SIDNEY H. STEIN, District Judge.
Plaintiffs in these four actions are members of the putative classes in In re Citigroup, Inc. Bond Litigation and In re Citigroup, Inc. Securities Litigation that have opted to bring suit in their own name. They are investors in the securities of defendant Citigroup, Inc., and they allege that the company, and certain of its affiliates, officers, and directors violated federal securities laws and other statutory and common law duties. The substance of plaintiffs' complaints mirrors the complaints in the Bond and Securities actions.
Purchasers of Citigroup securities in both domestic and European offerings bring these four actions. The first of the four, International Fund Management et al. v. Citigroup et al., was initiated in October 14, 2009. Plaintiffs in this action are twelve European investment firms— International Fund Management S.A., Deka International S.A. Luxemburg, Deka Investment GmbH, BayernInvest Kapitalanlagegesellschaft mbH, HansaInvest Hanseatische InvestmentGmbH, Metzler Investment GmbH, Nord/LB Kapitalanlagegesellschaft AG, INKA Internationale Kapitalanlagegesellschaft, Swiss Life Investment Management Holding AG, LGT Funds AGmvK, Kepler-Fonds Kapitalanlagegesellschaft mbH, ETFlab Investment GmbH—and the City of Richmond, Virginia. (Second Am. Compl. at ¶¶ 30-43, International Fund Management et al. v. Citigroup et al., No. 09 Civ. 8755 (S.D.N.Y. Nov. 17, 2010) (hereinafter IFM Compl.).)
Norges Bank, Norway's central bank, filed the second action on September 17, 2010. (First Am. Compl. at ¶ 30, Norges Bank v. Citigroup et al., No. 10 Civ. 7202 (S.D.N.Y. Dec. 15, 2010) (hereinafter Norges Compl.).) A pair of affiliated investment fund management companies, Swiss & Global Asset Management AG and Swiss & Global Asset Management (Luxembourg) SA, brought the third three months later. (Compl. at ¶¶ 30-32, Swiss & Global Asset Management AG et al. v. Citigroup et al., No. 10 Civ. 9325 (S.D.N.Y. Dec. 13, 2010).) And the plaintiffs in the final action, initiated on January 14, 2011, are a trio of German corporations—Universal-Investment-Gesellschaft mbH, an investment fund management company; Münchener Rüchversicherungs-Gesellschaft Aktiengesellschaft in München, a reinsurance company; and MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH, an investment company. (Compl. at ¶¶ 30-32, Universal-Investment-Gesellschaft mbH et al. v. Citigroup et al., No. 11 Civ. 314 (S.D.N.Y. Jan. 14, 2011).)
These nineteen plaintiffs (collectively, "plaintiffs") have sued Citigroup, Inc., a global financial services holding company, and its subsidiary, Citigroup Global Markets, Inc., which underwrote many of the debt offerings at issue in these actions. (IFM Compl. ¶¶ 44-45.) They have sued the following directors and officers of Citigroup: Charles Prince, Vikram Pandit, Gary Crittenden, John C. Gerspach, Robert Druskin, Thomas Maheras, Michael Stuart Klein, Steven Freiberg, C. Michael Armstrong, Alain J.P. Belda, George David, Kenneth T. Derr, John M. Deutch, Roberto Hernandez Ramirez, Andrew N. Livers, Anne M. Mulcahy, Richard D. Parsons, Judith Rodin, Robert L. Ryan, and Franklin A. Thomas. (IFM Compl. ¶¶ 47-66.) With the exception of Norges Bank, all plaintiffs sue Arthur H. Tildesley, Jr., as well. (IFM Compl. ¶ 67.) Norges Bank alone sues Citigroup Capital XXI, a Delaware statutory trust. (Norges Compl. ¶ 32.)
"[T]he allegations in the four complaints are identical in most respects." (Pls.' Opp. to Motion to Dismiss ("Pls.' Opp.") at 6 n. 8.) The complaints are also substantially similar to the complaints in the putative class actions In re Citigroup Inc. Securities Litigation and In re Citigroup Inc. Bond Litigation. They allege that plaintiffs suffered losses from alleged misrepresentations
The complaints bring causes of action pursuant to the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act"), the common law of New York, and, for the claims arising out of purchases in European offerings, the common law and statutory law of the United Kingdom.
