliance system and agent oversight were 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.) Individual Defendants chose not to instruct management to work cooperatively with the Monitor; chose not to ensure management’s progress on the Monitor recommendations was immediate and adequate; Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 24 of 70 17 chose not to engage directly with the Monitor; and chose not to approve an action plan documenting the Board’s standards for measuring and ensuring progress on implementing an effective AML compliance system. (¶85.) To the contrary, Individual Defendants allowed management to drag its feet in implementing such a system in the Southwest Border region and to make no effort whatsoever to implement risk-based AML compliance oversight over Western Union agents outside the Southwest Border region. (¶¶85, 113, 242.) C. Management Deceives the Board Regarding a Federal Criminal Money Laundering Investigation Naming Western Union as a “Target” On September 22, 2010, management informed the Governance Committee that a large Western Union agent in California was the subject of a criminal money laundering investigation. (¶¶100-01.) Coming on the heels of the SWB Settlement, any director acting in good faith would have instructed management to provide additional information and to keep the Board informed. (¶¶101-02.) If Individual 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 at the agent’s office 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 reasonably effective AML compliance system would have identified transaction structuring of this Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 25 of 70 18 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 Western Union was named as a “target” in the investigation because the government had substantial evidence linking Western Union to illegal money laundering. (¶137.) This was a momentous decision because a criminal prosecution of the Company could have a dramatic impact on its business. (¶¶62-63.) 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 in the USAO-CDCA criminal money laundering investigation. (¶140.) 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. (¶¶137, 142-51.) In fact, the Board did not become aware that the federal government named Western Union a “target” in a criminal investigation until they signed the Form 10-K on February 22, 2013. (¶151.) There is no indication anywhere that Individual Defendants held management accountable for withholding critically important information from the Board for a period of almost one year.8 8 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 4, 12, 43-44), and because management purportedly informed the Board that Western Union was a target in the USAO-CDCA investigation. (MTD Br. at 44, 44 n.27.) But none of the Individual Defendants, other than Ersek, signed Western Union’s quarterly filings with the SEC. Moreover, there is no reference in any of the Board materials that Defendants selected for production to the fact that the federal government informed management that it had substantial evidence linking Western Union to a crime – i.e., that the Company was a target and could be Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 26 of 70 19 D. Under Threat from Regulators, Western Union Implements Risk-Based AML Compliance, But Only For the Southwest Border Region 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”). (¶¶209-10.) 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. (¶¶223-24.) 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 subject to criminal prosecution. (¶¶140-51.) This was obviously critically important information and Defendants are therefore not entitled to an inference (as they request) that it was shared but was not captured in the board materials. (MTD Br. at 44.) Nor does the requested inference even help them. If Individual Defendants knew as early as May 2012 that the government had substantial evidence linking Western Union to criminal money laundering and that Western Union was a putative defendant in a criminal action, Individual 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, Individual Defendants refused to take any action despite their known duty to protect the Company and the willful failure to implement effective AML compliance continued through at least December 2012. (¶¶67, 71, 75, 262-65.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 27 of 70 20 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 detect [money laundering/terrorist financing].” (¶226.) Moreover, Koch made clear to Individual Defendants that a failure to address “Very High” risk geographic areas “could lead to [Western Union] facing imminent, significant regulatory violations.” (Id.) “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.” (¶226; see also ¶¶210-12, 224-26.) Individual Defendants knew the SWB risk assessment was limited to the Southwest Border region. (¶226.) Individual 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.) Despite this, the Board again chose not to ensure that Western Union was immediately complying with its AML obligations. Despite the known regulatory expectation, Individual 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 were other “Very High” risk areas that exposed Western Union to AML violations and regulatory scrutiny. (¶228.) Review of publicly available information on the FinCEN and Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 28 of 70 21 DEA websites reveals seven other “Very High” risk regions in the United States, including: Northern California, Chicago, most of New York, parts of New Jersey, Southern Florida, Puerto Rico, and the U.S. Virgin Islands. (¶229.) Because Individual 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.) E. Individual Defendants Reward Management’s Years of Obfuscation and Delay Individual Defendants knew that management’s annual incentive compensation was based on annual revenues and operating profits—and not on ensuring Western Union’s AML compliance. (¶¶49, 64.) In fact, the consequences of noncompliance with AML regulations would be borne by the Company, the Company’s agents, and society at large. (¶64.) However, as a result, management had a substantial financial incentive to prioritize annual revenues and operating profits over ensuring compliance with AML laws. Indeed, because implementing an effective risk-based AML compliance program, verifying and maintaining customer records, and reporting suspicious activity would significantly reduce the Company’s annual revenue and operating profits, management was incentivized to discourage immediate implementation of an effective AML compliance program and to ignore noncompliance. (Id.) Any director acting in good faith—knowing that noncompliance with AML requirements facilitates money laundering by brutal criminals and puts the Company at risk of criminal prosecution—would have ensured that management’s financial incentives did not undermine the immediate implementation of an effective AML compliance program. (¶48.) The Individual Defendants did the exact opposite by maintaining skewed incentives despite mounting evidence Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 29 of 70 22 of AML noncompliance and Monitor opposition. (¶49.) Indeed, the Board continued to award management massive incentive payments despite Western Union’s deficient AML compliance program, making clear that the Board viewed AML compliance as a business risk to be managed rather than a legal boundary to be avoided. (¶¶10, 49, 67.) For example, the Board doubled Ersek’s annual pay package from 2009 to 2013—from $4,283,100 in 2009 to $8,757,500 in 2013. (¶¶20, 234.) III. INDIVIDUAL DEFENDANTS’ CONSCIOUS DERELECTION OF DUTY CAUSED SIGNIFICANT HARM A. Western Union Is Forced to Accept an Extension of the SWB Settlement Individual Defendants’ conscious refusal to immediately implement 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- 44.) The Arizona Attorney General—needlessly antagonized by Western Union’s 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. (¶¶237-38.) 