The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge
This document relates to: 07 Civ. 9901 (SHS), 07 Civ. 10258 (SHS), 08 Civ. 135 (SHS) & 08 Civ. 136 (SHS)
Plaintiffs bring these consolidated securities fraud actions on behalf of a proposed class of investors in Citigroup, Inc., against the company and fourteen of its officials alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Their claims span an array of Citigroup's business -- from the mortgages it sold to consumers to the mortgage-backed securities it sold to institutional investors -- but sound a similar note: Citigroup allegedly knowingly understated the risks it faced and overstated the value of the assets it possessed. In this way, plaintiffs claim, Citigroup materially misled investors about the company's financial health and caused them to suffer damages when the truth about Citigroup's assets was finally revealed.
Defendants move to dismiss plaintiffs' claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing primarily that plaintiffs' complaint fails to satisfy the heightened pleading standards applicable in securities fraud actions.
The Court finds that plaintiffs have stated a claim to relief only with respect to alleged misstatements and omissions occurring between February 2007 and April 2008 concerning Citigroup's collateralized debt obligation holdings. Plaintiffs' remaining allegations do not adequately state a claim for relief. Accordingly, for the reasons set forth below, defendants' motion is granted in part and denied in part.
The Amended Consolidated Class Action Complaint ("Complaint"), filed on February 20, 2009, is 536 pages long, contains 1,265 paragraphs and weighs six pounds. The following facts are extracted from that tome and are presumed to be true for the purposes of this motion.
Plaintiffs are current or former Citigroup shareholders. Plaintiffs claim they purchased Citigroup common stock on the open market for a price that was inflated by defendants' alleged fraud. (Compl. ¶¶ 21-27.) Plaintiffs purport to represent all persons who purchased Citigroup common stock between January 1, 2004 and January 15, 2009. (Id. at 1.)
Citigroup is itself named as a defendant. Incorporated in Delaware with its principal place of business in New York, Citigroup is a financial services holding company operating in more than 100 countries. It employs over 300,000 people. (Id. ¶ 28.)
Plaintiffs also bring this action against several current and former directors and officers of Citigroup. The Complaint describes the individual defendants as follows:
* Charles Prince was Citigroup's Chief Executive Officer ("CEO") from 2003 to 2007 and Chairman of Citigroup's Board of Directors from 2006 to 2007. Plaintiffs allege that Prince was "forced to resign" on November 5, 2007 as a result of substantial losses Citigroup reported. (Id. ¶¶ 33, 1154.)
* Robert Rubin served as a Citigroup director beginning in 1999 and was named Chairman of the Board of Directors after Prince's departure. (Id. ¶ 36.)
* Lewis Kaden, starting in 2005, was Citigroup's Chief Administrative Officer ("CAO"), responsible for "audit and risk review" at Citigroup. (Id. ¶ 37.)
* Sallie L. Krawcheck was Citigroup's Chief Financial Officer ("CFO") from 2004 to 2007. (Id. ¶ 38.)
* Gary Crittenden replaced Krawcheck as CFO in March 2007. (Id. ¶ 41.)
* Steven Freiberg was the Chairman and CEO of Citigroup's Global Consumer Group and his responsibilities included consumer lending in the mortgage area. (Id. ¶ 43.)
* Robert Druskin was Citigroup's Chief Operating Officer from 2006 to 2007 and previously held other officer positions. (Id. ¶ 44.)
* Todd S. Thomson was Citigroup's CFO prior to 2004 and was the CEO of a Citigroup division between 2004 and 2007. (Id. ¶ 46.)
* Thomas G. Maheras held various officer positions with different Citigroup divisions, including the division responsible for Citigroup's collateralized debt obligation holdings. (Id. ¶ 48.)
* Michael Stuart Klein, like Maheras, held various officer positions with different Citigroup divisions, including the division responsible for Citigroup's collateralized debt obligation holdings. (Id. ¶ 50.)
