8 December 2010
On November 9, 2010, in the action entitled In re Citigroup Inc. Securities Litigation, 09-md-02070, 2010 U.S. Dist. LEXIS 119274 (S.D.N.Y. Nov. 9, 2010), Judge Sidney H. Stein ruled on motions to dismiss a putative class action complaint against Citigroup and 14 of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The judge allowed the action to continue but limited the claims and reduced the number of defendants.
According to the complaint, defendants’ wrongdoing relates to a series of alleged misrepresentations between January 2004 and January 2009 in which Citigroup knowingly understated its risk exposure and overstated the value of its assets, particularly those connected with the subprime mortgage market. These misrepresentations allegedly misled investors about the company’s financial health, and caused them to suffer damages when the truth about Citigroup’s assets was finally revealed.
In particular, the complaint alleges that Citigroup made incomplete and misleading disclosures about the extent of its collateralized debt obligation (CDO) holdings, the relation of its CDO holdings to the subprime mortgage market and the value of its CDO holdings. The court found that the plaintiffs had adequately pleaded all of the elements of their Section 10(b) and Rule 10b-5 claims (including scienter) as to Citigroup and seven of the individual defendants, including its former CEO, Charles Prince, and board Chairman and former Treasury Secretary, Robert Rubin.
With respect to certain individual defendants, the court found that there was a strong inference of scienter in part because they attended meetings in the summer of 2007 that specifically addressed Citigroup’s CDO exposure. Judge Stein concluded that “the mere existence [of the meetings] is indicative of scienter: That defendants engaged in meetings concerning Citigroup’s CDO risks is inconsistent with the company’s public statements downplaying or concealing that risk.”
Notably, Judge Stein permitted the plaintiffs to use the so-called “group pleading doctrine” to allege that certain individual defendants were responsible for claimed misstatements and omissions in Citigroup’s public filings. Several other circuit courts have concluded that this basis for pleading liability did not survive the enactment of the Private Securities Litigation Reform Act in 1995. The Second Circuit, however, has not expressly addressed this issue and some district courts within the Second Circuit have permitted “group pleading” in certain circumstances.
Judge Stein’s comprehensive opinion—carefully evaluating a 1,265 paragraph, 536 page complaint—provides a virtual primer on securities fraud and subprime-related securities and assets. It also demonstrates the value of a strong motion to dismiss even when it is not successful in terminating an action entirely.
Although the court allowed the action to proceed, the defendants did achieve some success. Judge Stein concluded that only the fraud allegations arising from statements between February 2007 and April 2008 were adequately pleaded, reducing the class period from five years to a little more than one year. He also dismissed claims against seven of the 14 individual defendants, including Citigroup’s current CEO, Vikram Pandit, and CFO, John Gerspach. Judge Stein found that there could be no finding of scienter as to these individuals because plaintiffs’ allegations regarding their knowledge of Citigroup’s CDO operations were not sufficiently particularized. Additionally, Judge Stein dismissed plaintiffs’ allegations concerning several other financial instruments (i.e., auction rate securities, leveraged loans and residential-mortgage-backed securities), leaving only those allegations related to Citigroup’s CDO to be further litigated.
In sum, as a result of Judge Stein’s Opinion, the scope of the action has been trimmed considerably. Not only are seven individual defendants dismissed from the action, but the remaining claims relate to a considerably reduced period of time and to only one financial instrument.
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