In Re Citigroup Inc. Securities Litigation
753 F. Supp. 2d 206
S.D.N.Y.2010Background
- Plaintiffs are Citigroup shareholders suing Citigroup and fourteen longtime officers/directors for alleged securities fraud under Sections 10(b) and 20(a).
- The consolidated Amended Complaint spans Citigroup’s activities across mortgages, RMBS, CDOs, SIVs, ARS, and leveraged loans/CLOs, asserting misstatements and omissions about risk exposure and asset values.
- Plaintiffs allege Citigroup understated CDO-related risks and overstated asset values, causing investor losses when the truth emerged.
- The case was filed as a 536-page Amended Complaint on February 20, 2009, with 1,265 paragraphs; the court assesses pleading adequacy for Rule 12(b)(6) purposes.
- Defendants moved to dismiss under Rule 12(b)(6), arguing the complaint fails to meet Rule 9(b) and PSLRA heightened pleading standards for securities fraud.
- The court's decision: partial denial as to CDO exposure misstatements (Feb 2007–Apr 2008) and partial grant as to other claims, with many counts dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pre-Nov. 4, 2007 CDO exposure | Citigroup misstated/omitted CDO exposure; failed to disclose billions in holdings and related risks. | Disclosures were not required to detail exact holdings; statements were not misleading given public information. | Plaintiffs stated claims tied to February 2007–November 3, 2007 CDO exposure. |
| Nature of CDO exposure and risk disclosure | Citigroup misled by separating CDO-type transactions from mortgage-related transactions and by claiming limited involvement. | Categorization and disclosures were proper; exposure was not misrepresented. | Misstatements/omissions about the nature and categorization of CDO exposure were pled adequately pre-November 2007. |
| GAAP violations regarding CDOs | Citigroup failed to disclose CDO exposure and to recognize writedowns in accordance with SFAS 107/FSP SOP 94-6-1 and FIN 46(R). | GAAP theories depend on disputed valuation methods; the complaint does not plead culpable intent. | GAAP-based claims concerning CDO exposure and valuation were adequately pled for the Feb 2007–Nov 2007 period. |
| November 4, 2007 and later statements | Citigroup's disclosure of $43B CDO exposure and proposed writedowns omitted $10.5B hedged CDOs and overstated value. | Post-disclosures were based on updated information and market conditions; scienter not adequately pled for all defendants. | Scienter adequately pled for Crittenden and others regarding November 4, 2007 disclosures; some defendants’ claims dismissed. |
| Control person liability | Control defendants aided and abetted the fraud through day-to-day involvement and supervisory culpability. | Some individuals lack sufficient culpable participation; group pleading may apply for insiders. | Control-person claims survive for Prince, Crittenden, Druskin, Maheras, Klein, Bushnell, and Rubin but are dismissed for Krawcheck, Freiberg, Thomson, Gerspach, Volk, and Pandit. |
Key Cases Cited
- Ashcroft v. Iqbal, 129 S. Ct. 1937 (U.S. 2009) (pleading standard; plausibility rather than possibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (heightened pleading standard; plausibility required)
- Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (U.S. 2007) (strong inference of scienter required)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (PLEADING standards for securities fraud; particularity and strong inference)
- In re Initial Public Offering Sec. Litig., 544 F. Supp. 2d 319 (S.D.N.Y. 2008) (loss causation standard; pleading requirements)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (materiality and duty to disclose; standard for omissions)
- In re MBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010) (course of addressing CDO-related claims; pleading standards)