The opinion of the court was delivered by: Owen, District Judge:
This action brought by a Citicorp shareholder on behalf of a
purported class of similarly situated shareholders attributes,
in general terms, Citicorp's recent financial
losses to securities fraud on the part of Citicorp, its
officers and directors.*fn1 Defendants deny any wrongdoing and
move to dismiss the amended complaint for failure to state a
claim under the provisions of the federal securities laws sued
upon.*fn2 For the reasons set forth below, I agree and,
accordingly, the motion is granted and the action is dismissed.
As sometimes happens when an industry encounters financial
problems, this is not the only case of its kind pending against
a major bank, and it also is not the only case of its kind that
Citicorp/Citibank is now defending. A number of these
complaints have been dismissed for a reason common to them all:
the claims in essence try to penalize banking institutions "for
failing to show 'greater clairvoyance.'" Hershfang v. Citicorp,
767 F. Supp. 1251, 1259 (S.D.N.Y. 1991). See also Shields v.
Amoskeag Bank Shares, Inc., 766 F. Supp. 32 (D.N.H. 1991); In re
First Chicago Corp. Securities Litigation, 769 F. Supp. 1444
(N.D.Ill. 1991). Plaintiff's amended complaint, while on first
reading sounds as if it were more, on subsequent readings I
conclude it suffers from the same defect.
The amended complaint alleges that defendants improperly
managed Citicorp and Citibank, primarily by failing to
establish adequate reserves for loan losses while at the same
time making additional loans of a high-risk nature. This being
so, it is next alleged that the representations to shareholders
and to the investing public that the loan reserves were
adequate and that the company in general was financially stable
were false and misleading.*fn3 Well-pleaded allegations must
be accepted as true for purposes of a motion such as this.
Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986). Unsupported
conclusory allegations, however, need not.
In any event, the claim that the defendants did not plan
their loan reserves properly is essentially a claim that
defendants mismanaged the company. Even if well-pled,
allegations of mismanagement are not actionable under section
10(b) of the federal securities laws. Santa Fe Industries, Inc.
v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292, 1302, 51 L.Ed.2d
480 (1977). See also Decker v. Massey-Ferguson, Ltd.,
681 F.2d 111, 115 (2d Cir. 1982). Addressing attempts to use disclosure
obligations to "federalize" wrongs that would otherwise only be
actionable under state law, the Second Circuit recently stated
that facts requiring a court "to distinguish between conduct
that is `reasonable' and `unreasonable,' or `informed' and
`uninformed,' [involve] distinctions that are the hallmark of
state fiduciary law," and therefore "allegations of
garden-variety mismanagement" are not actionable under section
10(b). Field v. Trump, 850 F.2d 938, 948 (2d Cir. 1988), cert.
denied, 489 U.S. 1012, 109 S.Ct. 1122, 103 L.Ed.2d 185 (1989).
See also Naye v. Boyd [1986 Transfer Binder] Fed.Sec.L.Rep.
(CCH) ¶ 92,979, at 94,808, 1986 WL 198 (W.D.Wash. Oct. 20,
(inquiry into "the adequacy of the loan loss would require the
court to evaluate [defendant's] business judgment to determine
whether [defendant] did indeed engage in imprudent banking
practices. This sort of inquiry . . . is precisely what the
[Supreme Court's] ruling in Santa Fe sought to avoid"); Shields
v. Amoskeag Bank Shares, Inc., 766 F. Supp. 32, 36-38 (D.N.H.
1991); In re First Chicago Corp. Securities Litigation,
769 F. Supp. 1444, 1448 (N.D.Ill. 1991).
Count One also alleges that certain "facts" set forth in the
quarterly and annual reports that are the subject of Count One
constituted material misrepresentations in violation of Rule
10b-5. Statements of predictions or opinions such as those
cited in the amended complaint are only actionable if the
speaker "disseminated the forecasts knowing that they were
false or that the method of preparation was so egregious as to
render their dissemination reckless." Estate of Detwiler v.
Offenbecher, 728 F. Supp. 103, 137 (S.D.N.Y. 1989). Decker v.
Massey-Ferguson, Ltd., 681 F.2d 111, 117 (2d Cir. 1982). Upon a
thorough reading of the complaint, there is no basis for such a
conclusion with respect to any statements or projections made
by these defendants. Plaintiff fails to aver any facts which
would give rise to an inference that defendants were aware of
where their decisions were leading, see Stern v. Leucadia,
844 F.2d 997, 1003-4 (2d Cir.), cert. denied, 488 U.S. 852, 109
S.Ct. 137, 102 L.Ed.2d 109 (1988), and it would not be
appropriate to allow this complaint to stand so that the
plaintiff might conduct a fishing expedition to see if there is
a smoking gun.