* David C. Bushnell was Citigroup's Senior Risk Officer from 2003 to 2007 and served as CAO for two months in 2007. (Id. ¶ 52.)
* John C. Gerspach served as Citigroup's Chief Accounting Officer and Controller beginning in March 2005. (Id. ¶ 54.)
* Stephen R. Volk held various officer positions at Citigroup. (Id. ¶ 57.)
* Vikram Pandit became Citigroup's CEO following Prince's departure. He previously was the CEO of a Citigroup division. (Id. ¶ 59.)
Plaintiffs allege that many of the individual defendants sold large amounts of stock during the class period. (Id. ¶¶ 33-61.) Plaintiffs also allege that several individual defendants "signed and certified the accuracy of" of Citigroup's SEC filings. (Id. ¶¶ 35, 40, 42, 46, 55, 60.)
The theory of plaintiffs' case is that defendants materially misled them about the risks Citigroup was exposed to via various financial instruments, including CDOs, SIVs, Alt-A RMBS, CLOs and ARS. Understanding the allegations in this action requires understanding the nature of this gallimaufry of financial instruments. They are described in the Complaint as follows.
1. Subprime and Alt-A Mortgages
A "conforming" mortgage is a mortgage that meets certain requirements designed to reduce the risk of default and to mitigate losses in the event of default. These include requiring the borrower to meet minimum standards of creditworthiness, to document his or her income and to make a down payment of at least 20% of the value of the home. In a conforming mortgage, the borrower's debt-to-income ratio does not exceed 35%. If the loan's interest rate is adjustable over time (for example, if the interest rate starts low but later increases), the borrower's debt-to-income ratio must be gauged at the "fully indexed" rate, which is the highest interest rate the loan will reach. (Id. ¶ 221.)
In the mid-2000s, banks increasingly issued "nonconforming" mortgages that departed from the requirements listed above. (Id. ¶ 222). They issued mortgages to borrowers who were less creditworthy. (Id. ¶ 231(a).) They did not verify borrower income. (Id. ¶ 231(f).) They accepted lower down payments or eliminated the down-payment requirement altogether. This practice increased the loan-to-value ("LTV") ratio -- the ratio of the loan amount to the home's value -- which enhanced the risk of default and the size of the loss upon default. (Id. ¶ 231(b).)
Banks issued mortgages when mortgage payments exceeded 35% of the borrower's income. (Id. ¶ 231(c).) In the case of "hybrid adjustable rate mortgages" or "hybrid ARMs," which featured a low teaser rate that lasted for two or three years that then ballooned higher, banks failed to measure debt-to-income ratios at the fully indexed rate. (Id. ¶¶ 231(d), (e).)
These nonconforming mortgages included both "subprime" mortgages, which carried the highest risk of default, and "alternative A class" ("Alt-A") mortgages, which were riskier than conforming mortgages but not as risky as subprime mortgages. (Id. ¶ 945.)
2. Residential-Mortgage-Backed Securities
Residential-mortgage-backed securities ("RMBS") are a type of asset-backed security. In RMBS, an underwriter buys a large quantity of residential mortgages -- typically three to four thousand individual mortgages -- and transfers the mortgages to a special purpose corporate entity. The entity's sole purpose is to receive those mortgages and issue securities -- RMBS -- that are collateralized by the mortgages the entity owns. An investor buys an RMBS and, over time, receives payments from the entity based on a "coupon" or interest rate. As homeowners make payments on their mortgages, the special purpose entity receives the income from the borrowers' payments and uses it to pay its investors, the RMBS owners. Thus, the entity's ability to continue making payments to the RMBS investor depends on the entity's continuing receipt of mortgage payments from the homeowners. If the mortgages are not paid, the entity's income stream decreases, undermining the entity's ability to pay the RMBS investors. (Id. ¶¶ 74-82.)