Defendants seek dismissal of all four complaints pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court ordered consolidated briefing of the motions to dismiss. Though there are four of each, the opinion often refers to the "complaint" or "motion" for simplicity's sake. The Court adopts the parties' convention of citing to the Second Amended Complaint in International Fund Management for allegations common to all complaints. The Court cites the other complaints as necessary.
In evaluating a motion to dismiss pursuant to Rule 12(b)(6), a court accepts the truth of the facts alleged in the complaint and draws all reasonable inferences in the plaintiff's favor. Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir.2006). A complaint should be dismissed if it fails to set forth "enough facts to state a claim for relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The basic pleading burden of "facial plausibility" is met "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955). Some of plaintiffs' claims are subject to a higher pleading burden, as discussed infra.
This motion to dismiss raises iterations of issues addressed in prior opinions in the Securities and Bond class actions. The discussion that follows presumes familiarity not only with the relevant factual background of those opinions, but with their legal analysis as well.
Plaintiffs bring causes of action pursuant to Sections 11, 12(a)(2), and 15 of the Securities Act. Defendants seek to dismiss these claims on the grounds that 1) plaintiffs have failed to plead the existence of actionable misrepresentations or omissions and 2) claims related to certain securities are untimely.
Securities Act claims need only meet the standards of notice pleading, unless the allegations sound in fraud, in which event the heightened Rule 9 fraud standard applies. Bond, 723 F.Supp.2d at 586. Contrary to defendants' position, a complaint does not sound in fraud simply by employing such terms as "misrepresented,"
Under the Rule 8 standard, defendants' motion seeks dismissal of only the preconsolidation SIV claims and the ARS claims.
In December 2007, Citigroup consolidated its affiliated structured investment vehicles (SIVs) on its balance sheet for the first time. (IFM Compl. ¶¶ 233-34.) According to plaintiffs, accounting rules required Citigroup to consolidate its SIVs and disclose certain aspects of its involvement with its SIVs prior to that date. (Id. ¶¶ 212-29.) Citigroup's failure to do so allegedly rendered financial statements for 2004 through 2007 misleading. (Id. ¶¶ 229, 232.)
The viability of these claims turns on whether plaintiffs have adequately alleged the existence of an "implicit guarantee" whereby Citigroup implicitly agreed to assume the SIVs' debts to prevent the SIVs from defaulting. Plaintiffs have failed to do so. Some of plaintiffs' allegations (see id. ¶ 584; Pls.' Opp. at 7 & n. 10) rely on the same faulty hindsight inference the Court rejected in the prior opinions. See Bond, 723 F.Supp.2d at 591; Securities, 753 F.Supp.2d at 243. The remaining allegations are that ratings agencies relied on Citigroup's reputation when rating SIV securities and that Citigroup played multiple managerial roles for the SIVs, including managing liquidity risk. (IFM Compl. ¶¶ 217-25.) Neither Citigroup's administration of the SIVs nor the fact that the third-party ratings agencies' drew comfort from that fact plausibly support the inference that Citigroup implicitly guaranteed the SIVs debts. Plaintiffs have thus failed to plead a misstatement or omission for the period prior to Citigroup's consolidation of its SIVs.
Plaintiffs allege Citigroup failed to disclose material information about its auction rate securities (ARS) exposures. Plaintiffs allege actionable omissions in two respects: 1) Citigroup's failure to disclose its own ARS holdings prior to April 2008, and 2) its failure to disclose liabilities to customers who owned illiquid ARS.
An omission gives rise to liability under the securities law only if "defendants had an affirmative duty to disclose the [omitted] information" or "where disclosure was necessary so as to prevent other information contained in the registration statements from being misleading." Bond, 723 F.Supp.2d at 593. In both Bond and Securities, the Court dismissed claims that Citigroup misled investors by failing to disclose ARS-related information because the plaintiffs in those failed to allege a duty to disclose. Id.; Securities, 753 F.Supp.2d at 245-46. The Court does the same here.
