CITY OF CAMBRIDGE RETIREMENT SYSTEM; MARTA/ATU LOCAL 732 EMPLOYEES RETIREMENT PLAN, derivatively on behalf of the Western Union company, Plaintiffs - Appellants,
HIKMET ERSEK; JACK M. GREENBERG; DINYAR S. DEVITRE; RICHARD A. GOODMAN; BETSY D. HOLDEN; LINDA FAYNE LEVINSON; ROBERTO G. MENDOZA; SOLOMON D. TRUJILLO; FRANCES M. FRAGOS TOWNSEND; THE WESTERN UNION COMPANY, a Delaware corporation, nominal defendant, Defendants - Appellees. and STANLEY LIEBLEIN, Plaintiff,
from the United States District Court for the District of
Colorado (D.C. No. 1:14-CV-00144-MSK-KLM)
Van Kwawegen of Bernstein Litowitz Berger & Grossmann
LLP, New York, New York (David J. MacIsaac of Bernstein
Litowitz Berger & Grossmann LLP, New York, New York;
Jeffrey A. Berens of Berens Law LLC, Denver, Colorado; and
Michael I. Fistel, Jr. of Johnson Fistel LLP, Marietta,
Georgia, with him on the briefs), for Plaintiffs-Appellants.
F. Graham of Sidley Austin LLP, Chicago, Illinois (Hille R.
Sheppard of Sidley Austin LLP, Chicago, Illinois; and Holly
Stein Sollod and Christina Gomez of Holland & Hart LLP,
Denver, Colorado, with him on the brief) for
MATHESON, PHILLIPS, and McHUGH, Circuit Judges.
PHILLIPS, CIRCUIT JUDGE.
shareholder-derivative action, Shareholders of The Western
Union Company aver that several of Western Union's
Officers and Directors breached their fiduciary duties to the
company by willfully failing to implement and maintain an
effective anti-money-laundering-compliance program
(AML-compliance program), despite knowing of systemic
deficiencies in the company's AML compliance. The
Shareholders didn't make a pre-suit demand on Western
Union's Board of Directors to pursue this litigation, and
the district court found no evidence that such demand would
have been futile. The district court thus dismissed the case,
reasoning that the Shareholders' obligation to make a
pre-suit demand on the Board was not excused. Exercising
jurisdiction under 28 U.S.C. § 1291, we affirm.
Union is a public Delaware corporation that facilitates
electronic money transfers through a sprawling international
network of about 550, 000 "agents"-individuals and
entities that serve as storefronts where customers can send
or receive funds-located in over 200 countries and
territories. Appellants' App. vol. 4 at 854-55, ¶
14. Western Union's primary business flows through
Western Union Financial Services, Inc. (WUFSI), a
wholly-owned subsidiary which facilitates
consumer-to-consumer money transfers. Western Union also
offers business-to-business and business-to-consumer
transfers through another wholly-owned subsidiary, Western
Union Business Solutions.
its vulnerability to criminal exploitation, the
money-transmittal industry is heavily regulated. Under the
Bank Secrecy Act of 1970 (BSA), 31 U.S.C. §§ 5311-
5332, financial institutions-including "money services
businesses" like Western Union-must implement and maintain
effective AML-compliance programs. See id. §
5318(h)(1). At a minimum, these programs must provide for
internal controls to guard against money laundering, for
monitoring and independent compliance testing, and for
personnel training. See 31 U.S.C. § 5318(h); 31
C.F.R. § 1022.210. A money-services business with
foreign agents must also adopt risk-based approaches to
cross-border transactions to help "guard against the
flow of illicit funds." 69 F.R. 74439, 74440 (Dec. 14,
2004). Finally, financial institutions must maintain records
and file reports on transmittals that exceed certain amounts
or are "relevant to a possible violation of law or
regulation." 31 U.S.C. § 5318(g)(1).
"Structuring" or breaking transactions into smaller
denominations to avoid the BSA's recordkeeping and
reporting requirements is a crime. Id. § 5324.
have long monitored Western Union's compliance with these
requirements. Between 2002 and 2006, when Western Union
became a public company, WUFSI entered into four settlement
agreements concerning alleged AML violations with federal
regulators and state authorities in Arizona, California, and
New York. Without admitting liability, WUFSI promised to
remedy deficiencies in its recordkeeping, reporting, and
monitoring practices. Yet WUFSI struggled to achieve these
objectives, and in 2008, it reached a second settlement with
Arizona regarding alleged recordkeeping violations. A third
settlement with Arizona followed in 2010: the Southwest
Border Agreement (SBA).
centered on violations that occurred between 2003 and 2007 at
16 agent locations in the Southwest Border region-Arizona and
the area within 200 miles north and south of the United
States-Mexico border. WUFSI admitted that it had "reason
to know" that agents at these locations had
"knowingly engaged in a pattern of money laundering
violations that facilitated human smuggling from Mexico into
the United States through Arizona." Appellants' App.
vol. 8 at 1933, ¶ 4. To remedy these violations, the SBA
imposed a $94 million fine and mandated that WUFSI work with
a court-appointed monitor to improve its AML compliance in
the Southwest Border region. The SBA set a July 2013
completion deadline for this endeavor.
