Nominal defendant MoneyGram International, Inc. (MoneyGram or the Company) specializes in the transfer of funds among businesses and individuals worldwide. While the majority of money transfers are for legitimate purposes, some bad actors use MoneyGram’s platform and services for fraudulent and money-laundering activities. Because of the risk of misuse by some, MoneyGram is highly regulated by the U.S. government. That regulation includes the requirement that MoneyGram maintain certain internal controls and compliance systems to guard against those bad actors. Failure to comply with the applicable laws and regulations could result in the suspension or termination of MoneyGram’s business.
In 2012, federal prosecutors alleged that MoneyGram failed to comply with anti-money-laundering requirements. The Company avoided prosecution by entering into a deferred prosecution agreement (the DPA) under which MoneyGram agreed to (i) pay $120 million into a fund for victims of fraud enabled by the Company’s services and (ii) substantially improve the Company’s compliance systems and controls over five years. Later, MoneyGram was compelled to pay an additional $125 million into the victims’ restitution fund and to extend the DPA by four years.
In their complaint, the plaintiffs alleged that the DPA was ineffective and complaints of fraudulent activities had failed to decrease, violating the terms of the DPA. The plaintiffs brought claims against MoneyGram’s directors and two of its officers for their alleged failure “to exercise oversight sufficient to comply with their fiduciary duties.” The plaintiffs alleged that the required compliance systems and controls had been implemented, but the defendants had “consciously failed to monitor or oversee operations thus disabling themselves from being informed of risks or problems requiring their attention.”
Prior to filing this action, the plaintiffs did not make a pre-suit demand on the board to take action because the plaintiffs alleged that such a demand would be futile since the director-defendants, as parties to the case, were interested in the outcome. The Court of Chancery began its analysis by reaffirming that a demand is not excused simply because directors are named as defendants in a lawsuit. Instead, a plaintiff must plead facts implying a substantial likelihood of directorial liability to satisfy Rule 23.1.
In addition, the court observed that MoneyGram’s certificate of incorporation includes an exculpation clause under 8 Del. C. section 102(b)(7), which exculpates directors from liability for breaches of the duty of care. Therefore, to survive a motion to dismiss, plaintiffs would have to plead with particularity that defendants had knowingly acted in bad faith.