Failure to disclose ARS holdings. Plaintiffs allege that Item 303 of SEC Regulation S-K required Citigroup to disclose its ARS holdings and the liquidity problems associated with them in its November 5, 2007 Form 10-Q and its 2007
Plaintiffs allege that "a known trend in the collapse of [Citigroup's] ARS business, and the inability to sell ARS securities on its books" triggered Citigroup's disclosure obligation pursuant to Item 303. (IFM Compl. ¶ 306.) The complaint fails to establish the existence of any alleged trend or its likelihood of materially impacting Citigroup's financial condition as of the relevant dates. The following facts are pled in support of the trend:
Most of these events, and certainly the most salient ones, occur after November 5, 2007; they do not plausibly establish the existence of a trend as of November 5, 2007, the date of the first alleged omission. Accordingly, plaintiffs have failed to allege a rising trend that would have required Citigroup to disclose its ARS holdings in the Form 10-Q issued that date. As to the second omission, alleged to have occurred on February 22, 2008, plaintiffs have not pled that Citigroup reasonably expected a trend to have a material impact on its financial results: Plaintiffs alleged that Citigroup knew its ARS could not be sold, but the complaint states that the ARS market did not become illiquid until the end of February, and that between mid-February and mid-April Citigroup still sold $3 billion of its ARS inventory. (IFM Compl. ¶¶ 296, 299.) Plaintiffs have thus failed to allege that Item 303 required an ARS disclosure prior to April 2008, and therefore they have not pled an actionable omission.
Disclosure of liabilities to ARS customers. In August 2008, pursuant to a settlement with the Securities and Exchange Commission and the New York Attorney General, Citigroup "agreed to repurchase $7.3 billion of ARS from its disgruntled clients" and disclosed this fact publicly. (Id. ¶ 303.) Plaintiffs allege that Citigroup's failure to divulge this liability at some unspecified earlier point is an actionable omission. (Id. ¶¶ 307, 308, 356, 402.) The duty to disclose this information, according to the complaint, arises from Statement of Financial Accounting Standards ("SFAS") No. 115 ¶ 3, which provides that "unrealized holding gains and losses for trading securities shall be included in earnings," (id. ¶ 307), and No. 5, which requires a company to "record contingent liabilities when the occurrence of a possible claim is probable and can be reasonably estimated," (id. ¶ 309).
Plaintiffs have not adequately established that either accounting standard required Citigroup to disclose the contingent liability before August 2008, when Citigroup repurchased its customer ARS. Plaintiffs have failed to allege or explain
The Securities Act contains a statute of limitations providing that "[n]o action shall be maintained to enforce any liability created under [Section 11] or [Section 12(a)(2)] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m. It also contains a statute of repose which states that "[i]n no event shall any such action be brought to enforce a liability created under [Section 11] . . . of this title more than three years after the security was bona fide offered to the public, or under [Section 12(a)(2)] of this title more than three years after the sale." Id. Defendants argue that claims concerning six securities at issue are barred by the statute of limitations, and that claims related to the majority of the securities at issue are barred by the statute of repose. The Court disagrees on both counts.
Defendants contend that claims with respect to six securities—Depositary Shares, 6.875% Notes, 5.5% Notes Due 2013, 6.125% Notes Due 2018, 6.5% Notes, and the e-TruPS bond (the "Challenged Securities")—are untimely. They argue that the one-year statute of limitations began on November 4, 2007 and that the limitations period for claims based on the Challenged Securities were not tolled prior to November 4, 2008. The Court assumes for the sake of argument that the limitations period expired on November 4, 2008, yet nevertheless concludes that the claims concerning the Challenged Securities are timely.
In American Pipe & Construction Co. v. Utah, the Supreme Court explained that "the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action." 414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974). This tolling rule applies "to class members who file individual suits before class certification is resolved." In re WorldCom Sec. Litig., 496 F.3d 245, 254 (2d Cir.2007). Defendants concede that any claims plaintiffs assert with respect to security offerings included in a putative class action prior to November 4, 2008 that remains pending are timely, but argue that claims concerning the Challenged Securities were not asserted in a class action before that date. (See Defs.' Mem. at 27-28.) Defendants' factual premise is incorrect.