The risk of loss is not shared equally among all RMBS investors. Instead, the RMBS are divided into different "tranches" that carry different risks. The junior-most tranche absorbs the first losses until that tranche is completely wiped out, and is therefore the riskiest investment. Then the second-junior-most tranche begins to suffer losses. The senior-most tranche suffers losses only when all the other tranches have been eliminated. (Id. ¶ 78.) For example, if the junior-most tranche represents 4% of the RMBS securitization, and if mortgage defaults cause the securitization to lose four percent of its cash flow, then the junior-most tranche will suffer a complete loss. The other tranches, however, will suffer no loss whatsoever. The junior tranches thus protect the senior tranches by absorbing losses as mortgages default. (Id. ¶ 82.) Each RMBS tranche is assigned a credit rating (triple-A, double-A, single-A, triple-B, double-B, etc.) with the more senior, i.e. safer, tranches receiving higher ratings. (Id. ¶ 83.) The most senior RMBS tranche bears an AAA credit rating. (Id. at 32-33.) Tranches between the junior- and senior-most tranches are known as "mezzanine" tranches. (Id. ¶ 95.)
3. Collateralized Debt Obligations
Like RMBS, collateralized debt obligations ("CDOs") are a form of asset-backed security. (Id. ¶ 74.) An underwriter creates a CDO by purchasing a pool of assets and transferring those assets to a special purpose entity. The entity then issues debt securities whose interest payments are backed by the income stream generated by the entity's assets. Although RMBS and CDOs are similar in many ways, RMBS securitizations purchase mortgages and issue securities backed by those mortgages, whereas many CDOs purchase other securities -- RMBS, for example -- and issue securities backed by those. (Id. ¶ 88.)
RMBS and CDOs have different tranche structures. In an RMBS securitization, the senior-most tranche is the AAA-rated tranche. In contrast, CDOs split the AAA tranche into a junior AAA tranche and a "super senior" AAA tranche. This super senior tranche is the last to suffer losses, insulated by the junior AAA tranche and all the tranches below that. Since it is insulated by a tranche with an AAA rating (the junior AAA tranche), the super senior's credit rating is considered better than AAA. Because of this enhanced credit protection, the super senior tranche involves less risk and thus pays a lower interest rate. The money the CDO securitization saves by offering a lower yield to the super senior tranche is used to pay higher yields to the junior tranches. In a sense, yield is taken from the super senior tranche and added to the junior tranches. Because the super senior tranche is substantially larger than the junior tranches, a small yield decrease for the super senior tranche results in a substantial yield increase for the smaller junior tranches. (Id. ¶¶ 90-93.)
4. Structured Investment Vehicles
A structured investment vehicle ("SIV") is much like a CDO or RMBS securitization. The SIV is a special purpose corporate entity that invests in different kinds of long-term assets -- for example, an SIV might invest in corporate bonds or RMBS. To finance its investments, the SIV issues securities in several tranches, with junior tranches absorbing the first losses and thus protecting more senior tranches. (Id. ¶¶ 645-48.)
SIVs finance their investments mostly by means of short-term securities: commercial paper and medium-term notes. (Id. ¶ 647.) As a result, an SIV earns profits through a form of arbitrage. The SIV invests in long-term securities with a certain yield. It finances those long-term securities with short-term debt securities that carry a lower yield. The SIV makes a profit that is equal to the difference between the higher "incoming" yield the SIV earns from its long-term assets and the lower "outgoing" yield the SIV must pay on its commercial paper and medium-term notes. Some of that "profit" goes to an equity tranche, and the rest of the profit is paid in the form of fees to the SIV's manager -- here, Citigroup. (Id. ¶ 649.) In this way, a small "equity" investment in the SIV's junior tranches can be used to leverage substantial arbitrage gains resulting from the existence of large senior tranches of short-term debt. (Id. ¶¶ 650-53.)
