When a Whistleblower Complaint Becomes a Board-Level ‘Red Flag

In a recent Caremark decision, the Delaware Court of Chancery largely denied a motion to dismiss, holding that most of Regions Bank’s board purportedly ignored red flags raised in a whistleblower report concerning the bank’s unlawful overdraft practices — practices that later led to the company paying US$191 million in penalties and remediation to the Consumer Financial Protection Bureau (CFPB). The court found a former in-house lawyer’s draft complaint sent to the board was a true red flag, and it held that merely engaging outside counsel to investigate, without timely corrective action, does not automatically defeat an inference of bad faith at the pleadings stage. The opinion underscores that both documented, prompt board-level escalation and timely corrective action are critical as to compliance risks that are central to the business.