The putative class action of Minneapolis Firefighters Relief Association et al. v. Rosen et al., No. 08 Civ. 10353—filed in New York state court on October 28, 2008 and subsequently removed and consolidated into the Bond class action—included in its class purchasers of the Challenged Securities and asserted claims on their behalf. See Appendix A. That class action was consolidated into the Bond action and remains pending today. Thus even if the
Defendants argue that the Securities Act's statute of repose bars plaintiffs from bringing Section 11 and 12(a)(2) claims with respect to securities that were offered or sold more than three years prior to the filing of these actions. Plaintiffs respond that the statute of repose does not bar any of their claims because the pendency of the Bond class action—which raised the same claims plaintiffs raise in connection with the same securities plaintiffs purchased—tolled the period of repose pursuant to the doctrine of American Pipe. Federal courts are split on whether American Pipe tolling applies to the Securities Act's statute of repose. Compare Joseph v. Wiles, 223 F.3d 1155, 1166-68 (10th Cir.2000), and In re Morgan Stanley Mortg. Pass-Through Certificates Litig., No. 09 Civ. 2137, 810 F.Supp.2d 650, 666-69, 2011 WL 4089580, at *14-*17 (S.D.N.Y. Sept. 15, 2011) (American Pipe tolling applies), with Footbridge Ltd. Trust v. Countrywide Fin. Corp., 770 F.Supp.2d 618, 624-27 (S.D.N.Y.2011), and In re Lehman Bros. Sec. & Erisa Litig., No. 09 MD 2017, 800 F.Supp.2d 477, 480-83, 2011 WL 1453790, at *2-*3 (S.D.N.Y. Apr. 13, 2011) (American Pipe tolling does not apply). For the foregoing reasons, the Court concludes that American Pipe tolling is available.
In Crown, Cork & Seal Co., Inc. v. Parker, 462 U.S. 345, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983), the Supreme Court explained the rationale for the American Pipe tolling doctrine as follows:
Id. at 350-51, 103 S.Ct. 2392. The same reasoning applies to the statute of repose. The complexity of securities class actions often precludes resolution of the certification question within the three-year repose period. Without tolling, class members content to remain in the class action would nevertheless need to bring their own suits within the three-year repose period to guard against the possible eventual denial of class certification. "The result would be a needless multiplicity of actions—precisely the situation that Federal Rule of Civil Procedure 23 and the tolling rule of American Pipe were designed to avoid." Id. at 351, 103 S.Ct. 2392. Tolling the statute of repose clearly serves the purposes of Rule 23 and the American Pipe doctrine.
At the same time, class action tolling does not disserve the purposes of the statute of repose. The statute of repose is meant "to serve as a cutoff," extinguishing a defendant's liability to a plaintiff who has failed to assert a claim within the limitations period. Lampf, Pleva, Lipkind, Prupis
Those courts that reject the applicability of American Pipe tolling do so in reliance on the Supreme Court's decision in Lampf holding that "the equitable tolling doctrine" does not apply to the Securities Act's statute of repose. Lampf, 501 U.S. at 363, 111 S.Ct. 2773; see Footbridge Ltd. Trust, 770 F.Supp.2d at 624-27; In re Lehman Bros., 2011 WL 1453790 at *2-*3. Lampf does not suggest, let alone require, the result those courts reach. In Lampf, the equitable tolling that concerned the Supreme Court was the kind that applies when the plaintiff demonstrates "ignorance of [the fraud] without any fault or want of diligence or care on his part." Lampf, 501 U.S. at 363, 111 S.Ct. 2773 (quoting Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348, 22 L.Ed. 636 (1874)). The Court found tolling of this character to be inconsistent with the absolute cutoff required by the statute of repose. Lampf, 501 U.S. at 363, 111 S.Ct. 2773. American Pipe tolling has a completely different character. It is not an equitable device for excusing ignorance, but a legal device for maintaining efficient class litigation. See Joseph, 223 F.3d at 1166-67; In re Morgan Stanley Mortg. Pass-Through Certificates Litig., 810 F.Supp.2d at 667-68, 2011 WL 4089580 at *16. The Supreme Court in Lampf— which was not a class action—had neither need nor occasion to address whether tolling of this latter type was consistent with the statute of repose. See, e.g., Joseph, 223 F.3d at 1166 ("Lampf . . . [is] not relevant in the present context because the tolling that [the plaintiff] seeks is legal rather than equitable in nature.")
Nor does the language of the statute of repose bar American Pipe tolling, as one court has suggested, see Footbridge, 770 F.Supp.2d at 624. The repose statute speaks in absolute terms. See 15 U.S.C. § 77m ("In no event shall any action be brought . . .,"). But the Securities Act's statute of limitations employs comparable language, see id. ("No action shall be maintained . . ."), and there is no doubt that it is subject to American Pipe. See In re WorldCom, 496 F.3d at 254. Indeed, the statute of limitations at issue in American Pipe was more emphatically absolute, providing that "any action to enforce any cause of action [under the antitrust laws] shall be forever barred unless commenced" within the limitations period, 15 U.S.C. §§ 15b, 16(b). See American Pipe, 414 U.S. at 560-61, 94 S.Ct. 756. As the Supreme Court there explained, "the mere fact that a federal statute providing for substantive liability also sets a time limitation upon the institution of suit" does not preclude tolling "under certain circumstances
Because tolling the statute of repose would serve the purposes of Rule 23 and would not contravene the purposes of the statute of repose, the Court concludes that American Pipe tolling is available in this case. Accordingly, the statute of repose does not bar claims in these suits.
