In Re Smith Barney Transfer Agent Litigation
2011 U.S. Dist. LEXIS 10977
S.D.N.Y.2011Background
- Lead plaintiff Operating Local 649 Annuity Trust Fund sues Smith Barney Fund Mgmt LLC, Citi GM, Daidone, and Jones alleging securities fraud and fiduciary breaches.
- The court previously dismissed §10(b), §20(a), and §36(b) claims in 2007; the Second Circuit vacated and remanded the §10(b) claims while affirming §36(b) dismissal.
- CAM arranged a transfer agent contract restructuring, proposing to outsource to First Data with a revenue guarantee and profit-sharing; Daidone and Yellin helped evaluate proposals and negotiate terms.
- The 1999 memorandum to fund boards allegedly omitted key terms, including the initial DST option, profits to CAM, and the revenue guarantee; boards approved the revised agreement.
- From 2000–2003, several prospectuses allegedly failed to disclose material terms of the transfer agent arrangement; SEC/DOJ investigated the scheme in 2003–2004.
- Court addresses standing, statute of limitations, and individual defendant liability, and denies extent of discovery stay insofar as necessary.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §10(b) claims must be pursued derivatively. | Plaintiffs argue direct claims since injuries were to investors in the funds, not the funds themselves. | Defendants contend only injury to the funds, suggesting derivative standing. | Direct standing allowed; plaintiffs may pursue direct §10(b) claims. |
| Whether standing extends to funds not owned by the named plaintiffs. | Named plaintiffs’ investments cover some funds; standing may extend by implied injury to plaintiffs’ portfolios. | Plaintiffs lack standing for 102 funds in which they did not invest. | Lacks standing for funds not invested in by named plaintiffs. |
| Whether holders of Smith Barney Funds may sue under §10(b). | Holders disputing misrepresentations should have standing to seek relief. | Section 10(b) private action is limited to purchasers/sellers, not mere holders. | Holders lack standing; claims limited to purchasers/sellers. |
| Whether Jones can be liable under §10(b) given group pleading. | Group pleading may impute statements to Jones due to his insider role and involvement. | Jones lacked direct involvement in day-to-day fund statements; cannot be liable as a group-pleading defendant. | Jones’s §10(b) claim fails; group pleading not applicable to him. |
Key Cases Cited
- ATSI Communications, Inc. v. Shaar Fund Ltd., 493 F.3d 87 (2d Cir. 2007) (standard for considering attached documents and incorporated materials in pleadings)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires strong inference of scienter; not merely plausible)
- In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611 (S.D.N.Y. 2007) (group pleading and director involvement in fraudulent statements)
- SHEEKS v. S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (reckless disregard standard for scienter)
- In re PXRE Grp., Ltd. Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y. 2009) (standard for primary/controlling person liability under §20(a))
- Howard v. Haddad, 916 F.2d 167 (4th Cir. 1990) (standing where investor injuries arise from misrepresentations to investors)
- ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (standing and pleading standards for §10(b) claims)