In re Fifth Third Bancorp Derivative Litig.

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IN RE FIFTH THIRD BANCORP DERIVATIVE LITIGATION

No. 20 C 4115

United States District Court, N.D. Illinois, Eastern Division

March 8, 2023

OPINION AND ORDER

SARA L. ELLIS, United States District Judge.

Fifth Third Bancorp (“Fifth Third”) shareholders filed this shareholder derivative action against Defendants Fifth Third; Fifth Third board members Nicholas K. Akins, B. Evan Bayh III, Jorge L. Benitez, Katherine B. Blackburn, Emerson L. Brumback, Jerry W. Burris, Greg. D. Carmichael, C. Bryan Daniels, Mitchell S. Feiger, Thomas H. Harvey, Gary R Heminger, Jewell D. Hoover, Eileen A. Mallesch, Michael B McCallister, Marsha C. Williams (the “Director Defendants”); and former Fifth Third officers Tayfun Tuzun and Frank Forrest (the “Officer Defendants,” and together with the Director Defendants the “Individual Defendants”). In this action Plaintiffs seek to remedy wrongdoing allegedly committed by the Individual Defendants from February 26, 2016 through the present (the “relevant time period”). Specifically, Plaintiffs allege that the Individual Defendants breached their fiduciary duties to Fifth Third, were unjustly enriched, wasted corporate assets, and committed violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), codified at 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.

On March 30, 2022, the Court dismissed Plaintiffs' consolidated complaint pursuant to Federal Rule of Civil Procedure 23.1 for failure to plead demand futility. Doc. 107. Plaintiffs filed an amended complaint, which Defendants have moved to dismiss for failure to plead demand futility and, pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), for failure to state a claim. Because

Plaintiffs have again failed to specifically allege the futility of a demand upon the Director Defendants, the Court grants Defendants' motion to dismiss [121] and dismisses this action with prejudice.

BACKGROUND^[1]

I. Fifth Third's Cross-Sell Strategy

Fifth Third, headquartered in Cincinnati, provides financial services to corporations, individuals, and non-profits, including an assortment of checking, savings, and money market accounts, wealth management solutions, payments and commerce solutions, insurance services, and credit products such as commercial loans and leases, mortgage loans, credit cards, installment loans, and auto loans. Fifth Third operates full-service banking centers across Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia, and North Carolina.

Between 2010 and at least 2019, Fifth Third employed a cross-sell strategy, encouraging employees to sell additional services and/or products to existing customers to meet aggressive sales targets, all supported and awarded through various incentive programs. As part of this strategy, Fifth Third set a goal of providing each customer with at least four products. To meet these sales targets, management encouraged or pressured employees into using improper sales tactics, such as opening false accounts, also known as gaming.^[2]The success of the cross-sell strategy led to inflated financial results and the impression that Fifth Third was growing organically.

Fifth Third did not have a system to detect or stop unauthorized account activity, instead relying on customer or employee reports of misconduct. This led to the underreporting of the scope of the problem. But Fifth Third did engage in monthly testing and reviews of account documentation, with a special investigation group reporting suspicious activities to senior executives. To the extent Fifth Third reviewed improper activity, it only recorded the conduct as improper if the allegation was escalated above the bank branch, internally investigated, and determined to be substantiated by an investigator. A senior vice president in March 2015 noted that 568 Fifth Third branches did not escalate or report a single complaint.

II. The Individual Defendants

A. The Director Defendants

The Director Defendants are current and former members of Fifth Third's Board of Directors. When this action was filed, the Board consisted of fourteen members, Fifth Third's Chief Executive Officer, Carmichael, and thirteen independent directors: Akins, Bayh, Benitez, Blackburn, Brumback, Daniels, Feiger, Harvey, Heminger, Hoover, Mallesch, McCallister, and Williams. Burris resigned from the Board in June 2020.

1. Committee Membership

The Director Defendants have all served on various Fifth Third committees. The Audit Committee has oversight responsibilities relating to Fifth Third's accounting and financial reporting processes and the audits of its financial statements. The Audit Committee also monitors Fifth Third's system of internal controls and compliance with applicable legal and regulatory requirements. Akins, Benitez, Blackburn, Brumback, Burris, Daniels, Harvey, Hoover, Mallesch, McCallister, and Williams have served on the Audit Committee.