In conclusion, the Court grants defendants' motion to dismiss plaintiffs' Securities Act pre-consolidation SIV claims and plaintiffs' ARS claims. Defendants' motion is denied in all other respects relating to the Securities Act.
Plaintiffs bring causes of action pursuant to Sections 10(b), 18, and 20(a) of the Exchange Act. The Court considers each in turn.
To state a claim pursuant to Section 10(b) and its implementing regulation, Rule 10b-5, "a plaintiff must allege that, in connection with the purchase or sale of securities, the defendant made material misstatements or omissions of material fact, with scienter, and that the plaintiff's reliance on the defendant's actions caused injury to the plaintiff." Slayton v. American Exp. Co., 604 F.3d 758, 765 (2d Cir.2010). The complaint must "state with particularity sufficient facts" to support allegations that a given statement or omission was misleading. Novak v. Kasaks, 216 F.3d 300, 312 (2d Cir.2000); see 15 U.S.C. § 78u-4(b)(1). Scienter must also be pled with particularized facts, and those facts must give rise to an "inference of scienter [that is] cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).
With two exceptions, the parties agree that the Court's disposition of claims concerning collateralized debt obligations ("CDOs") in Securities controls this case. In Securities, the Court sustained CDO-related Section 10(b) claims against defendants Citigroup and Crittenden for the period of February 2007 to April 2008, and against defendants Prince, Druskin, Maheras, and Klein for the period February 2007 through November 3, 2007.
Plaintiffs allege that CDO write-downs Citigroup announced on April 18, 2008 were insufficient because "Citi had written down its CDO portfolio by just under half, while the relevant [ABX and TABX] indices had lost nearly all their value by early 2008." (IFM Compl. ¶ 357.) Defendants seek dismissal of this claim, which appears to be the only specific CDO-related statement identified in the April 2008 period or after.
Arthur Tildesley headed Citigroup's Investor Relations department from 2004 to February 2008. (Id. ¶ 67.) Defendants argue that plaintiffs have not adequately pled scienter for Tildesley. The Court disagrees. The complaint alleges that in the spring, summer, and fall of 2007, Tildesley received specific information indicating that Citigroup had billions of dollars in undisclosed subprime CDO exposures. (Id. ¶¶ 597-98, 602, 604.) These allegations are sufficient to raise a strong inference of recklessness. See Novak, 216 F.3d at 308. These allegations, however, only pertain to the February 2007 through November 3, 2007 period; there are no allegations that could give rise to a strong inference of scienter for defendant Tildesley on or after November 4, 2007. Accordingly, the Court finds that plaintiffs have stated a Section 10(b) claim against Tildesley for CDO-related statements between February 2007 and November 3, 2007 only. Claims against Tildesley for other time periods are dismissed.
In Securities, the Court dismissed Alt-A RMBS claims for failure to allege an actionable misrepresentation or omission. See 753 F.Supp.2d at 242. Plaintiffs concede that their allegations of Alt-A RMBS misrepresentations or omissions are materially identical to the corresponding allegations in Securities. (Ex. B to Decl. of Susanna M. Buergel ("Buergel Decl.") dated Feb. 4, 2011.) Accordingly, for the reasons set forth in the Securities opinion, the Court dismisses plaintiffs' Section 10(b) claims regarding Alt-A RMBS.
In Securities, the Court dismissed ARS claims for failure to allege an actionable omission and for failure to plead scienter. See 753 F.Supp.2d at 245-46. Plaintiffs here concede that their allegations of scienter are identical to the corresponding allegations in Securities. (Ex. B to Buergel Decl.) Accordingly, as set forth in the Securities opinion, the Court dismisses plaintiffs' Section 10(b) claims regarding ARS for failure to plead scienter. For the reasons set forth in Section II.A.1.b, supra, the Court also dismisses these claims for failure to plead an actionable omission.
