On July 12, 2010, in one of the more high-profile investor
actions filed as part of the subprime securities litigation wave, Southern
District of New York Judge Sidney
Stein substantially denied in part the defendants' motions to dismiss in
the Citigroup Bond Litigation. A copy of the opinion can be found here.
As detailed in greater detail here,
Citigroup bondholders first filed their suits in September 2008 in connection
with 48 different Citigroup bond offerings in which Citigroup raised over $71
billion between May 2006 and August 2008. (The first of these cases was filed
in New York state court but later removed to federal court.) The defendants
include the company itself and related corporate entities, as well 28 current
or former Citigroup directors and officers and nearly eighty investment banks
that served as offering underwriters in the bond offerings.
The plaintiffs, who purchased bonds in some of the
offerings, alleged that the defendants had violated sections 11, 12 and 15 of
the Securities Act of 1933 by failed to truthfully and fully disclose in the
bond offering documents information concerning the company's exposure to "toxic
Specifically, the plaintiffs alleged that Citigroup had
failed to disclose Citigroup's exposure to $66 billion worth of CDOs backed by
subprime mortgage assets; Citigroup's exposure to $100 billion in structured
investment vehicles backed by subprime mortgage assets; that Citigroup
"materially understated reserves" held for residential loan losses;
Citigroup's exposure to $11 billion of auction rate securities; that as result
of these exposures, Citigroup was not, contrary to its representations,
"well capitalized" and in fact required a massive government bailout.
In his July 12 order, Judge Stein first held that the
plaintiffs had standing to assert claims in connection with all of the 48
offerings, even though plaintiffs had not purchased bonds in all offerings.
Because the offerings were based common shelf registration document containing
at least some common information, he found that the plaintiffs have standing to
assert claims common to all purchasers.
But while he found that the plaintiffs has standing to
assert Section 11 claims, he granted the defendants' motions to dismiss the
plaintiffs' Section 12 for lack of standing, based on the insufficiency of
plaintiffs' allegations about whom the plaintiffs bought their investments
The centerpiece of the defendants' dismissal motions was
their argument that the plaintiffs had failed to allege any actionable
misstatement or omission. Judge Stein found that that the plaintiffs' had
adequately alleged misrepresentation or omission as to Citigroup's CDO
exposure; with respect to plaintiffs' allegations about Citigroup's SIV
exposure, at least with respect to statements made after those exposures were
consolidated on Citigroup's balance sheet; plaintiffs' allegations about the
adequacy of Citigroup's residential mortgage loan loss reserves; with respect
to Citigroup's statements about the adequacy of its capitalization; and with
respect to Citigroup's statements that its financials were GAAP compliant.
However, Judge Stein also found that the plaintiffs had not
sufficiently alleged misrepresentation or omission in connection with their
allegations concerning Citigroup's SIV exposure, at least those made prior to
the consolidation of the SIV assets onto Citigroup's financial statements; and
about Citigroup's exposure to auction rate securities.
Thus while a portion of plaintiffs' claims did not survive
defendants' dismissal motions, a substantial portion of plaintiffs' case will
be going forward.
Both because of Citigroup's prominence and because of the
sheer magnitude of dollars involved in this case, this is a high profile
decision. Though there is definitely a school of thought that defendants are faring better on the subprime securities cases
in general, the plaintiffs are still managing to get some cases past the
initial pleading hurdles, particularly in many of the highest profile cases
(e.g., Countrywide, New Century, Washington Mutual, etc.).
In addition, Judge Stein's decision in the Citigroup
Bondholders case is the latest of several recent rulings in subprime related
securities cases in the Southern District of New York that have favored the
plaintiffs, including the recent decisions in the Ambac Financial subprime
related case (about which refer here) and in the CIT Group subprime related securities case
(about which refer here).
I have in any event added the July 12 decision in the
Citigroup Bondholders' suit to my running tally of subprime related securities
class action lawsuit dismissal motion ruling, which can be accessed here.
Andrew Longstreth's July 12, 2010 Am Law Litigation Daily
article about the decision can be found here. A July 12, 2010 Bloomberg article about the decision can
be found here.
Special thanks to a loyal reader for providing a copy of the
Read other items of
interest from the world of directors & officers liability, with occasional
commentary, at the D&O
Diary, a blog by Kevin LaCroix.