Akins, Blackburn, Brumback, Hoover, and Williams also served on the Regulatory Oversight Committee, which had oversight responsibilities relating to compliance with regulatory findings and supervisory issues between 2015 and December 2016, after which some of its responsibilities moved to the Risk and Compliance Committee. The Risk and Compliance Committee oversees the risk management policies of Fifth Third's global operation and oversight of its global risk management framework. It also oversees Fifth Third's operational, legal, and reputational risks. Bayh, Benitez, Blackburn, Brumback, Burris, Daniels, Harvey, Heminger, Hoover, Mallesch, and Williams have served on the Risk and Compliance Committee.

Akins, Brumback, Heminger, Mallesch, McCallister, and Williams served on the Human Capital and Compensation Committee. This committee oversees the development and implementation of Fifth Third's incentive compensation strategy, policies, and programs. Finally, Akins, Bayh, Benitez, Blackburn, Harvey, Heminger, and Williams have served on Fifth Third's Nominating and Corporate Governance Committee. This committee develops, recommends, and performs annual reviews of Fifth Third's corporate governance policies and guidelines. It also identifies and nominates director and committee member candidates.

2. Outside Relationships

Several of the Director Defendants have longstanding business and personal relationships with one another and Fifth Third. Harvey, Daniels, and Feiger all have ties to MB Financial Bank, N.A. (“MB Financial”), where Harvey served as Chairman of the Board of Directors, Daniels served as a director, and Feiger served as president and CEO. On May 3, 2019, MB Financial merged with and into Fifth Third Bank, N.A., with Fifth Third Bank, N.A. as the surviving entity. Fifth Third Bank, N.A. is an indirect subsidiary of Fifth Third. Feiger then served as the chairman and CEO of Fifth Third Bank Chicago until he retired from these positions on May 29, 2020. Upon Fifth Third's acquisition of MB Financial, Daniels became a Fifth Third director. Daniels is also the co-founder and principal of Prairie Capital, a private equity firm that has done business with MB Financial and Fifth Third.

Bayh previously served on the board of Marathon Petroleum Corporation, for which Heminger served as the CEO and Board Chair. Mallesch, Burris, and Carmichael have all had management and leadership positions at General Electric in the past, with Mallesch having served as its Chief Financial Officer.

Finally, Blackburn serves as the Executive Vice President of the Cincinnati Bengals. Fifth Third has paid the Bengals $1.8 million for sponsorship arrangements, tickets, and advertising expenses. Around the same time that Blackburn became a director, Fifth Third signed a five-year extension contract with the team, paying a total of $7.9 million to the Bengals. Fifth Third's 2020 Proxy Statement discloses that “[b]y virtue of Ms. Blackburn's being an executive officer and a principal owner of the Cincinnati Bengals, she is deemed to be a related party having a direct material interest in these arrangements.” Doc. 111 ¶ 533.

3. Director Compensation and Stock Trades

The Director Defendants receive compensation from Fifth Third for their service as Board members, including stock awards. Carmichael has served as Fifth Third's President since September 2012, its CEO since November 2015, a director since 2015, and the elected Chairman of the Board since 2018. At the end of fiscal year 2019, Carmichael received $8,999,237 in compensation from Fifth Third, including $1,100,070 in salary, $4,462,507 in stock awards, $787,498 in option awards, $2,200,000 in non-equity incentive plan compensation, and $449,162 in other compensation. As of December 31, 2019, Carmichael owned 1,336,633 shares of Fifth Third's common stock. From 2016 through 2019, Carmichael made the following sales of Fifth Third's common stock:

Date

Number of Shares

Price

Proceeds

10/29/2019

55,251

$29.59

$1,634,877.09

02/13/2018

87,613

$32.37

$2,836,032.81

11/16/2016

36,821

$25.11

$924,575.31

11/10/2016

17,689

$23.45

$414,807.05

Id. ¶ 53.

Similarly, both Hoover and Brumback sold Fifth Third's common stock during the relevant time period. Hoover made the following sales of Fifth Third's common stock:

Date

Number of Shares

Price

Proceeds

06/03/2019

3,739

$26.51

$99,120.89

02/12/2018

3,700

$32.40

$119,880.00

04/28/2017

2,000

$24.82

$49,640.00

Id. ¶ 86. Brumback made the following sale of Fifth Third's common stock:

Date

Number of Shares

Price

Proceeds

03/05/2018

3,000

$33.44

$100,320.00

Id. ¶ 69.

B. The Officer Defendants

As for the Officer Defendants,...