Imagine that you are the chief compliance officer for an international stock brokerage firm. You are asked to meet with the board of directors of the firm to provide suggestions that will enable the firm to ensure that employees comply with the firm’s compliance programs:How will the standard articulated by the courts in Caremark and Citigroup inform your recommendations?

1. In the Citigroup litigation, shareholders alleged that directors breached their fiduciary duty by allowing the business divisions to remain active in the subprime mortgage market long after other competitors, such as JP Morgan, began to reduce their exposure to these types of loans and the exotic financial products that financial product engineers developed using these risky loans. In your initial post for this

Discussion Question, imagine that you served as Citigroup’s chief risk officer during the period at issue in the litigation. The lawyers for the plaintiffs (shareholders) have asked you to testify regarding the decision to continue to allow the credit department to issue subprime mortgages to borrowers likely to default on home mortgage loans, to acquire portfolios of subprime mortgages, and to create financial products comprised of subprime mortgages.

How might you go about explaining your decisions? Were there legitimate business reasons to have remained in this market? Were there particular challenges you faced in designing a compliance policy to assess the risks that financial investments might decline in value in the future? In your follow‐up postings for this Discussion Question,

provide your own evaluation of the arguments presented. Were you persuaded by the arguments raised on behalf of Citigroup’s chief risk officer? Or do you agree with the shareholders that the board of directors and risk management professionals should have anticipated the sudden calamitous decline in the value of subprime mortgages and related financial products in 2007?

2. Imagine that you are the chief compliance officer for an international stock brokerage firm. You are asked to meet with the board of directors of the firm to provide suggestions that will enable the firm to ensure that employees comply with the firm’s compliance programs.

How will the standard articulated by the courts in Caremark and Citigroup inform your recommendations? Does this standard require the board of directors or the chief compliance officer to be aware of every violation of the firm’s compliance policies?

How diligently should the board of directors and executives police employee activities? Should shareholders expect the board and compliance professionals to identify wrongdoing that happens: a) rarely; b) periodically, or c) frequently? Should it matter if the actors frequently accused of wrongdoing are rank‐in‐file employees or executives? What specific policies will you recommend to help ferret out wrongdoing by employees who work in the firm’s ten offices located around the world?

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