AHW Investment Partnership, MFS, Inc. v. Citigroup Inc.
661 F. App'x 2
2d Cir.2016Background
- Plaintiffs are a corporation, a partnership, and seven grantor-retained annuity trusts controlled by Angela and Arthur Williams who held large blocks of Citigroup stock.
- Plaintiffs alleged that between May 2007 and March 2009 Citigroup and senior officers made fraudulent and negligent misrepresentations about Citigroup’s financial condition, inducing plaintiffs to hold (not sell) shares and causing over $800 million in losses.
- Defendants moved to dismiss for failure to state a claim; district court dismissed the complaint. Plaintiffs appealed; defendants cross‑appealed arguing the claims were derivative, not direct.
- The Second Circuit certified the direct-vs-derivative issue to the Delaware Supreme Court, which held the claims are direct (only shareholders can bring them).
- The Second Circuit then addressed choice-of-law (New York v. Florida) and whether plaintiffs’ fraud and negligent‑misrepresentation allegations state viable claims under the applicable law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the claims are direct or derivative | Claims are direct holder claims brought by shareholders | Claims should be dismissed as derivative and asserted on behalf of Citigroup | Delaware Supreme Court: claims are direct; only holders can assert them (certified to Delaware) |
| Choice of law: which state’s rules govern damages for fraud and negligent misrepresentation | Florida law applies (permits benefit-of-the-bargain damages) | New York law applies (Citigroup HQ and alleged misrepresentations occurred in NY) | New York law governs because the contested rules are conduct-regulating and the wrongful conduct occurred in NY |
| Viability of holder fraud claim seeking lost profits (use of a "fraud-free" price) | Plaintiffs can recover lost profit by using expert’s hypothetical fraud-free price for May 2007 | NY’s out-of-pocket rule bars speculative lost-profit holder claims | Dismissed: NY out-of-pocket rule bars recovery for the hypothetical market exchange; claim too speculative per Starr Foundation |
| Negligent misrepresentation: requirement of a special relationship | Plaintiffs sought to proceed without alleging a special/fiduciary relationship | Defendants: NY law requires a special relationship for negligent misrepresentation liability | Plaintiffs conceded they lack the necessary special relationship; negligent misrepresentation claim fails |
Key Cases Cited
- AHW Investment Partnership v. Citigroup Inc., 806 F.3d 695 (2d Cir. 2015) (Second Circuit certified derivative/direct issue to Delaware Supreme Court)
- Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 739 F.3d 45 (2d Cir. 2014) (where conflicting conduct-regulating laws exist, place of wrongful conduct generally governs)
- Padula v. Lilarn Props. Corp., 84 N.Y.2d 519 (N.Y. 1994) (distinguishes conduct-regulating from loss-allocating choice-of-law rules)
- Cooney v. Osgood Mach., Inc., 81 N.Y.2d 66 (N.Y. 1993) (place of tort governs conduct-regulating rules)
- Starr Foundation v. American Int’l Grp., Inc., 901 N.Y.S.2d 246 (N.Y. App. Div.) (New York’s out-of-pocket damages rule bars speculative holder claims seeking hypothetical sale value)
- Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (N.Y. 1996) (injury is an element of fraud claim and damages rules define cognizable injury)