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 locations within the Southwest Border region 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 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 30 of 70 23 oversee management in complying with the SWB Settlement. (¶¶235-44.) This has cost Western Union millions of dollars in expenses that would have been avoided if Individual Defendants had acted in good faith and in accordance with their fiduciary duties to Western Union. (¶¶236, 240.) B. Western Union Admits Criminal Responsibility for Willful Violations of AML Laws On January 18, 2017, Western Union entered into the DPA. (¶254.) Western Union admitted that from 2004 through December 2012, the Company violated U.S. laws by “willfully failing to implement and maintain an effective [AML] program that was designed to detect, report, and prevent criminals from using Western Union to facilitate their fraud, money laundering, and structuring schemes.” (Id.) As part of the DPA and consumer fraud allegations that were based in large part on Western Union’s deficient AML compliance program, Western Union agreed to forfeit $586 million to the United States.9 Moreover, Western Union’s non-compliance with AML laws have caused grave reputational harm. (¶268.) Western Union has no ability to reduce this harm by making public statements to the contrary. Pursuant to the DPA, Western Union cannot “make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company set forth [in the DPA] or the facts described in the [DPA’s] Statement of Facts.” (¶256.) The facts admitted to by Western Union in the DPA confirm Individual Defendants’ conscious adoption of a strategy to treat AML compliance as a business risk to be managed rather 9 Defendants state that “Western Union neither admitted nor denied the factual allegations in the FTC Complaint. (MTD Br. at 12.) This is misleading. The facts alleged in the FTC Complaint “will be taken as true” in any subsequent FTC enforcement action. (Dkt. 132-6, FTC Stipulated Injunction and Final Judgment, § VII(D).) This is important because the FTC Complaint confirms the well-pled allegations in the Complaint. (132-5, at ¶37.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 31 of 70 24 than a legal requirement to be obeyed. For example, Western Union also admitted in the DPA that it willfully failed to prevent criminal structuring of transactions, failed to terminate or discipline the agents involved, and failed to implement effective AML compliance that would have prevented the structuring. (¶62; see also DPA SOF ¶¶55-89.) The same was true for management. For example, Western Union admitted that in 2010 and 2011, Ersek and other executives knew about AML violations yet consciously allowed such violations to continue. (¶265; see also DPA SOF, ¶¶73, 76.)10 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 (1991). 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. Delaware law provides several tests for 10 Contrary to Defendants’ argument (MTD Br. at 15-16), the communication cited in the DPA between Ersek and the then-President of the Americas is consistent with the allegations in the Complaint. Following a decision by Western Union’s Compliance Officer to suspend New York Agent 1, the sales employees raised concerns that the suspension would lead to lost profits. The then-President of the Americas contacted Ersek to let him know the sales department is “trying to save [New York Agent 1].” (DPA SOF ¶73.) Only 24 days later, the suspension was lifted and New York Agent 1 was permitted to continue acting as a Western Union Agent, despite continuing BSA violations. (Id.) The inference is clear that Ersek was being notified that the compliance department was being overruled in order to protect one of the Company’s most lucrative Agents, even though New York Agent 1 was engaged in illegal conduct. The fact that Defendants would even offer this weak explanation shows how unwilling they are to actually investigate or remedy the problems plaguing Western Union. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 32 of 70 25 determining whether demand was excused before commencing a derivative action.11 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.’”) (citation omitted). “Delaware’s demand futility law does not require [a 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 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”). 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 (quotation and citation omitted); Harris v. Carter, 582 A.2d 222, 229 (Del. Ch. 1990). 11 The question of demand futility is governed by Delaware law because Western Union is incorporated in the State of Delaware. Kamen, 500 U.S. at 96-97. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 33 of 70 26 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”). Finally, demand futility allegations are to be viewed holistically or collectively, and cannot be individually scrutinized in isolation from one another. See Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.2d 1017, 1019 (Del. 2015) (“[I]t is important that the trial court consider all the particularized facts pled by the plaintiffs . . . in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs.”); Wells Fargo, 2017 WL 1735573, at *13 (applying Delaware law) (noting that red flags “viewed collectively” established demand futility). B. Demand Futility Is Assessed As of the Filing of the First Amended Complaint On March 31, 2016, this Court dismissed Plaintiff’s initial complaint without prejudice and ordered Plaintiffs’ to file an amended complaint within 30 days of the dismissal order. (Dkt. 97.) The Court instructed Plaintiff to focus on “[Western Union’s] attempts (if any) to reform itself from lax 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 in February 2010. (MTD Order at 25.) Plaintiffs followed the Court’s instructions and filed a substantially modified First Amended Complaint (“FAC”) on May 2, 2016. (Dkt. 98.) When Western Union entered into the DPA and admitted that it willfully failed to implement an effective AML compliance program Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 34 of 70 27 between 2004 and December 2012, Plaintiffs filed a motion to supplement to the FAC pursuant to FRCP 15(d) with thirteen supplemental paragraphs. (Dkt. 130.) Pursuant to the Court’s February 24, 2017 Order (Dkt. 131), Plaintiff included those thirteen paragraphs in a Second Amended Complaint (“SAC”) that was filed on March 17, 2017. (Dkt. 132; see also Dkt. 133, Ex. 1.) According to Defendants, this Court should assess demand futility as of the date of the SAC – i.e., March 17, 2017. (MTD Br. at 20.) Defendants are wrong. In Braddock v. Zimmerman, the Delaware Supreme Court held that “when an amended derivative complaint is filed, the existence of a new independent board of directors is relevant to a Rule 23.1 demand inquiry only as to derivative claims in the amended complaint that are not already validly in litigation.” 906 A.2d 776, 786 (Del. 2006) (emphasis added). Here, the SAC did not add new claims or causes of action, but instead provided judicial admissions that confirmed the FAC’s well-pled allegations.12 Indeed, Defendants admit that “[t]he SAC repeats the same allegations and merely adds a new section about the [DPA] and other settlements that Western Union entered into with various governmental authorities in January 2017.” (MTD Br. at 2) (emphasis added). The SAC’s thirteen supplemental paragraphs merely confirmed Plaintiffs’ allegations in the FAC—that Individual Defendants allowed Western Union to continue to break the law by not 12 Judicial admissions, such as those contained in the DPA, are “formal, deliberate declarations which a party or his attorney makes in a judicial proceeding for the purpose of dispensing with proof of formal matters or of facts about which there is no real dispute.” U.S. Energy Corp. v. Nukem, Inc., 400 F.3d 822, 833 n.4 (10th Cir. 2005) (quoting Kempter v. Hurd, 713 P.2d 1274, 1279 (Colo. 1986)). “It is well established that ‘by stipulating to elemental facts, a defendant waives his right to a jury trial on that element.’” United States v. Smith, 472 F.3d 752, 753 (10th Cir. 2006) (quoting United States v. Mason, 85 F.3d 471, 472 (10th Cir. 1996)). By admitting its willful criminal intent to violate criminal money laundering laws and regulations, Western Union also waived any right to a jury trial on its knowledge of illegality. Id.; Ratzlaf v. United States, 510 U.S. 135, 137 (1994). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 35 of 70 28 implementing an effective AML compliance program after the SWB Settlement. Thus, demand futility is properly assessed at the time of Plaintiff’s FAC – i.e., May 2, 2016. Braddock, 906 A.2d at 786 (demand futility assessed at filing of original complaint where amended complaint “elaborates upon facts relating to acts or transactions alleged in the original pleading”) (quoting Harris v. Carter, 582 A.2d 222, 231 (Del. Ch. 1990)). As of May 2, 2016, the Board consisted of 12 directors: Ersek, Greenberg, Goodman, Holden, Levinson, Mendoza, Trujillo, Townsend, Cole, Joerres, Miles, and Selander. Of Western Union’s 12 directors, six (i.e., half) had served on the Board since the SWB Settlement in February 2010 or long before then—Ersek (2010), Greenberg (2006), Holden (2006), Levinson (2006), Mendoza (2006), and Miles (2006). (¶¶20, 23, 24, 25, 26, 30.) The inquiry as to whether demand on the Board is futile ends there. In re Walt Disney Co Deriv. Litig., 731 A.2d 342, 354 (Del. Ch. 1998), aff’d in part and rev’d in part sub nom., Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (“for demand to be futile, the Plaintiffs must show a reasonable doubt as to the disinterest of at least half of the directors”). Defendants argue that Levinson should not be considered for demand futility purposes because the Board had announced that she would be retiring. (MTD Br. 21 n.14.) But demand futility is assessed at the time of the filing of the relevant complaint. See Rales, 634 A.2d at 934 (court must determine whether demand is futile “as of the time the complaint is filed”). Defendants’ cited case presents a narrow exception not applicable here because Plaintiffs filed the FAC pursuant to a Court-ordered deadline and made no attempt to rush its filing to game demand Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 36 of 70 29 futility.13 Indeed, Plaintiffs were not even aware that Levinson was planning to resign. Thus, demand should be assessed against the Board in place on May 2, 2016, including Levinson. Moreover, Defendants ignore that Goodman joined in January 2012 and served on the Board, acted as Chairman of the Audit Committee, and was a member of the Compensation Committee for a full year while the Individual Defendants allowed Western Union to continue willfully breaking the law by not implementing an effective AML compliance program. Meanwhile, Trujillo joined the Board in July 2012, and also remained wholly passive in the face of Western Union’s continued willful lawbreaking. Thus, even if the Court excludes Levinson— which it should not—demand remains futile because Goodman and Trujillo face a substantial likelihood of liability for remaining passive in the face of a troubling continuing pattern of non- compliance. C. 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, 13 Defendants cite Park Emps.’ & Ret. Bd. Emps.’ Annuity & Ben. Fund v. Smith, No. 11000-VCG, 2016 WL 3223395 (Del. Ch. May 31, 2016) for the proposition that Levinson should not be considered for demand futility purposes. (MTD Br. at 21 n.14.) There, the plaintiff rushed the filing of an initial complaint after the filing of the Company’s proxy, and only four days before an uncontested election at which a majority of the board of directors would turn over due to retirement. 2016 WL 3223395, at *7. Here, by contrast, Plaintiffs named Levinson in the initial complaint—long before there was any indication that she might retire—and filed the FAC within 30 days from the Court’s March 31, 2016 Order, a date that was not within Plaintiffs’ control. If anything, Levinson’s retirement is being used to deprive Plaintiffs of the benefit of their efforts. Id. at *1 (“great mischief could be done if change in board composition could be used by defendants as a tool to raise the cost of appropriate derivative litigation and to deprive the litigant of the benefits of his effort, and mischief could result even if innocent changes to board composition have that result”). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 37 of 70 30 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 (citing In re Caremark Intern. Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)). Delaware law recognizes that most of the corporation’s decisions, made through human agents, are not the 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). Under Delaware law, there are three ways in which there is a sufficient connection between the corporate trauma and a director to render him or her incapable of impartially assessing a demand. First, a director is not disinterested if a plaintiff alleges 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 AIG Consol. Deriv. Litig., 965 A.2d 763, 777, 795 (Del. Ch. 2009)). Second, a director is not disinterested if a plaintiff alleges with particularity that he or she “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 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 38 of 70 31 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 director is not disinterested if a plaintiff alleges sufficient board connection to illegality by focusing on the director’s 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 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 type of oversight claim for a majority of the Board. The Complaint pleads facts and circumstances sufficient to infer that a majority of the Board was actually involved in Western Union’s decision to delay compliance with the Company’s 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 particularized facts that a majority of the Board consciously failed to act after learning that Western Union continued to violate AML laws by delaying and failing to implement effective AML compliance after the SWB Settlement in February 2010. (¶85; see also SAC § V.E.) Plaintiffs’ claims sound in the duties of loyalty and good faith and, contrary to Defendants’ arguments (see MTD Br. at 7-8), 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 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 39 of 70 32 loyalty or good faith); 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 that they were aware of Western Union’s noncompliance with its AML obligations and the fact that numerous Western Union agents were facilitating criminals in laundering illicit proceeds through Western Union agents using Western Union systems. (¶¶65, 71, 86, 136-40, 226, 245-53.) Thus, the cases cited by Defendants 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. V. DEMAND WAS EXCUSED AS TO COUNT I A. A Majority of the Board Faced Potential Liability for 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 AIG, 965 A.2d at 777, 795). Here, Plaintiffs more than satisfied that standard, and the Motion should be denied on that basis alone. Defendants have admitted they knew by February 2010 that Western Union’s AML compliance program was legally deficient, allowing criminals to use Western Union’s system to launder money and putting the Company at grave risk of criminal prosecution. (¶¶61-63, 71, 74, 88-90.) Furthermore, the Complaint detailed how, despite this admitted knowledge of the Board, Individual Defendants allowed Western Union to continue breaking the law for almost three years by “willfully” failing to implement an effective AML compliance program. (¶254.) And the Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 40 of 70 33 detailed allegations of the Complaint, including reasonable inferences drawn from those allegations, show that during this time, Individual Defendants knew that management was not making progress on key elements of AML compliance, and were unwilling and dis-incentivized to address Western Union’s severe shortcomings. (¶¶86, 89-90, 98-99, 101, 105-06, 113-14, 116- 17, 119-20, 122-23, 128-29, 131-32, 134-35, 144-45, 154, 161, 164, 169, 172, 178-79, 184, 187, 191-92, 195, 198, 202, 205-06, 233-34.) Specifically, the Complaint alleges particularized facts showing that management informed a majority of the Board of their refusal to cooperate with the Court-appointed Monitor and their lack of progress on implementing critical features of any effective AML compliance program. (Id.)14 In response, the Individual Defendants supported management in their refusal and delay to implement an effective AML compliance program—awarding management lavish pay packages as they fought with the Court-appointed monitor and implementation of effective AML compliance in the Southwest Border region languished. (¶¶105-06, 128-29, 178-79, 233-34.) The Board’s decision to allow Western Union to operate without an effective AML compliance system has rendered the Company complicit in money laundering for the world’s most dangerous criminals. The well-pled allegations and fair inferences from those allegations that Individual Defendants knowingly decided to flout this BSA requirement precludes dismissal. 