Stone v. Ritter

911 A.2d 362 (Del. Supr. 2006)

Facts:

  • Two individuals were operating a Ponzi scheme, which operated the majority of its funding through AmSouth bank.
  • Ultimately, two Ponzi schemers were convicted and the bank was required to pay over $50 million in fines.
  • The evidence suggests that employees would have discovered this information immediately had they instituted any basic monitoring system.
  • As result of the loss to the company in fines, shareholders sued the bank derivatively claiming a lack of oversight on the part of the directors.

Issue:

  • Whether the lack oversight executed by the board of directors was sufficient for a lawsuit claiming negligent oversight.

Holding:

  • No, the directors are not liable.
  • The test for director negligence is a high standard and should operate as follows:
    1. There must be a showing of a “lack of good faith as evidenced by a sustained or systematic failure of a director to exercise reasonable oversight.”
      • This generally requires a showing of two things in particular:
        1. An utter failure to implement any reporting information or controls
          • OR
        2. Once implemented, a conscious failure to monitor or oversee the operating – which thereby disables the directors from being informed of the risks or knowledge of illegality/wrongdoing.
      • For either of these, there must also be a showing that the directors knew they weren’t meeting their fiduciary obligations. Some would call this knowledge “bad faith” or certainly a lack of good faith.

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