In a November 9, 2010 order (here) in the Citigroup subprime-related securities suit, Southern District of New York Judge Sidney Stein dismissed a host of allegations and a number of individual defendants. However, Judge Stein denied the motion to dismiss as to plaintiffs’ claims regarding Citigroup’s exposure to its CDO portfolio, which Judge Stein described as the plaintiffs’ "principal" allegations.
Among the defendants who must answer these allegations are seven individual defendants, including former Citigroup CEO Charles Prince and former Citigroup board member (and former Treasury Secretary) Robert Rubin.
As reflected here, plaintiffs first sued Citigroup and certain of its directors and officers in November 2007. In their February 20, 2009 consolidated amended complaint, which named as defendants the company and 14 of its directors and offices, the plaintiffs alleged that the defendants had mislead investors about the company’s financial health and caused them to suffer damages when the truth about Citigroup’s assets were later revealed.
Judge Stein emphasized the length and weight of the amended complaint, noting that it is "536 pages long, contains 1,265 paragraphs, and weights six pounds." The amended complaint alleges that defendants misled investors about its exposure to what Judge Stein described as a "gallimaufry of financial instruments." However, as Judge Stein noted, the plaintiffs’ "principal grievance" is that Citigroup "did not disclose that it held tens of billions of dollars of super-senior tranche CDOs until November 4, 2007," and that even after that date, until April 2008, the company did not disclose the full extent of its exposure.
The basic thrust of the plaintiffs’ CDO-related allegations is that though the company disclosed that it was deeply involved in underwriting CDOs, the company did not disclose that billions of dollars of the CDOs had not been purchased at all but instead had been retained by Citigroup. In November 2007, the company disclosed that it was exposed to super-senior CDO tranches in the amount of $43 billion and that it estimated a write down of $8 to $11 billion of those assets. The plaintiff alleged that this disclosure omitted an additional $10.5 billion worth of holdings that the company had hedged in swap transactions.
In his November 9 order, Judge Stein found that the plaintiffs had adequately alleged that Citigroup’s CDO valuations were false between February 2007 and October 2007. In concluding that these statements were made with scienter, Judge Stein noted that the plaintiffs’ claims "concern a series of statements denying or diminishing Citigroup’s CDO exposure and the risks associated with it." These statements, Judge Stein found were "inconsistent with the actions Citigroup was allegedly undertaking between February 2007 and October 2007."
Citigroup was, Judge Stein found, "taking significant steps internally to address increasing risk in its CDO exposure but at the same time it was continuing to mislead investors about the significant risk those assets posed. This incongruity between word and deed establishes a strong inference of scienter."
Judge Stein then went on to hold that the plaintiffs allegations of scienter against seven of the individual defendants was insufficiently particularized, but that the allegations against the remaining defendants were sufficient, in part because these individuals attended meetings concerning the company’s CDO exposure during the period in question and in part because they were responsible for the company’s SEC filings, and therefore bear responsibility for the statements under the "group pleading doctrine."
Judge Stein also found that even the company’s disclosures in November 2007 were materially misleading because they omitted to disclose the additional $10.5 of CDO exposure that the company had hedged. However, Judge Stein concluded that the allegations of individual scienter were only sufficient against the company’s CFO at the time, Gary Crittenden.
Judge Stein the concluded that the plaintiffs’ allegations regarding the other financial instruments in the "gallimaufry" of financial assets were insufficient. Judge Stein granted the motion to dismiss the plaintiffs allegations as to all of the financial assets other than the company’s CDO assets.
Though Judge Stein significantly narrowed the plaintiffs allegations and though he dismissed out seven of the 14 individual defendants, substantial portions of plaintiffs’ complaint survived – and more importantly from the plaintiffs’ perspective, what Judge Stein himself described as the plaintiffs’ "principal" allegations substantially survived dismissal, and the plaintiffs managed to keep some of the higher profile defendants in the case as well.
I am sure the plaintiffs in this case would have preferred to keep their other allegations in this case, but with the remaining allegations, the plaintiffs still have a substantial basis on which to proceed. As I have often noted on this blog, the name of the game for the plaintiffs is to survive dismissal and to try to move on to the settlement phase. Of course the defendants may well take a different view, and where this case may ultimate wind up remains to be seen.
In the meantime, I do think it is interesting to note that pretty much all of the mega subprime cases – AIG, Countrywide, Fannie Mae, Washington Mutual, New Century Financial – seem to have survived the initial pleading stage, in whole or in part. Thus while there has been considerable discussion (among other places, on this blog) about whether or not the plaintiffs are fairing poorly in the subprime lawsuit dismissal motions, it definitely seems that in the high profile cases, the plaintiffs claims are managing to survive.
As noted here, Judge Stein has previously denied in part the motions to dismiss in the separate subprime-related Citigroup bondholders’ action.
I have in any event added the Judge Stein’s ruling in the Citigroup case to my running tally of subprime and credit crisis-related dismissal motion rulings, which can be accessed here.
Special thanks to a loyal reader for providing me with a copy of the Citigroup ruling.
The Latest on the BankAtlantic Securities Class Action Trial: While the rest of us have been going about our daily business, the BankAtlantic Securities Class Action trial has been going forward in federal court in Miami. Now, according to a reliable source, after four weeks of trial, 13 fact witnesses and a damages expert, the lawyers are going to begin delivering their summations today. The case could be going to the jury shortly. The verdict form weighs in at a hefty 53 pages. Stay tuned, we could have a rare securities class action jury trial verdict just ahead.
The News from San Antonio: I have arrived in San Antonio for the PLUS International Conference, where I have noticed among other things that the winner of the PLUS1 Award at this year’s conferfence will be my good friend and former law partner Gary Dixon of the Troutman Sanders firm. The PLUS1 award is given annually to the person "whose efforts have contributed to the advancement and image of the professional liability industry." No one deserves this award more than Gary, who is one of the lions of our industry. My congratulations to Gary. If you are at the conference this week, I hope you will plan on attending the award ceremony at lunch on Thursday to help congratulate Gary for this honor.