In this respect I find the case of DiLeo v. Ernst & Young,
901 F.2d 624 (7th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct.
347, 112 L.Ed.2d 312 (1990), to be particularly apt. There,
shareholders of the failed Continental Illinois Bank brought a
§ 10b-5 action against the bank's accountants. The plaintiffs
alleged that the bank's nonperforming loans had increased
regularly in volume over time, as had the reserves established
for such loans, and that the bank and its accountants had known
and failed to disclose that a substantial portion of the bank's
loans were uncollectible. The Court of Appeals, in affirming
the district court's dismissal of the complaint, made the
following observations, which are appropriate here:
The story of this complaint is familiar in
securities litigation. At one time the firm bathes
itself in a favorable light. Later the firm
discloses that things are less rosy. The plaintiff
contends that the difference must be attributable
to fraud. "Must be" is the critical phrase, for
the complaint offers no information other than the
differences between the two statements of the
firm's condition. Because only a fraction of
financial deteriorations reflects fraud,
plaintiffs may not proffer the different financial
statements and rest. Investors must point to some
facts suggesting that the difference is
attributable to fraud. That ingredient is missing
in the DiLeos' complaint. It presents nothing
other than the change in the stated condition of
the firm to suggest that [Ernst & Young] was so
much as negligent in auditing Continental's
financial statements. Rule 9(b) required the
district court to dismiss the complaint, which
discloses none of the circumstances that might
separate fraud from the benefit of hindsight.
There is no "fraud by hindsight," in Judge
Friendly's felicitous phrase, Denny [v. Barber],
576 F.2d  at 470 [2nd Cir.1978], and hindsight
is all the DiLeos' offer.
901 F.2d at 627-28. See also Hershfang v. Citicorp, 767 F. Supp.
at 1257 ("The complaint as a whole alleges simply that
defendants' optimism about Citicorp's prospects turned out
wrong. Missing are any facts or identified circumstances that
would generate an inference of guilty knowledge.").
In addition, I observe with respect to Count Two that
plaintiff lacks standing to assert claims under section 11 and
section 12(2) because the amended complaint fails to allege
that plaintiff purchased any shares pursuant to the
Registration Statement relating to the Dividend Plan. See
Unicorn Field, Inc. v. Cannon Group, Inc., 60 F.R.D. 217, 226
(S.D.N.Y. 1973) (§ 11 "permits recovery only by purchasers of
the shares covered by the defective registration statement or
by those who can trace their purchases directly to such
shares"); Akerman v. Oryx Communications, Inc., 810 F.2d 336,
344 (2d Cir. 1987) (only "the person purchasing such security
from" the seller or offeror has standing to sue under § 12(2)).
Plaintiff was put on notice of this flaw when defendants moved
to dismiss plaintiff's original complaint, see supra note 2,
yet the amended complaint nonetheless does not cure this fatal
Finally, Count Three alleges that all of the defendants
except for Jones violated § 14(a) and Rule 14a-9 of the 1934
Act in connection with proxy statements issued for Citicorp's
1989 and 1990 annual shareholders' meetings. Specifically,
plaintiff alleges that defendants failed to disclose in those
materials that the candidates for the Board of Directors had
engaged in the wrongdoings complained of in Count I and that,
in soliciting the ratification of KMPG Peat Marwick as
Citicorp's auditors, defendants failed to disclose that the
accounting firm was guilty of numerous improprieties. To the
extent that the factual predicate of this cause of action
differs from that of Counts One and Two, I address the
sufficiency of the pleadings separately.
With respect to the allegation that defendants had a duty to
disclose the "utter failure of the [director] defendants to
fulfill their stewardship responsibilities," the law does not
impose a duty to disclose uncharged, unadjudicated wrongdoing
or mismanagement. See United States v. Matthews, 787 F.2d 38
(2d Cir. 1986); GAF Corp. v. Heyman, 724 F.2d 727 (2d Cir.
1983); Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979);
Management Assistance, Inc. v. Edelman, 584 F. Supp. 1021
The same is true regarding Peat Marwick. Plaintiff claims
that the defendants should have disclosed in their proxy
materials "that there were numerous failures in the audit
process," that the directors "did not consider, in light of
these audit failures, alternative auditors," that the
relationship between Peat Marwick and Citicorp "had grown
incestuous over the years," that Peat Marwick was not an
"independent" auditor in fact, and that Peat Marwick "had a
long history of questionable `audits' of corporate entities and
other financial institutions, many of which `audits' preceded
collapses of the companies in question." Disclosure of unproven
allegations of this nature is not required in proxy
information, see GAF Corp. ...