The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
This Document Relates To: 08 Civ. 3095
By Order dated June 25, 2008, the Court consolidated the five putative class actions identified above under the caption In Re: Citigroup Auction Rate Securities Litigation, and appointed Michael A. Passidomo ("Passidomo" or "Plaintiff") as Lead Plaintiff. On August 26, 2008, Lead Plaintiff filed a Consolidated Amended Complaint (the "Complaint") alleging that named Defendants Citigroup, Inc. ("Citigroup"), Citigroup Global Markets, Inc. ("CGMI"), and Smith Barney*fn1 (collectively "Defendants"), violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5(a) and (c) promulgated thereunder, Sections 206 and 215 of the Investment Advisers Act of 1940 (the "Investment Advisers Act"), and various state laws in connection with Defendants' underwriting and/or selling of Auction Rate Securities ("ARS") in auctions that Defendants managed. Defendants move pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the Complaint for failure to state a claim upon which relief can be granted. Defendants also invoke Federal Rule of Civil Procedure 12(b)(1) in connection with their arguments that Plaintiff lacks standing to pursue certain of the claims asserted in the Complaint. The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331.
The Court has reviewed thoroughly and considered carefully the parties' submissions and, for the following reasons, grants Defendants' motion to dismiss the Complaint.
The following facts are drawn from the Complaint unless otherwise indicated. Plaintiff brings this action on behalf of all persons who purchased Citigroup ARS (including persons who placed hold orders for such securities) during the period from August 1, 2007, through February 11, 2008 (the "Class Period"). (Compl. ¶ 19.)
ARS are municipal bonds, corporate bonds, and preferred stocks with interest rates or dividend yields that are periodically reset through auctions. (Compl. ¶ 27.) Interest rates are paid in the current period based on a price determined at the prior auction. (Id. at ¶ 29.) Additionally, at the auctions, investors are able to resell their ARS. (Id. at ¶ 28.) A broker-dealer manages the auction process; most auctions are run by a single broker-dealer. (Id. at ¶ 31.) The auction agent collects orders from the broker-dealers, determines the amount of ARS available for sale, organizes the bids, and determines the clearing rate (i.e., the final rate at which all the of the ARS are sold). (Id. at ¶ 32.) If there are more ARS for sale than there are bids for the ARS, the auction fails and the holders of the ARS are unable to resell the ARS. (Id. at ¶ 33.)
Defendants receive fees for services in connection with the auctions, including fees for underwriting offerings of Citigroup ARS, and "auction dealer fees" (fees paid on the principal amount of the securities places with investors through Defendants) for managing Citigroup ARS auctions. (Id. at ¶¶ 40-41.) A failed auction would result in the loss of underwriting and auction dealer fees. (Id. at ¶ 42.)
During the Class Period, the supply of Citigroup ARS was increasing while demand was decreasing. (Id. at ¶ 43.) Defendants knew that buyer demand for ARS did not match or exceed seller offerings of Citigroup ARS. (Id. at ¶ 36.) Defendants were aware that this imbalance would lead to failed auctions unless Defendants intervened. (Id. at ¶ 37.)
Defendants regularly and increasingly intervened throughout the class period in order to prevent failed auctions. (Id. at ¶ 42.) When supply exceeded demand, Defendants submitted bids to ensure that the ARS offered at auction would be sold. (Id. at ¶ 44.) Defendants continued to underwrite and/or act as a broker-dealer managing auctions despite their knowledge that supply outstripped demand. (Id. at ¶ 47.) Although Defendants' competitors experienced failed auctions during the Class Period, Defendants' conduct prevented Defendants' auctions from failing. (Id. at ¶ 44.) According to the Complaint, Defendants prevented the failed auctions in order to offset the negative impact of the subprime crisis and to generate underwriting, broker-dealer and auction dealer fees. (Id. at ¶ 66.)
Plaintiff and other members of the putative class continued to purchase Citigroup ARS believing that the auction process was occurring as intended. (Id. at ¶ 45.) Defendants' increasing intervention into the auctions was unknown to Plaintiff and purported class members. (Id. at ¶ 46.) Citigroup ARS for which CGMI served as auction dealer during the Class Period included HIGHLANDS COUNTY FLA HEALTH FACS AUTH REV--VAR-HOSP-ADVENTIST HLTH SYS-B, dated August 8, 2007, auctioned every 7 days; EDUCATIONAL FDG SOUTH INC FLA EDL LN REV-VAR-AMT-STUDENT LN BKD-A-8, dated November 7, 2007, and auctioned every 28 days; CALIFORNIA STATEWIDE CMNTYS DEV AUTH REV-VAR- LA CNTY MUSEUM ART PJ-B, dated November 9, 2007, and auctioned every 7 days; HARRIS CNTY TEX HEALTH FACS DEV CORP HOSP REV-ARS-BAYLOR COLLEGE MED-A-4, dated November 15, 2007, and auctioned every 7 days; and VERMONT ST STUDENT ASSISTANCE CORP ED LN REV-ARS-TAXABLE-SER YY, dated December 5, 2007, and auctioned every 28 days. (Id. at ¶ 48.) Defendants' "auction desk" continued to tout new issues for which Citigroup ARS would be sold during the Class Period, id. at ¶ 49, and also increased both the commission rates to brokers and the interest rates paid to investors in order to entice brokers and investors, id. at ¶¶ 52, 54. Defendants' auction desk told Smith Barney brokers that the attractive terms did not reflect any increased risk associated with the ARS. (Id. at ¶ 55.)
On February 11, 2008, Defendants ceased intervening in the auctions to prevent the auctions from failing. (Id. at ¶ 59.) All of Defendants' Citigroup ARS auctions failed. (Id.) Plaintiff and the members of the putative class were unable to sell their Citigroup ARS. (Id.) In a brokerage statement for the February 1, 2008, through February 29, 2008, period, a "Message" stated "that the Auction-Rate Securities (ARS) market is experiencing a supply and demand imbalance, resulting in failed auctions and significantly reduced or lack of liquidity." (Id. at ¶ 60.)
Following the auction failures, there was no longer a market for Citigroup ARS and Plaintiff and other class members have been unable to sell the ARS, rendering them illiquid. (Id. at ¶¶ 77-78.) Plaintiff and other class members relied upon the integrity of the market for Citigroup ARS, specifically the understanding that the prices at which the ARS were sold, and the interest rates set, were determined by the natural interplay of supply and demand, and they would not have purchased these ...