14 Management’s unwillingness to implement effective AML compliance ran up to the highest levels of the Company. Even Western Union’s Chairman and CEO, Defendants Ersek, was implicated. For example, the admitted facts in the DPA make clear that Ersek allowed Western Union’s sales department to override AML concerns expressed by the compliance department with respect to one of the Company’s largest agents four months after entering into the SWB Agreement. (¶265 (citing DPA SOF ¶¶73, 76).) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 41 of 70 34 Wells Fargo is instructive. There, the plaintiffs alleged that a majority of the members of Wells Fargo’s board of directors received reports discussing “increases in sales integrity issues or in notifications to law enforcement in part relating to the uptick in sales integrity issues” concerning Wells Fargo’s illegal cross-selling efforts and that “sales integrity issues were also discussed periodically with the Board.” 2017 WL 1735573, at *10 (citing Rosenbloom, 765 F.3d at 1152). In addition, the plaintiffs pointed, among other things, to regulatory interventions, direct communications from a former Wells Fargo employee to the board, several lawsuits involving allegations of unauthorized account-creation practices, and articles in the press. See id. at *10- *12. Refusing to draw factual inferences in favor of the Defendant-movants, the Wells Fargo court held that the complaint adequately alleged that “despite having ‘knowledge that the company’s controls [were] inadequate,’ the allegations plausibly suggest that the Director Defendants knowingly failed to stop further problems from occurring, thus breaching their fiduciary duties to the company.” Id. at *15 (citation omitted). As the court explained, “[w]here, as here, Plaintiffs allege that directors failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct, the directors’ conscious inaction is not protected by the business judgment rule.” Id. (quoting In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 130 (Del. Ch. 2009). The same is true here. In response to the well-pled allegations, Defendants contend that liability only arises if Plaintiffs can point to specific board-approval of an illegal business plan. (MTD Br. at 27.) But this is not the law. As the Delaware court explained in Pyott, “a plaintiff does not have to point to actual confessions of illegality by defendant directors to survive a Rule 23.1 motion. . . . Particularly at the pleadings stage, a court can draw the inference of wrongful conduct when Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 42 of 70 35 supported by particularized allegations of fact.” Pyott, 46 A.3d at 357 (overruled on other grounds); see also Rosenbloom, 765 F.3d at 1157-58 (9th Cir. 2014) (“an inference that the Board decided to break the law can be drawn even without a Board-approved document”).15 Nor is it accurate to suggest, as Defendants do (MTD Br. at 28), that the mere presence of control systems is sufficient to satisfy the Individual Defendants’ fiduciary duty to monitor Western Union’s AML compliance system. As the Wells Fargo court explained, “a director can be held liable for failure to monitor even if control systems were in place.” 2017 WL 1735573, at *14 (citing Stone, 911 A.2d at 370). Thus, under Delaware law, “a director cannot simply implement control systems, consciously fail to oversee its operations, and then claim to have satisfied its fiduciary duties.” Id. The same law and principles apply to the Individual Defendants here. B. A Majority of the Board Also Faced Potential Liability for Consciously Disregarding Their 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, “[w]here 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 15 Defendants’ reliance on In re Lear Corp. S’holder Litigation, 967 A.2d 640 (Del. Ch. 2008), Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007), and Decker v. Clausen, Civ. A. Nos. 10,684, 10,685, 1989 WL 133617 (Del. Ch. Nov. 6, 1989), is misplaced. All those cases pre-date the opinion in Pyott, where Vice Chancellor Laster made clear, in this precise context, that board approval of illegal conduct can be established by inference because sophisticated corporate defendants cannot be expected to admit to breaking the law in board-level documents. 46 A.3d at 357 (“sophisticated corporate actors at times engage in illegal behavior and attempt to hide their misconduct with the appearance of legal compliance”). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 43 of 70 36 fiduciary obligation in good faith.” 911 A.2d at 370 (Del. 2006); see also Rich ex rel. Fuqi Int’l, Inc. c. Yu Kwai Chong, 66 A.3d 963, 984 (Del. Ch. 2013) (“When faced with knowledge that the Company’s controls were inadequate, the directors must act, i.e., they must prevent further wrongdoing from occurring.”). Here, Individual Defendants have admitted knowing as early as February 2010 that Western Union’s AML compliance system was legally deficient, allowed criminals to launder their illicit proceeds, and exposed the Company to criminal and civil liability, including the potential revocation of essential business licenses. (¶¶65-67, 69-71, 73-74, 278.) Individual Defendants have also admitted that they were informed about the pre-2010 consent decrees and multi-million dollar fines, yet (as the Complaint details) they supported management in its refusal and delay to implement critical elements of any effective AML compliance system. (¶67.) Furthermore, Western Union has admitted that, despite this Board knowledge, the Company continued to “willfully” fail to implement a legally required, effective AML compliance system. (¶¶254-65.) Defendants cite no case law (because none exists) where a court held that, under these circumstances, directors are entitled to a finding, as a matter of law, that they were acting in good faith and do not face potential liability for their failure to ensure compliance with mandatory legal requirements or face potentially ruinous regulatory consequences. To the contrary, courts around the country have found that when a complaint contains particularized allegations showing that a majority of the board knew of systemic regulatory compliance problems at the corporation, yet failed to respond to “red flags” of continued noncompliance, then demand is excused. Massey Energy is instructive. There, stockholders alleged that management “fostered a business strategy expressly designed to put coal production and higher profits over compliance Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 44 of 70 37 with the law” and caused the company to “take an openly aggressive attitude with the [Mine Safety and Health Administration].” 2011 WL 2176479, at *19. Moreover, the stockholders 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, then 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.”16 Id. at *20. Similarly, the Complaint here contains particularized allegations that the Individual Defendants did not make a good faith effort to ensure that Western Union complied with its legal 16 See also Rosenbloom, 765 F.3d at 1151-59 (excusing demand where board closely monitored Botox sales and “received repeated FDA warnings about illegal promotion of Botox”); 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”); Countrywide, 554 F. Supp. 2d at 1060-64 (excusing demand where directors knew of subprime lending and “increased delinquencies” through membership on various committees); Veeco, 434 F. Supp. 2d at 277-78 (excusing demand because plaintiff alleged directors “failed to exercise appropriate attention to potentially illegal conduct” in the face of “flagrant, systematic and repeated violations of export control laws”); Pfizer, 722 F. Supp. 2d at 460 (excusing demand because complaint contained a “large number of reports to the board from which it may be reasonably 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 plaintiff provided sufficient allegations to show that the board received repeated FDA warnings and failed to comply with reporting regulations). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 45 of 70 38 obligations and did not respond to numerous red and yellow flags of continued non-compliance and improper delay by aggressively correcting the management culture at Western Union that put profits and the “client experience” ahead of AML compliance. (¶¶77-81, 86, 89-90, 98-99, 101, 113-14, 116-17, 119-20, 122-23, 131-32, 134-35, 144-45, 154, 161, 164, 169, 172, 184, 187, 191- 92, 195, 198, 202, 205-06, 254-65.) Furthermore, just as in Massey Energy, the Board allowed management to take an antagonistic attitude towards regulators seeking to bring Western Union into compliance with its legal obligations because its failure to do so could cause extreme personal suffering. (¶¶68-75.) 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.”).17 Moreover, Massey Energy refutes Defendants’ argument that they can face no liability so long as the Company had some AML compliance and management took some steps towards AML compliance, no matter how inadequate. (MTD Br. at 29, 46-55.) 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, let alone legal liability. But that is not the law. In Massey Energy, 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 17 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 143 Filed 06/09/17 USDC Colorado Page 46 of 70 39 safety performance.” 2011 WL 2176479, at *20.18 The 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 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. A recent decision from this Court, Gubricky v. Ells, No. 16-cv-2011-WJM-KLM, slip op. (D. Colo. June 7, 2017), also refutes Defendants’ argument. In Gubricky, Judge Martinez noted that even if a board implemented “any sort” of risk monitoring system, demand would still be futile so long as a derivative plaintiff alleges the board “consciously disregarded red flags signaling that the company’s employees were taking facially improper, and not just ex-post ill-advised or even bone- headed, business risks.” Id. at 16;19 see also Wells Fargo, 2017 WL 1735573, at *14 (holding that “a director cannot simply implement control systems, consciously fail to oversee its operations, and then claim to have satisfied its fiduciary duty to monitor”); Pyott, 46 A.3d at 357-58 (demand excused, noting that “sadly, sophisticated corporate actors at times engage in illegal behavior and 18 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. 19 The Gubricky court ultimately granted the motion to dismiss because, based on the facts alleged, the individual defendants “had no reason to suspect that [improper cooking procedures] [were] leading to actual harm, or a serious threat of it.” Id. slip op. at 17-18. Here, by contrast, the Individual Defendants knew that Western Union’s deficient AML compliance system facilitated money laundering by brutal criminals and exposed the Company to criminal prosecution and revocation of essential business licenses. This knowledge triggered a duty to act immediately. Massey Energy, 2011 WL 2176479, at *21; see also Melbourne Mun. Firefighters’ Pension Tr. v. Jacobs, 2016 WL 4076369, at *12 (Del. Ch. Aug. 1, 2016) (“Qualcomm”) (“Red flags that rise to the severity of those in Massey may implicate an immediate duty to alter a company’s culture and business practices.”) (emphasis added). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 47 of 70 40 attempt to hide their misconduct with the appearance of legal compliance”). So too here. Accordingly, Defendants’ argument should be rejected. Moreover, Defendants’ argument that they could passively rely on management also fails. (MTD Br. at 33-35, 40-45.) Individual Defendants have admitted that they knew about the pre- 2010 consent decrees and multi-million dollar fines, and the particularized allegations of the Complaint show that they were informed of a troubling continuing pattern of AML noncompliance at Western Union after February 2010 and that they supported management in its disputes with the company’s regulators, including the Court-appointed Monitor, over access to critical information. (¶¶67, 71, 77-81, 86, 89-90, 98-99, 101, 113-14, 116-17, 119-20, 122-23, 131-32, 134-35, 144-45, 154, 161, 164, 169, 172, 184, 187, 191-92, 195, 198, 202, 205-06.) As now-Chief Justice Strine 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 managerial attitude suggestive of a desire to fight with and hide evidence from the company’s regulators. Massey Energy, 2011 WL 2176479 at *21. This holding is equally applicable here. Under this analysis, Defendants’ argument that, pursuant to Del Code Ann. tit. 8, § 141(e), Individual Defendants cannot have acted in conscious disregard of their duties as long as they relied on management (MTD Br. at 40-41), fails for the same reason. See id.; 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, the plaintiffs alleged that management implemented a business strategy to illegally market Botox for off-label purposes. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 48 of 70 41 765 F.3d at 1142. The plaintiffs there also alleged that a majority of the defendants 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) the FDA had repeatedly sent letters warning the company its promotional activities and materials were misleading and improper under the Food Drug & Cosmetic Act; (ii) the violations found by the FDA over several years were “unquestionably of significant magnitude and duration”; (iii) Botox was an important product that the board monitored closely; and (iv) the board received data linking revenues to illegal activity. 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); see also Wells Fargo, 2017 WL 1735573, at *14 (“allegations plausibly suggest that the Director Defendants knowingly failed to sop further problems form occurring, thus breaching their fiduciary duties to the company); Veeco Instruments, 434 F. Supp. 2d at 277-78 (same); Countrywide, 554 F. Supp. 2d at 1044 (same) (citations omitted). In sum, Massey Energy, Rosenbloom, Wells Fargo, Westmoreland, Veeco, Countrywide, Pfizer, and Intuitive Surgical all support denial of Defendants’ motion. By contrast, Defendants have not cited a single case granting a motion to dismiss on demand futility grounds where: (i) the board admitted knowing that their company was breaking the law; (ii) the company admitted continuing to willfully break the law; and (iii) the complaint contained detailed and particularized allegations that a majority of the board failed to act despite being informed of continued—and indeed, admitted to—lawbreaking. The Court should deny Defendants’ motion. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 49 of 70 42 C. Defendants Mischaracterize the Allegations in the Complaint and Cite Inapposite Authority As discussed above, Delaware law recognizes three types of Caremark claims: (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. Seeking to avoid liability, Defendants pretend that the Complaint alleges the third type of oversight claim, ignoring the other two types of Caremark claims. (See MTD Br. at 28-29.) Indeed, Defendants’ cited cases overwhelmingly rest on a concession or a finding that the fiduciaries did not know or have reason to know of any illegal conduct.20 In the last round of briefing, Defendants cited similarly inapplicable cases predicated on board ignorance of wrongdoing.21 20 See Stone, 911 A.2d at 364 (“plaintiffs acknowledge that 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, 924 A.2d at 914 (“complaint is devoid of any facts suggesting a rational inference that any members of the . . . board, much less a majority, knew about the [alleged options backdating]”); In re GM Co. Deriv. Litig., C.A. No. 9627-VCG, 2015 WL 3958724, at *14-17 (Del. Ch. June 26, 2015) (board was concededly unaware of ignition switch failures and had not “utterly failed to implement” board reporting for safety issues and monitored same). 