monitors served between 2010 and 2013, recommending a bevy of
improvements to WUFSI's AML-compliance program. Western
Union struggled to keep apace of these mounting proposals,
implementing just 18 of (then) 80 proposals by September
2011, 33 of 98 proposals by October 2012, and 54 of 98
proposals by April 2013. In July 2013-at the end of the
initial monitorship-Western Union management advised the
Board of Directors that certain improvements were "at a
standstill." Id. vol. 3 at 777-78, ¶¶
184-85. Management also reported the disturbing news that, in
the first quarter of 2013, 28 of 335 high-risk agents in the
Southwest Border region had "confirmed instances of
Human Smuggling." Id. at 786, ¶ 214.
Western Union failed to complete all the monitors'
proposals by the July 2013 deadline, Arizona threatened to
declare a willful and material breach of the SBA. Instead,
recognizing their "mutual goal" that Western Union
develop and maintain an effective AML-compliance program, the
parties negotiated an amended SBA, extending the monitorship
through December 2017. Id. vol. 8 at 1986. The
Amended SBA also mandated more rigorous recordkeeping and
reporting practices for transactions in the Southwest Border
these events unfolded, numerous federal investigations into
Western Union's AML compliance began to ramp up. In 2012,
the U.S. Attorney's Office for the Central District of
California named Western Union a "target" in an
investigation into a California agent arrested for
structuring transactions worth $65.7 million. Id.
vol. 3 at 763, ¶ 137. Also in 2012, the Federal Trade
Commission (FTC) began investigating Western Union's
possible facilitation of fraudulent money transfers. Two
years later, in 2014, the U.S. Attorney's Office for the
Southern District of Florida named Western Union a target in
an investigation into allegations of money laundering by
agents in Central America. Meanwhile,  the U.S.
Attorney's Offices for the Eastern and Middle Districts
of Pennsylvania started investigating Western Union for
anti-fraud and AML violations.
this backdrop, various Shareholders filed five derivative
actions in 2014 alleging that certain of Western Union's
Directors had caused the company to willfully violate AML
laws and regulations. In 2015, the district court
consolidated these actions, and the Shareholders filed a
consolidated complaint, asserting violations of the
Securities Exchange Act of 1934, breaches of fiduciary
duties, and Delaware common-law claims. The Directors moved
to dismiss under Rule 23.1 of the Federal Rules of Civil
Procedure, arguing that the Shareholders had failed to plead
facts sufficient to show the futility of making a pre-suit
demand on the Board to pursue litigation. The court granted
the motion but gave the Shareholders leave to amend.
Accordingly, on May 2, 2016, the Shareholders filed a first
amended complaint (FAC), asserting two
breach-of-fiduciary-duties claims. The Directors again moved
to dismiss for failure to plead demand futility.
that motion was pending, on January 19, 2017, Western Union
entered into a deferred prosecution agreement (DPA) with the
U.S. Department of Justice and the U.S. Attorney's
Offices for the Central District of California, Southern
District of Florida, and Eastern and Middle Districts of
Pennsylvania. The DPA alleged that, between 2004 and 2012,
Western Union had willfully failed to implement an effective
AML-compliance program and take corrective action against
agents engaged in fraud, money laundering, and structuring
schemes. Western Union admitted these allegations, accepted
responsibility, and agreed to penalties and conditions in
exchange for having criminal charges dismissed after three
years. That same day, Western Union also announced a
settlement with the FTC in a related consumer-fraud
light of these developments, the district court granted the
Shareholders leave to amend their pleading. Accordingly, on
March 17, 2017, the Shareholders filed a second amended
complaint (SAC), adding 13 paragraphs addressing the
settlement agreements. On April 21, 2017, the Directors filed
a renewed motion to dismiss for failure to plead demand
futility, which the district court granted on September 29,
2017. This appeal followed.
Shareholders concede that they made no pre-suit demand on
Western Union's Board of Directors to pursue this
litigation. Thus, we need decide only whether such demand
would have been futile. We first address the standard of
review applicable to Rule 23.1 dismissals before considering
the legal sufficiency of the Shareholders'
Standard of Review
circuit has yet to decide what standard of review applies to
dismissals under Rule 23.1 for failure to plead demand
futility. See In re ZAGG Inc. S'holder Deriv.
Action, 826 F.3d 1222, 1227 (10th Cir. 2016) (finding
the standard of review immaterial to the decision). The
courts of appeals are split on this question, with the recent
trend favoring de novo review over a discretionary
standard. We tend to agree with the trend towards
plenary review, given that the issue whether demand is futile
depends on the legal sufficiency of the complaint's
allegations-a determination we typically review de novo.
See Carabajal v. City of Cheyenne, 847 F.3d 1203,
1212 (10th Cir. 2017). We see no sound reason to apply a
different standard to a derivative pleading when we have
"exactly the same task as when reviewing the dismissal
of any other action." Espinoza v. Dimon, 797
F.3d 229, 235 (2d Cir. 2015) (explaining that an ...