Plaintiffs do not contest dismissal of the mortgage lending and loan loss reserve claims concerning statements or omissions predating June 2006. (Ex. B to Buergel Decl.) They do pursue claims that, in June 2006 and after, Citigroup officials misrepresented the quality of the mortgages Citigroup underwrote or held and that Citigroup understated its loan loss reserves in violation of Generally Accepted Accounting
The only new scienter allegations concern Richard Bowen's testimony before the Financial Crisis Inquiry Commission. Mr. Bowen is a former Chief Underwriter for Correspondent Lending in Citigroup's Consumer Lending Group. He testified that from June 2006 through 2007 he issued warnings within Citigroup about risk issues concerning alleged lapses in mortgage underwriting standards. (IFM Compl. ¶¶ 626-27.) These alleged warnings lack specifics and are vague in both their content and their timing. As such, they do not constitute particularized allegations of scienter. See In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 352 (S.D.N.Y.2011).
For the reasons set forth in Section II.A.1.a, plaintiffs have failed to plead an actionable misstatement or omission in connection with Citigroup's nonconsolidation of its SIVs prior to December 14, 2007. Accordingly, the corresponding Section 10(b) claims are dismissed.
Plaintiffs allege that Citigroup misrepresented the credit quality of its SIV assets when, in a December 2007 press release, it stated that "[g]iven the high credit quality of the SIV assets, Citi's credit exposure under its commitment [to provide liquidity for the SIVs] is substantially limited." (IFM Compl. ¶ 233.) This statement was supposedly false because the SIVs were invested in subprime backed assets. (Id. ¶ 350.) The complaint, however, fails to establish what portion of the SIV assets, if any, were U.S. subprime-based securities. (IFM Compl. ¶¶ 3, 131, 230, 350.) Plaintiffs' allegation that there was some unspecified amount of credit exposure in the form of subprime assets does not establish that Citigroup's statement was false with the particularity required in a Section 10(b) action.
Citigroup also allegedly misrepresented the value of the SIVs' assets when it reported in February 2008 that the "consolidation of the SIVs onto the Company's balance sheet had resulted in an increase of Citi's asset base of $59 billion." (Id. ¶ 234.) To establish falsity, plaintiffs allege that
(Id.) This is hindsight pleading that does not state a claim. See Securities, 753 F.Supp.2d at 246.
In Securities, the Court dismissed as puffery certain statements that CEO Vikram
Plaintiffs allege that Citigroup repeatedly overvalued its assets in financial filings for the years 2006, 2007, and 2008. (IFM Compl. ¶ 278.) In their opposition to the motion to dismiss, plaintiffs argue that their success in stating a claim concerning CDO valuation means that they necessarily stated a claim with respect to Citigroup's overall asset valuation. The complaint, however, concerns Citigroup's "total assets," (id.), including the valuation of "subprime related direct exposures, monoline credit value adjustments, highly leveraged finance commitments, AltA mortgages, ARS, commercial real estate, and SIVs," (id. ¶ 282). Plaintiffs have not adequately pled falsity or scienter with respect to the valuation of this array of assets. Because plaintiffs may not rely on viable CDO claims to state claims concerning the valuation of these myriad assets, the total asset valuation claims are dismissed.
Plaintiffs allege that Citigroup misstated its Tier 1 capital ratio from 2006 through the third quarter in 2008 because that ratio was calculated in reliance on overvalued subprime-related assets, understated loan loss reserves, and misleading "Repo 105" transactions. (Id. ¶¶ 313, 315.) These claims are dismissed for failure to plead scienter. Plaintiffs have not submitted particularized allegations of scienter with respect to the loan loss reserves or Repo 105 transactions. And, as with asset valuation, viable claims with respect to CDOs cannot sustain the substantively and temporally broader claims concerning capital adequacy.
The complaint can be construed to assert Section 10(b) causes of action in connection with securities purchased in European offerings. Defendants contend correctly, and without any objection from plaintiffs, that Morrison v. Nat'l Australia Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869, 2884, 177 L.Ed.2d 535 (2010), precludes Section 10(b) claims in relation to securities purchased in European offerings. Accordingly, any Section 10(b) claims that relate to securities purchased in European offerings are hereby dismissed.