21 See Andropolis v. Snyder, No. 05 CV 01563 EWN BNB, 2006 WL 2226189, at *12-*14 (D. Colo. Aug. 3, 2006) (no red flags informing the board that management was abusing access to the corporate plane and expense accounts); Lear Corp., 967 A.2d at 648-53 (Del. Ch. 2008) (no factual support for inference that board knowingly wasted corporate assets); Decker, 1989 WL 133617, at *3 (no red flags putting board on notice of misconduct at a 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); 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); Citigroup, 964 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 50 of 70 43 But Defendants here have admitted that they knew by February 2010 that Western Union’s AML compliance was legally deficient and needed to improve. (¶71.) No fair reading of the Complaint supports the conclusion that this is a case about Individual Defendants’ lack of knowledge due to their failure to implement an internal reporting mechanism to funnel information up to senior management and the Board. Nor can the Individual Defendants credibly argue that they were “blamelessly unaware” of Western Union’s ongoing AML violations and deficient AML compliance system. Defendants nevertheless 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 31-32, 34-35, 38-39, 42-45.) This is nonsense. The Complaint contains dozens of particularized allegations regarding numerous instances between February 2010 and July 2013 in which the Board was informed that: (i) management was making little or no progress on implementing basic AML compliance elements, including a foundational risk assessment, effective agent oversight, internal controls, a written AML policy, and due diligence of frontline associates; (ii) management refused to share basic money transmittal information concerning WUBS with the Monitor who was appointed to assist Western Union implement an effective, legally required AML compliance A.2d at 123-24, 128 (allegations generally describing worsening conditions across the financial sector 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 U.S. Veterans Administration). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 51 of 70 44 system; (iii) management’s lack of progress and hostility threatened the timely compliance with the SWB Settlement; and (iv) that Western Union was named a “target” in two federal criminal money laundering investigations at opposite sides of the United States. (¶¶77, 161, 164, 173, 184, 186, 245-53.) Defendants’ reliance on Qualcomm is misplaced. (MTD Br. at 29, 35, 64.) In Qualcomm, the Delaware Chancery Court found that “the Complaint indicate[d] that the Board, at all times, was under the impression that its conduct did not violate applicable antitrust laws.” 2016 WL 4076369, at *12. Defendants’ admissions cited in the Complaint make such a finding impossible here. (¶¶67, 74, 254.) Moreover, the Delaware Chancery Court reaffirmed Massey Energy, noting that “[r]ed flags that rise to the severity of those in Massey may implicate an immediate duty to alter a company’s culture and business practices.” 2016 WL 4076369, at *12. The Qualcomm court’s grounds for distinguishing Massey Energy do not apply here. Compare id. (“[t]his case . . . is not one in which the company pled guilty to criminal charges—as in Massey—or was advised by its general counsel that its business plan included potentially illegal conduct—as in Pyott”) with (¶¶65-67, 71-75). Furthermore, Defendants’ protestations notwithstanding (MTD Br. at 40-41, 50), Plaintiffs do not allege that Individual 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. Nor would denial of their Motion somehow require the members of the Western Union Board to insure against all misconduct at Western Union and its thousands of agents with 100% success or face liability. (Id.) Rather, Plaintiffs seek to hold Individual Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 52 of 70 45 Defendants accountable for their deliberate failure to implement an effective risk-based AML compliance system as required by the AML laws and regulations. Finally, Defendants argue that Plaintiffs cannot rely on the DPA as evidence of the Board’s bad faith or misconduct. (MTD Br. at 55-59.) However, the DPA merely confirms Plaintiffs’ allegations that, even after entering into the SWB Settlement in February 2010, the Individual Defendants allowed Western Union to continue breaking the law for years by willfully failing to implement an effective AML compliance system. (¶254.) The Individual Defendants’ bad faith is shown, among other allegations in the Complaint, by their admission that they were aware of the pre-2010 consent decrees, their admission that they knew as of February 2010 that Western Union’s AML compliance needed to be improved, their knowledge that Western Union’s management continued to refuse and delay implementing an effective AML compliance system, and their knowledge that their failure to ensure compliance would expose the Company to the risk of draconian consequences (including potential criminal prosecution) and contribute to grave human suffering. (¶¶67, 74, 77-82, 84-85.) Accordingly, Defendants’ cited cases once again are inapposite. In In re Discover Financial Services Derivative Litigation, No. 12 C 6436, 2015 WL 1399282 (N.D. Ill. Mar. 23, 2015), the court found that the complaint did not include particularized facts showing that the board was on notice of the wrongdoing. Id. at *7. In In re SAIC Inc. Derivative Litigation, 948 F. Supp. 2d 366 (S.D.N.Y. 2013), the court refused to infer board knowledge based solely on: (1) the contract at issue being part of the company’s core operations; (2) news articles that did not report the company engaged in fraud; (3) the magnitude and duration of the alleged wrongdoing; and (4) problems with unrelated projects and contracts. Id. at 383-87. And in King v. Baldino, the court Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 53 of 70 46 refused to infer board knowledge of off-label marketing where plaintiff’s 19-page complaint relied on news articles that did not explicitly state off-label marketing was taking place, bald reliance on an increase in sales of the pharmaceutical drug, and an audit report not addressed to the board of directors. 648 F. Supp. 2d at 624-25.22 Unlike these cases, Plaintiffs do not seek an inference based on circumstantial evidence that the Board had knowledge of known illegality. Defendants have admitted that they knew about the pre-2010 consent decrees, and the fact that Western Union’s AML compliance systems were legally deficient and needed to improve. Moreover, Plaintiffs have also pled in painstaking detail direct knowledge on the part of the Individual Defendants that Western Union continued to refuse and delay implementing an effective AML compliance system for years after the Company paid $94 million in fines and settlements in the SWB Settlement. D. Defendants Improperly Rely on Self-Serving Interpretations of Unreliable and Incomplete Documents to Request Inferences in Their Favor Defendants ask the Court to adopt their interpretation of disputed and incomplete documents to infer that: (i) all Individual 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 33-39, 46-55.) This is inappropriate at the pleading stage. See Gee, 627 F.3d at 1186-87 (reversing dismissal where district court improperly relied on documents 22 Defendants’ reliance on Zucker v. Hassell is flawed. C.A. No. 11625-VCG, 2016 WL 7011351 (Del. Ch. Nov. 30, 2016). Zucker arose in a wholly inapposite context where a plaintiff challenged the Bank of New York Mellon special litigation committee’s decision to refuse a demand. Id. at *4. More importantly, the legal theory in Zucker did not even implicate the board, as there were no instances in which the board admitted to knowing illegal conduct was taking place—let alone entering into numerous consent orders prior to the illegal conduct coming to light—which is precisely why a demand was made on the board. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 54 of 70 47 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’”) (quoting 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 a staggering 123 exhibits along with their motion to dismiss. In doing so, Defendants rely on their own self-serving interpretation of these documents to argue that they 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 which included consent decrees, lawsuits seeking to limit law enforcement access to information needed to combat human trafficking, the 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 region 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. 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. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 55 of 70 48 at 5 n.1 (citing Bank v. Allied Jewish Fed’n of Colorado, 4 F. Supp. 3d 1238, 1240 (D. Colo. 2013).) But 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. (¶¶94 n.2, 156 n.3.) Defendants themselves admit that the board minutes and materials are incomplete and therefore subject to dispute. (MTD Br. at 47 (citing Progressive Cas. Ins. Co. v. F.D.I.C., 80 F. Supp. 3d 923, 935-36 (N.D. Iowa 2015) (“it is ridiculous to imagine that a Board meeting would necessarily detail each and every issue discussed by the Board members”).) Further, 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.23 Additionally, Defendants redacted highly material, non-privileged information.24 Defendants 23 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 Skt. 110- 1. It is unclear at this stage in the proceedings what the contents of the other pages were or, indeed, even how many pages in total there were. 24 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; Dkt. 110-2 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; Dkt. 110-3 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 Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 56 of 70 49 cannot unilaterally doctor a record and then ask this Court to interpret that doctored record to find in their favor that they acted in good faith and 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 the 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 the reasonable inferences to which Plaintiffs are entitled therefrom. Defendants submitted a 42- page appendix providing their interpretation and characterization of the extraneous exhibits, citing Cunningham v. Bank of Am. N.A., No. 12-cv-03316-MSK-GPG, 2013 WL 2455945 (D. Colo. June 6, 2013) (quoting Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179, 184 (S.D.N.Y. 2000)), Tilley v. Maier, 495 F. App’x 925, 927 (10th Cir. 2012), 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 24 n.16.) 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) (“Further, even if there had been allegations of fraud, defendants’ SEC filings could not properly be considered for the truth 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., Dkt. 110-4. 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 143 Filed 06/09/17 USDC Colorado Page 57 of 70 50 of their contents. The district court's view that ‘the Defendants’ statements, which have been submitted to a government agency and made public, should not be contradicted or taken as perjurious simply because the Plaintiff, without evidence, says they are,’—although a possible argument to a jury—was not an appropriate rationale for ruling on a motion under Rule 12(b)(6).”).25 But that is not how the Defendants attempt to use their exhibits here. Defendants rely on their appendix and extraneous exhibits to dispute the veracity of the detailed particularized allegations of the Complaint and to seek an inference that they acted in good faith and could rely on management in good faith. 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]”);26 Baldwin v. United States, 25 As the Second Circuit Court of Appeals explained in Roth v. Jennings, 489 F.3d 499: 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’. Id. at 510-11. Bank of America is equally inapposite. There, unlike here, this Court found that the plain language of a deed of trust—the operative document for purposes of the cause of action— contradicted the plaintiff’s allegations. 2013 WL 2455945, at *4. Importantly, the deed of trust did not contain statements of fact proffered for the truth of their contents, but rather the words themselves represented the operative legal event. Here, Defendants impermissibly offer their factual take on board documents to establish the truth of the matter asserted, which is inappropriate. Baldwin, 2012 WL 2215680, at *2. 26 Pursuant to this Court’s Civil Practice Standards, Defendants were required to discuss whether their Rule 12(b) motion should be converted to a summary judgment motion. See Civ. Practice Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 58 of 70 51 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, 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). For example, Defendants 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 9-10 (citing Ex. L).) Similarly, Defendants rely on the recitals in the DPA suggesting that Ersek took steps to implement an AML compliance program. (MTD Br. at 5, 34.) Even if true—an open question until discovery commences—this recitation does not refute the allegation that Western Union did not have an effective AML compliance system and that management did not make substantial efforts towards an effective AML compliance system before December 2012. Moreover, at this stage, it would be improper for this Court to dismiss this action based on Defendants’ self-serving interpretation of these extraneous documents given the exhaustive particularized factual allegations and admissions in the Complaint. See Baldwin, 2012 WL 2215680, at *2; Shifrin, 2010 WL 2943348, at *4. Standard 7.6.1(e). They have failed to do so. If the Court decides not to disregard Defendants’ parol submissions, Plaintiffs’ respectfully request that the Court follow Civil Practice Standard 7.6.1(e), and issue an order to show cause why Defendants’ motion should not be treated as a Rule 56 motion. See id. In that case, Plaintiffs will submit an affidavit pursuant to Fed. R. Civ. P. Rule 56(d)(2). Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 59 of 70 52 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 at trial. 2. Defendants Are Not Entitled to Their 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 23-26, 28, 31-33, 34-36, 38-39, 42-44, 46-49, 50-55.) For example, Defendants ask this Court to find that management was not “adversarial” to the Monitor and the Arizona Attorney General. (MTD Br. at 38-39.) 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. (MTD Br. at 34-38.) However, and particularly in light of Western Union’s record as a recidivist, Defendants “cannot take comfort in the appearance of compliance . . . at the pleading stage” given 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.” Massey Energy, 2011 WL 2176479, at *21; see also Westmoreland, 727 F.3d at 729 (district court’s “focus on other hypothetical explanations” posited by defendants’ reversible error); 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); Wells Fargo, Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 60 of 70 53 2017 WL 1735573, at *14 (rejecting inferences sought by defendants in favor of plaintiffs’ reasonable inferences).27 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 32 n.19.) Again, Defendants are asking for an inference that is contradicted by the detailed allegations of the Complaint, including Defendants’ own admissions as well as the findings of the regulators who imposed those regulatory settlements in the first place.28 Moreover, this is precisely the kind of defendant-friendly inference that Rosenbloom highlighted as reversible error. 765 F.3d at 1155-56 (reversing lower court because it parsed prior FDA warning letters to infer that the board might not have realized that ongoing off-label marketing was occurring because the letter addressed was superficially distinct conduct); see also Wells Fargo, 2017 WL 1735573, at *13 (rejecting defendants’ argument to address each red flag in a “piecemeal fashion”). 27 See also Pyott, 46 A.3d at 317 (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); 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”). 