In re Smith Barney Transfer Agent Litigation
2012 U.S. Dist. LEXIS 115264
S.D.N.Y.2012Background
- Plaintiffs are mutual fund investors in the Smith Barney Funds and alleged a transfer agent scheme involving CTB and First Data.
- Smith Barney and CGMI (Citi Defendants) served as mutual fund adviser entities; Jones was CAM CEO and chair of Citi’s investment management group; Daidone held senior roles and helped prepare disclosures.
- CTB replaced First Data as transfer agent and subcontracted most work to First Data while charging higher fees, generating profits for Citi affiliates.
- Daidone signed SEC filings that allegedly failed to disclose the transfer agent scheme; other Fund officers signed or prepared related disclosures.
- The SEC settlement in 2005 involved Smith Barney and CGMI, and a prior dismissal and remand procedure preceded the filing of the Fourth Consolidated and Amended Complaint in 2012.
- Plaintiffs’ claims proceed as a putative class action addressing securities fraud under §10(b) and §20(a) of the Exchange Act and Rule 10b-5, with the Defendants moving to dismiss under Rule 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Plaintiffs state scheme liability under Rule 10b-5(a) and (c). | Plaintiffs allege Defendants created CTB and used First Data to conceal transfer agent savings. | Defendants argue most claims rely on misstatements and fail under Janus after Stoneridge. | Plaintiffs’ scheme liability claims dismissed for lack of adequate reliance and improper theory. |
| Whether the claims are time-barred by the statute of repose and tolling. | American Pipe tolling should preserve timely claims for putative class members. | Repose bars claims not brought within five years of violation; tolling unclear. | American Pipe tolling applies; claims timely; but other issues remain depending on standing analysis. |
| Whether plaintiffs can rely on presumptions of reliance (Affiliated Ute or fraud-on-the-market). | Plaintiffs rely on implied reliance from fiduciary duties and market impact. | Affiliated Ute and fraud-on-the-market inapplicable; funds did not trade in efficient market. | No reliance presumptions; plaintiff must plead actual reliance; claims fail on scheme theory. |
| Whether Daidone, as a signer, can be liable under Rule 10b-5(b). | Daidone signed misleading fund disclosures. | Janus limits liability to makers who sign or authorize statements. | Daidone liable for statements he signed; unrelated statements not signed by him dismissed. |
| Whether Jones is liable under Section 20(a) as control person. | Jones controlled the deceptive scheme and signatories. | Allegations show only general control status, not actual control over statements. | Count dismissed for lack of actual control over the misleading disclosures; no 20(a) liability. |
Key Cases Cited
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (maker of statements; ultimate authority over content)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 128 (U.S. 2008) (scheme liability requires deceptive acts beyond misstatements)
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (U.S. 1972) (presumption of reliance for nondisclosure in certain contexts)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (fraud-on-the-market presumption framework)
- Pac. International Management Co. v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 2010) (reaffirmed 10b-5 elements (PIMCO))
- In re Pfizer Inc. Sec. Litig., 2012 WL 983548 (S.D.N.Y. 2012) (signer liability under Janus where signer attested to accuracy)
- SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011) (scheme liability limits; proper focus on misrepresentation vs. manipulation)
- In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277 (S.D.N.Y. 2012) (Janus does not shield signatories signing misstatements)
- Haw. Ironworkers’ Annuity Trust Fund v. Cole, No. 3:10 CV 371 (N.D. Ohio 2011) (Janus applied to corporate officers signing statements)
- City of Roseville Emps.’ Ret. Sys. v. EnergySolutions, Inc., 814 F. Supp. 2d 395 (S.D.N.Y. 2011) (corporate officers liable for misstatements they sign)