Plaintiffs assert claims pursuant to Section 18 of the Exchange Act for alleged misstatements and omissions contained in Citigroup's 2006 Form 10-K and the 2007 Form 10-K. (IFM Compl. ¶ 496.) The Section 18 cause of action requires plaintiffs to plead "that (1) a false or misleading statement was contained in a document filed pursuant to the Exchange Act (or any rule or regulation thereunder); (2) defendant made or caused to be made the false or misleading statement; (3) plaintiff relied on the false statement; and (4) the reliance caused loss to the plaintiff." In re Alstom SA, 406 F.Supp.2d 433, 478 (S.D.N.Y.2005). In particular, plaintiffs must allege actual reliance, i.e. "that they actually read and relied on the filed document. Constructive reliance is not sufficient." Id. at 479; see In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 283 (3d Cir.2006) (citing Heit v. Weitzen, 402 F.2d 909, 916 (2d Cir.1968)); Ross v. A.H. Robins Co., Inc., 607 F.2d 545, 552 (2d Cir.1979).
Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), creates a cause of action against defendants alleged to have been "control persons" of those who violate the Exchange Act. "To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir.2007). Plaintiffs assert control person claims against defendants Prince, Pandit, Crittenden, Gerspach, Druskin, Maheras, Klein, and Tildesley.
Plaintiffs have stated primary violations of the Exchange Act relating to statements concerning Citigroup's CDO holdings over the February 2007 to April 2008 period. For the period of February 2007 through November 3, 2007, plaintiffs have adequately pled scienter for defendants Prince, Crittenden, Druskin, Maheras, Klein, and Tildesley. It follows that plaintiffs' have pled culpable participation for these defendants for that period of time. Securities, 753 F.Supp.2d at 249. With respect to defendant Crittenden, plaintiffs have adequately pled scienter, and thereby culpable participation, for the period from February 2007 to April 2008. Control person claims against these defendants corresponding to the relevant time periods may proceed.
Though plaintiffs assert in their opposition that they have pled culpable participation as to defendants Pandit and Gerspach, they do not specify how and they previously conceded that they had not, (Ex. B to Buergel Decl.). Accordingly, the CDO-related control person claims against these defendants are dismissed.
The other control person claims—which rely on the remaining Section 10(b) claims and the Section 18 claims as underlying violations—are dismissed for failure to plead a primary violation of the Exchange Act.
Plaintiffs assert claims of fraud under New York common law. "The elements of common-law fraud are a representation of a material fact, falsity,
They have not done so. Like their Section 18 reliance allegation, plaintiffs' reliance allegation in the context of their fraud claim, (IFM Compl. ¶ 683), is too conclusory to state a claim to relief. Plaintiffs' claims of common law fraud are therefore dismissed.
Plaintiffs also assert a conspiracy to commit fraud. (Id. ¶ 682.) Since plaintiffs have failed to plead fraud, their conspiracy claim necessarily fails. See, e.g., Cohen v. Stevanovich, 722 F.Supp.2d 416, 437 (S.D.N.Y.2010). Conspiracy also requires "a corrupt agreement between two or more parties," Fezzani v. Bear, Stearns & Co. Inc., 592 F.Supp.2d 410, 429 (S.D.N.Y.2008), which plaintiffs have not pled. Their attempt to meet this element relies on allegations that certain defendants attended meetings together where CDO exposure was discussed. (IFM Compl. ¶¶ 566, 597-600, 604.) This joint attendance at company meetings does not plausibly suggest the existence of a corrupt agreement. See de Atucha v. Hunt, 128 F.R.D. 187, 190 (S.D.N.Y.1989). What it suggests is merely that corporate managers meet regularly to discuss corporate business.
Norges Bank asserts that defendants Citigroup, Citigroup Capital XXI, and Citigroup Global Markets are guilty of negligent misrepresentation. (Norges Compl. ¶¶ 480-87.) "A claim for negligent misrepresentation can only stand where there is a special relationship of trust or confidence, which creates a duty for one party to impart correct information to another, the information given was false, and there was reasonable reliance upon the information given." Hudson River Club v. Consolidated Edison Co. of New York, Inc., 275 A.D.2d 218, 220, 712 N.Y.S.2d 104 (1st Dep't 2000).
