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HERSHFANG v. CITICORP

June 24, 1991

STANLEY HERSHFANG, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
CITICORP, JOHN S. REED AND THOMAS JONES, DEFENDANT.



The opinion of the court was delivered by: Mukasey, District Judge.

OPINION AND ORDER

Plaintiff Hershfang, on behalf of a purported class of similarly situated shareholders, claims that newspaper reports and dividend announcements were part of a scheme devised by defendants Citicorp, John S. Reed, Citicorp's Chairman, and Thomas Jones, Citicorp's Executive Vice President, to inflate the price of Citicorp stock, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Rule 10b-5, 17 C.F.R. § 240.-10b-5 (1990). Defendants move to dismiss the complaint under Fed.R.Civ.P. 9(b) and 12(b)(6), for failure to plead fraud with particularity and to state a claim. Because the present complaint does nothing more than allege what Judge Friendly once called "fraud by hindsight," defendants' motion is granted.

I.

The following rendition is based entirely on the complaint, whose fact allegations must be accepted as true in connection with a motion to dismiss. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir. 1986). As will be seen, the allegations consist of little more than unremarkable facts and excerpts from newspaper articles.

On March 19, 1990, Reed met with securities analysts, and cautioned that the then-current real estate slump could have an effect on the bank, but reassured the analysts by telling them that Citicorp expected to implement "a customary dividend increase" in the 8% to 10% range. Complaint ¶ 19. In response to this announcement, Richard Bove, an analyst at Dean Witter Reynolds, Inc., commented that he was particularly encouraged by the planned dividend increase because "regulators wouldn't let them increase if they were in big trouble." Id.

On April 17, 1990, at the bank's annual meeting, Reed again expressed pessimism about the real estate market and its possible effect on earnings, but confirmed his earlier statement to the securities analysts by announcing that Citicorp was increasing its annual dividend by 10% from $1.62 to $1.78 per share. Complaint ¶ 19. The next day, USA Today reported that "Reed's gloomy pronouncement about real estate and the bank company's weak earnings report didn't seem to phase Citicorp's directors. They voted Tuesday to raise the firm's dividend to an annual rate of $1.78, up 10% from the previous rate of $1.62." Complaint ¶ 21. Similarly, The Wall Street Journal reported that Citicorp was "signaling that the Company expects its operations to remain healthy" by boosting its dividend. Complaint ¶ 22.

On June 21, 1990, in an article partially titled "Citicorp's Chief Comes Under Fire as Earnings Remain Disappointing," The Wall Street Journal reported that "[r]ather than knuckle under to calls for greater reserves and more emphasis on short-term profits, Mr. Reed takes a damn-the-torpedoes attitude . . . he insists that reserves are adequate and that capital will be replenished through asset sales and retained earnings. New shares will be issued only for a major acquisition, he adds." The article further stated that "[I]n April, Mr. Reed's bravado surfaced again. Citicorp thumbed its nose at critics by announcing a 9.9% increase in the dividend at the same time its write-offs of bad loans soared 79% and first-quarter earnings plunged 56%." Complaint ¶ 23 (brackets and ellipses in complaint).

On July 17, 1990, Citicorp reported net income of $248 million for the second quarter of 1990, compared with $231 million for the first quarter of 1990 and $395 million for the second quarter of 1989. Also, consistent with the decision taken at the annual meeting in April, the Board of Directors declared a quarterly dividend of $0.445 per share. Complaint ¶ 24.

On September 22, 1990, in an article discussing possible dividend cuts by major companies, The Dallas Morning News reported that "Citicorp, the nation's largest banking group, said it was in no such trouble. `Will we have losses resulting from large provisions in the third and fourth quarters? No,' said a Citicorp spokesman. `No dividend cut is planned.'" Complaint ¶ 25. On September 24, 1990, The Wall Street Journal quoted Michael A. Callen, an executive in charge of Citibank's wholesale banking division, as saying "no one around here is talking about a dividend cut" and that "I don't think we will have change in the pattern of reserving and write-offs that's in place; I think we've got a hold on it." Complaint ¶ 26. On September 25, 1990, the American Banker similarly reported that "a spokesman for Citicorp said `there's been no talk about a dividend cut.'" Complaint ¶ 27.

On October 16, 1990, Citicorp announced that its profits for the third quarter of 1990 had fallen 38% from the level reported in the third quarter of 1989 and 10% from the level reported in the second quarter of 1990 to $221 million. Complaint ¶ 28. On October 23, 1990, The Wall Street Journal, in an article discussing a meeting between Citicorp executives and securities analysts, reported that:

  "with pens poised on note pads, more than 150
  analysts hung on every word Citicorp's Chief
  Financial Officer Thomas Jones had to say about
  problem loans, dividends and earnings last
  Wednesday . . . Mr. Jones appeared Wednesday to be
  measuring his words carefully when he said `I
  personally doubt' Citicorp would cut its dividend.
  After the meeting, he also responded to rumors
  about layoffs in the consumer banking sector,
  which has 72,000 employees. He said the number of
  employees there is likely to remain `stable to
  slightly down. I can assure you that there are not
  going to be a lot of firings'."

Complaint ¶ 29 (ellipses in complaint).

On December 7, 1990, The Wall Street Journal reported that at a Goldman, Sachs & Co. banking conference, Reed

  "confirmed that the nation's largest banking
  company is seeking to raise new capital through a
  private placement. Mr. Reed didn't specify the
  amount or type of the hoped-for private placement,
  but argued that any resulting dilution for current
  shareholders would be preferable to a dividend cut
  on common shares. According to a report yesterday
  by Goldman Sachs, Mr. Reed told the ...

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