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In re Smith Barney Transfer Agent Litigation

April 17, 2006

IN RE SMITH BARNEY TRANSFER AGENT LITIGATION


The opinion of the court was delivered by: William H. Pauley III, District Judge

MEMORANDUM AND ORDER

The present application involves the appointment of lead plaintiff and lead counsel in this consolidated putative class action. Plaintiffs assert claims against Defendants Smith Barney Management Limited ("Smith Barney") and Citigroup Global Markets, Inc. ("Citigroup Global Markets") pursuant to, inter alia, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 36 of the Investment Company Act of 1940, 15 U.S.C. § 80a-35. Class members Jeffrey Weber and Operating Engineers Local 649 Annuity Trust Fund (collectively, "Local 649") move for selection as lead plaintiff and for designation of their attorneys, Bernstein Liebhard & Lifshitz, LLP ("Bernstein Liebhard"), as lead counsel. Class members Charles Chiumento, Maurice and Vivaine Benoudiz, Charles Walkiewicz and David F. Zagunis (collectively, the "Chiumento Group") also move for selection as lead plaintiff and for designation of their attorneys, Stull, Stull & Brody ("Stull, Stull") and Weiss & Lurie, as lead counsel. For the reasons set forth below, this Court appoints Local 649 as lead plaintiff and approves Local 649's selection of Bernstein Liebhard as lead counsel.

BACKGROUND

Smith Barney and Citigroup Global Markets are divisions of Citigroup Asset Management, an investment advisor and management services provider. (Amended Complaint in Shropshire v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 7818 (WHP), dated Oct. 10, 2005 (the "Compl.") ¶ 2.) Smith Barney is an investment advisor to the Smith Barney Family of Funds (the "Funds"), which oversees $97 billion in assets. (Compl. ¶¶ 1, 13.) Citigroup Global Markets is responsible for providing the bulk of Smith Barney's administrative services. (Compl. ¶ 14).

Transfer agents provide many of the administrative services required by Smith Barney. A transfer agent is responsible for, inter alia, processing transactions in Fund shares, processing dividend transactions and calculating daily net asset values. (Compl. ¶ 26.) From June 1, 1989 through September 30, 1999, Smith Barney's transfer agent services were outsourced to First Data Investor Services Group ("First Data"), which is not affiliated with Citigroup Asset Management. (Compl. ¶15.) The Smith Barney business was profitable for First Data because of a favorable fee schedule and the low cost of serving the Funds. (Compl. ¶ 27.)

First Data entered into a new contract as of October 1, 1999 to provide transfer agent services for the Funds. (Compl. ¶¶ 59-62, 77.) Under the new arrangement, the primary transfer agent for the Funds was the predecessor to Citicorp Trust Bank ("CTB"), an affiliate of Citigroup Asset Management. (Compl. ¶ 77.) Although responsible for providing all of Smith Barney's transfer agent services, CTB consisted merely of a small customer service call center. (Compl. ¶¶ 77-78.) CTB subcontracted the vast majority of the transfer agent work to First Data. (Compl. ¶ 77.) Pursuant to the subcontract, First Data received significantly lower fees than it had previously charged. (Compl. ¶ 3.) Yet CTB did not pass those discounts on to the Funds. To the contrary, CTB continued to charge the Funds its higher pre-1999 transfer agent fees, thereby earning over $90 million in profits between October 1999 and September 2004. (Compl. ¶¶ 77, 80.)

Defendants are required to advise each Fund's board of directors regarding the retention of transfer agent services. (Compl. ¶ 1.) Plaintiffs contend that Defendants violated their fiduciary duty to the Funds, and misled the investing public, by concealing their scheme to withhold the fee discounts from the Funds. (Compl. ¶¶ 1, 5, 82.)

The purported class period is August 26, 2000 through August 26, 2005. (Compl. ¶ 20.) The only class complaint asserting claims pursuant to the Exchange Act was filed on October 11, 2005 under the caption Shropshire v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 7818 (WHP). The next day, notice of the complaint was published over Business Wire, a national news-wire. On December 12, 2005, both Local 649 and the Chiumento Group moved for selection as lead plaintiff. In addition to the Shropshire case, four complaints containing nearly identical factual assertions were filed in this Court. See Chilton v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 7583 (WHP), Complaint dated Aug. 26, 2005; Ratner v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 8356 (WHP), Complaint dated Sept. 28, 2005; Weber v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 8357 (WHP), Complaint dated Sept. 28, 2005; Brinn v. Smith Barney Fund Mgmt. LLC, No. 05 Civ. 8399 (WHP), Complaint dated Sept. 30, 2005. By Order dated December 28, 2005, this Court consolidated all of these cases pursuant to Fed. R. Civ. P. 42(a).

DISCUSSION

I. Lead Plaintiff

A. Legal Standard

The Private Securities Litigation Reform Act of 1995 ("PSLRA") governs the appointment of a lead plaintiff in actions brought pursuant to the Exchange Act. 15 U.S.C. § 78u-4(a)(3)(B). First, the PSLRA requires the plaintiff who files the first-covered action to publish notice to the class within 20 days of filing the action, to inform class members of their right to seek designation as lead plaintiff. 15 U.S.C. § 78u-4(a)(3)(A)(i). All lead plaintiff motions must be filed "not later than 60 days after the date on which the notice is published." 15 U.S.C § 78u-4(a)(3)(A)(i)(II).

Next, the PSLRA requires that the Court select as lead plaintiff the "member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members." 15 U.S.C. § 78u-4(a)(3)(B)(i). There is a rebuttable presumption that the plaintiff who is "most adequate":

(aa) has either filed the complaint or made a motion in response to a notice under subparagraph (A)(i); (bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the ...


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