Norges Bank has failed to plead reliance adequately (see, e.g., Norges
In connection with Citigroup securities purchased in European offerings, plaintiffs bring causes of action pursuant to the United Kingdom's Misrepresentation Act of 1967 and the U.K.'s common law of deceit. Both claims require plaintiffs to plead reliance. See Raiffeisen Zentralbank Osterreich AG v. Royal Bank of Scotland, [2010] EWHC (Comm) 1392[153]; Lindsey v. O'Loughnane, [2010] EWHC (QB) 529[86]. As discussed supra, plaintiffs have not pled actual reliance. Plaintiffs nevertheless again try to avail themselves of a presumption of reliance, again to no avail. They argue that reliance can be "inferred" for the purposes of their U.K. claims "if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract." Spice Girls v. Aprilia World Serv. BV, [2002] EWCA (Civ) 15[70]. Beyond stating this legal principle, however, plaintiffs do not establish why an inference of reliance is appropriate in this case. The cases they cite involve direct contractual negotiations between parties, see, e.g., id.; Dadourian Grp. Int'l, Inc. v. Simms, [2009] EWCA (Civ) 169, not impersonal purchases of securities on an open market. The Court will not infer reliance solely on the basis of these inapposite cases. Accordingly, plaintiffs Misrepresentation Act claims and deceit claims are dismissed.
Plaintiffs' final cause of action is brought pursuant to Section 90 of the U.K. Financial Services and Markets Act of 2000. The parties have conceded for purposes of the present motion that the Section 90 claims are viable to the same extent as plaintiffs' claims pursuant to Section 12(a)(2) of the Securities Act. (See Defs.' Mem. at 39; Pls.' Opp. at 43.) Accordingly, the Court dismisses the Section 90 pre-consolidation SIV claims and ARS claims; the remaining Section 90 claims will go forward.
For the reasons set forth, defendants' motion to dismiss is granted in part and denied in part. The New York common law claims and the U.K. Misrepresentation Act and deceit claims are dismissed. With respect to the Securities Act and U.K. Financial Services and Markets Act claims, the motion is granted for plaintiffs' pre-consolidation SN claims and plaintiffs'
SO ORDERED.
The Challenged Securities are described in the complaints as follows:
--------------------------------------------------------------------------------------------Security ISIN Issue Date -------------------------------------------------------------------------------------------- Depositar Shares representing a 1/25th interest in a share US172967ER86 Apr. 28, 2008 of 8.4% fixed rate/floating rate Non-Cumulative Preferred E Stock Series E (IFM Compl. ¶¶ 72(ii), 87) -------------------------------------------------------------------------------------------- 6.875% Notes Due 2038 US172967EP21 Mar. 5, 2008 (IFM Compl ¶¶ 72(xxiii), 85) -------------------------------------------------------------------------------------------- 5.5% Notes Due 2013 US17296EQ04 Apr. 11, 2008 (IFM Compl. ¶¶ 72(xxiv), 86) -------------------------------------------------------------------------------------------- 6.125% notes Due 2018 US172967ES69 Ma 19, 2008 (IFM Compl. ¶¶ 72(xxv), 88) -------------------------------------------------------------------------------------------- 6.5% Notes Due 2013 US172967EU16 Aug. 19, 2008 (IFM Compl. ¶¶ 72(xxvi), 89) -------------------------------------------------------------------------------------------- 8.3% Enhanced Trust Preferred Securities US17094AA18 Dec. 21, 2007 (Norges Compl. ¶¶ 59(ii), 68) --------------------------------------------------------------------------------------------
The putative class action of Minneapolis Firefighters Relief Association et al. v. Rosen et al., No. 08 Civ. 10353, asserted claims on behalf of purchasers of the same Citigroup securities as follows:
---------------------------------------------------------------------------------------Security CUSIP * Issue Date ---------------------------------------------------------------------------------------- Depositary Shares Each representation a 1/25th Interest 172967ER8 Apr. 28, 2008 in a share of 8.40% fixed Rate/Floating Rate Non-Cumulative Preferred Stock Series E (Minn. Compl. at 29) --------------------------------------------------------------------------------------- 6.875% Notes due 2038 172967EP2 Mar. 5, 2008 (Minn. Compl. at 29) --------------------------------------------------------------------------------------- 5.5% Notes due 2013 17296EQ0 Apr. 11, 2008 (Minn. Compl. at 29) --------------------------------------------------------------------------------------- 6.125% Notes due 2018 172967ES6 May 12, 2008 (Minn. Compl. at 29) --------------------------------------------------------------------------------------- 6.500% Notes due 2013 172967EU1 Aug. 19, 2008 (Minn. Compl. at 29) --------------------------------------------------------------------------------------- Citigroup Capital XXI 8.300% Enhanced Trust Preferred 173094AA1 Dec. 21, 2007 Securities (Minn. Compl. at 31) ---------------------------------------------------------------------------------------