28 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.) In 2017, Western Union admitted that from 2004 through December 2012, the Company “repeatedly identif[ied] Western Union Agents involved in or facilitating unlawful structuring but knowingly fail[ed] to take corrective action . . . despite repeated[] violat[ions of] the [BSA] and other statutes or Western Union [AML] or anti-fraud policies . . ..” (DPA SOF ¶¶1-2.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 61 of 70 54 Next, Defendants argue that the Individual Defendants acted in good faith because they supposedly probed management and asked follow-up questions on Western Union’s compliance deficiencies. (MTD Br. at 46-48.) Defendants’ argument is inconsistent with the detailed allegations of the Complaint (see, e.g., ¶¶124, 162, 212, 229) and cannot be resolved in their favor at this stage. 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 the Complaint raises a reasonable doubt of the Individual Defendants’ lack 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.”). As explained above, the Complaint easily meets this standard. Finally, Defendants no longer argue that the Complaint fails to allege any substantive deficiencies in Western Union’s AML compliance controls outside the Southwest Border region. (Compare Dkt. 102 at 42-44, with MTD Br. at 55-59.) Nor could they. Western Union has expressly admitted that through December 2012, the Company violated U.S. law by willfully failing to implement and maintain effective AML compliance systems in areas outside the Southwest Border area. (¶255.) E. A Majority of the Board Also Faces a “Substantial Likelihood” of Liability By Virtue of Their Specific Responsibilities at Western Union Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 62 of 70 55 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 an even greater likelihood of liability (and therefore was disabled from considering a demand), given that he has been a Western Union 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 AML compliance system. (¶¶270-71.) Ersek had direct managerial responsibility for Western Union, direct information regarding 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 engaged in violations of law and simultaneously did not implement an effective AML compliance system. (¶¶255, 263-65.) 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.) Moreover, pursuing the claims alleged could result in Ersek’s termination and would therefore be antithetical to his financial interest. (¶273.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 63 of 70 56 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 In the years leading up to and following the SWB Settlement, the members of each of the Governance,29 Audit,30 Compliance,31 and Compensation32 Committees assumed heightened duties under their charters33 to ensure AML compliance, received additional information showing 29 Devitre, Holden, Levinson, and Miles were voting members on the Governance Committee (¶¶21, 24, 25, 30.) Ersek served as a nonvoting member on both the Governance and Audit Committees, and Greenberg observed (though was not a member). (¶¶20, 23.) Each of these directors attended all or most Governance and/or Audit Committee meetings during their respective tenures. (¶¶20-26, 30.) 30 Devitre, Goodman, Levinson, Mendoza, and Miles were voting members on the Audit Committee. (¶¶21-23, 25, 26, 30.) 31 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. (¶¶20-21, 23, 27-28, 30.) 32 Goodman, Holden, Levinson, Mendoza, and Trujillo served on the Compensation Committee and attended all or most of its meetings. (¶¶22, 24-26, 28.) 33 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.) The Compensation Committee was 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.) The Compliance Committee was 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.) Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 64 of 70 57 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., 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). Because the Committee Defendants assumed heightened duties, had even greater knowledge of 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 is even more culpable. (See ¶¶57-75, 85.) Indeed, despite Western Union’s persistent compliance violations, the Governance Committee repeatedly assigned the same individuals to the Governance and Audit Committees, and 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. (¶¶283, 285-86, 310(e).) 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 370.34 Moreover, the Compensation Committee kept the status quo during 34 Defendants argue that Plaintiffs’ appointment allegations are conclusory and dependent on Plaintiffs’ other claims. (MTD Br. at 64 (citing Del. Code Ann. tit. 8, § 141(c)(1)).) But having Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 65 of 70 58 the time Western Union admitted to willfully violating federal law by continuing to grant large compensation packages to the Company’s management based heavily on revenue and profit that would be jeopardized by AML compliance.35 Demand is, therefore, excused as to the Committee Defendants.36 VI. DEMAND IS EXCUSED AS TO COUNT II 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, 66 A.3d at 983. Defendants knew from Western Union’s sustained and systemic failure to comply with the SWB Settlement that refusing to replace those responsible did not comply with their fiduciary obligations. Stone, 911 A.2d at 370; Caremark, 698 A.2d at 971. 35 Defendants’ cited cases do not provide for a different conclusion. Unlike In re Goldman Sachs Grp., Inc., S’holder Litig., Civil Action No. 5215–VCG, 2011 WL 4826104, at *19-23 (Del. Ch. Oct. 12, 2011), 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. 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. 36 Defendants have in the past argued that Plaintiffs seek to hold the Committee Defendants liable solely due to their committee memberships. This is false. Plaintiffs have pled with particularity that the Committee Defendants: (i) were privy to all the red flags available to the Board generally (¶¶63, 67, 71-75); (ii) were exposed to additional red flags of systemic AML compliance at the various committee meetings (¶¶86, 89-90, 98-99, 101, 105-06, 113-14, 116-17, 119-20, 122-23, 128-29, 131-32, 134-35, 144-45, 154, 161, 164, 169, 172, 178-79, 184, 187, 191-92, 195, 198, 202, 205-06, 233-34); 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 are inapposite. See, e.g., 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. Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 66 of 70 59 In Count II, Plaintiffs assert that Ersek, in his capacity as CEO, breached his fiduciary duties. (¶¶313-19.) The only difference between Count I and Count II is that: (i) 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 predicated on the exact same approval of a business plan based largely 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. Defendants argue that 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 64.) 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. at *4. There were no Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 67 of 70 60 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. (¶¶274-81.) Thus, Ersek and a majority of the Board face a substantial likelihood of liability for the exact same conduct and demand was excused. CONCLUSION For the reasons set forth above, the Motion should be denied in its entirety. Dated: June 9, 2017 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 BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP Mark Lebovitch Jeroen van Kwawegen Edward G. Timlin David MacIsaac 1285 Avenue of the Americas Case 1:14-cv-00144-MSK-KLM Document 143 Filed 06/09/17 USDC Colorado Page 68 of 70 61 -and- Michael I. Fistel, Jr. 40 Powder Springs Street Marietta, GA 30064 Tel: (770) 200-3104 michaelf@johnsonandweaver.com Counsel for Lead Plaintiffs 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 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 143 Filed 06/09/17 USDC Colorado Page 69 of 70 62 CERTIFICATE OF SERVICE I hereby certify that on June 9, 2017, 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 143 Filed 06/09/17 USDC Colorado Page 70 of 70