Valentini v. Citigroup, Inc.
2011 U.S. Dist. LEXIS 148263
S.D.N.Y.2011Background
- Valentini is a Brazilian businessman; Windsor is the trust he formed to manage family investments.
- Between Sept 2006 and Sept 2008 Valentini, in his name or for Windsor, bought about two dozen structured notes from CFSC and CPB totaling over $130 million, mostly ELKS tied to ADRs or NYSE stocks.
- Some ELKS carried risk features like knock-in provisions that could convert notes into shares of linked stocks.
- Valentini suffered losses starting in 2007, including two airline stock drops that caused conversion losses when notes knocked in.
- Windsor’s credit needs led Citibank to loan $26 million to Windsor to purchase more notes; Windsor later faced margin calls and accelerated losses during the 2008 crisis.
- In Feb 2011 Plaintiffs filed suit asserting §10(b) of the Exchange Act, IAA claims, and various state-law claims; Defendants moved to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Section 10(b) materiality | Valentini contends misstatements/omissions were material. | Defendants argue warnings in offering documents render misrepresentations immaterial. | Materiality shown for at least some misstatements/omissions. |
| scienter | Plaintiffs allege conscious misbehavior or recklessness by Defendants. | Defendants argue lack of motive and insufficient scienter; only corporate motive alleged. | Strong inference of corporate scienter found for CFSC and CPB; dismissed as to Citigroup and CGMI with leave to amend. |
| Reasonable reliance | No-representations clauses do not fully bar reliance; context factors support reliance. | Clauses and boilerplate negate reasonable reliance. | Reasonable reliance adequately pled; context-based evaluation used instead of plain waiver. |
| Loss causation | Losses linked to misstatements about risk and convertibility. | External market crisis breaks causal chain. | Loss causation plausibly supported; not foreclosed by crisis at motion stage. |
| Time-bar under §1658(b) | Discovery of scienter and related facts occurred after 2009. | Earlier discovery of facts would bar claims. | Not time-barred; storm warnings do not trigger limitations absent discovered facts; plaintiffs arguably learned after Feb 28, 2009. |
| Morrison jurisdictional reach | Transactions may be within §10(b) due to domestic-linked securities or convertibility. | Morrison restricts §10(b) to US purchases or domestic-listed securities. | Transactional reach satisfied for convertible notes linked to domestically traded securities; §10(b) survives dismissal as to at least some notes. |
| IAA claim viability | Defendants breached investment-advisory duties during the engagement. | No investment-adviser contract; broker duties only. | IAA claim dismissed; no contract for advisory services proved. |
| Breach of fiduciary duty (Structured Notes Master vs Initial Purchaser) | Fiduciary duties breached for notes under Master Agreement. | Disclaimers negate fiduciary duties for certain notes. | Disclaimers effective for notes under Initial Purchaser Representations; fiduciary duty claims survive for notes under Structured Notes Master Agreement. |
| Breach of contract | Contract required to specify obligations allegedly breached; broadly alleged. | Lacks specific contract provisions alleged to be breached. | Breach-of-contract claim dismissed with leave to amend. |
| Negligence and negligent misrepresentation | Derives from duty of care and fiduciary-like duties. | Contractual disclaimers bar tort claims; some claims time-bar. | Negligence claims partly dismissed as time-barred; negligent misrepresentation survives for Structured Notes Master Agreement; negligent supervision dismissed with leave to amend. |
| Conversion | CPB liquidated notes and repaid losses; claim for improper conversion. | Liquidation authorized by security agreement. | Conversion claim dismissed. |
| Unjust enrichment | Defendants profited improperly from handling of notes. | Contract governs recovery; no independent duty. | Unjust enrichment claim dismissed. |
Key Cases Cited
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality requires substantial likelihood disclosure would alter total mix)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading must be plausible, not merely speculative)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference standard for scienter)
- Merck & Co. v. Reynolds, 130 S. Ct. 1784 (U.S. 2010) (discovery rule for §1658(b) hinges on scienter facts)
- Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869 (U.S. 2010) (§10(b) reach depends on location of purchase/sale)
- Elliott Assocs. v. Porsche Automobil Holding SE, 759 F. Supp. 2d 469 (S.D.N.Y. 2010) (economic reality approach to 10(b) liability for derivatives linked to domestic shares)
- Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002) (options-equivalent analysis for 10(b) liability)
- City of Pontiac Gen. Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011) (strong inference framework for scienter under PSLRA)
- Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020 (2d Cir. 1993) (diligence and reliance considerations in §10(b) context)
- De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293 (2d Cir. 2002) (fiduciary duties in brokerage relationships)