Using short-term debt to purchase long-term assets creates "liquidity risk," a risk caused by the fact that an SIV must continually "roll-over" its short-term funding. (Id. ¶ 655.) An SIV's long-term assets generate income streams that are sufficient to pay the interest on the SIV's short-term debt. But when the short-term debt comes due -- that is, when the SIV must return the principal of the commercial paper and medium-term notes -- the SIV must issue new short-term debt to pay off the maturing short-term debt. This is called "rolling over" short-term debt. If an SIV were unable to roll-over its short-term debt, it would be forced to sell its long-term assets to pay its maturing short-term debt. (Id. ¶¶ 655-56.)
Losses stemming from liquidity risk can be substantial. If an SIV's long-term assets decline in value, the SIV will no longer be as safe an investment, and investors will become reluctant to purchase the SIV's short-term debt. The SIV will have to sell its long-term assets to meet the amount due on any short-term debt that is not rolled over. Because the assets have declined in value, however, the SIV will take losses on its asset sales. Thus, when the SIV's long-term assets lose value, the SIV is often forced to sell the assets immediately at a loss. A decline in asset value has the potential to cause the entire SIV to collapse. (Id. ¶ 656.)
SIVs typically employ two mechanisms in response to liquidity risk. First, SIV covenants often stipulate that, if the value of the SIV's assets falls so far that the SIV cannot meet its short-term-debt obligations, the SIV is declared in "defeasance" and must immediately liquidate its assets to pay senior debt investors. (Id. ¶ 659.) Second, SIVs often obtain "liquidity backstops" from banks, where the banks will purchase a limited amount of short-term debt from the SIV. Liquidity backstops allow SIVs to ensure that a limited amount of short-term financing will always be available. (Id. ¶ 658.)
5. Leveraged Loans and Collateralized Loan Obligations
Leveraged loans are loans that banks arrange for companies, often in anticipation of mergers and acquisitions, leveraged buyouts, recapitalizations, or restructurings. Leveraged loans are typically made to companies with high debt-to-equity ratios, and thus leveraged loans garner a low credit rating and a high yield. In the mid-2000s, the market for leveraged loans boomed, and banks began arranging leveraged loans that were riskier than the leveraged loans arranged in the past. (Id. ¶¶ 865, 867, 870-74.)
Collateralized loan obligations (CLOs) are much like CDOs, except CLOs are collateralized primarily by corporate debt. In the mid-2000s, CLOs were increasingly collateralized by riskier leveraged loans. (Id. ¶¶ 866, 874.)
6. Auction Rate Securities
Auction rate securities (ARS) are long term obligations, similar to bonds, with variable interest rates that reset through periodic auctions held as frequently as once a week. The issuer of an ARS, such as a company or municipality, selects a broker-dealer such as Citigroup to underwrite the offering and manage the auction process by which rates are set. Potential investors then bid the lowest interest rate at which they are willing to purchase ARS. The auction clears at the lowest rate bid that is sufficient to cover all of the securities for sale and that rate then applies to all of the securities until the next auction. If there are not enough bids to cover the securities for sale, the auction fails and the current holders are left in possession of the ARS. The interest rate is set at a predetermined "maximum rate" that may be higher or lower than the market rate for securities of similar credit quality and duration. (Id. ¶ 907.)
Plaintiffs allege that Citigroup made numerous material misstatements and omissions regarding its CDOs. Plaintiffs' principal grievance is that Citigroup did not disclose that it held tens of billions of dollars of super-senior CDOs until November 4, 2007. As described in greater detail below, plaintiffs allege that the market knew, at least by late 2006 or early 2007, that CDOs faced a substantial risk of losses. Although the market knew that Citigroup had underwritten billions of dollars of CDOs, the market did not know who had purchased the CDOs that Citigroup had underwritten. In plaintiffs' view, defendants intentionally hid the truth:
namely that billions of dollars of CDOs had not been purchased at all but had, instead, been retained by Citigroup. Plaintiffs further allege that defendants affirmatively misled investors by disclosing facts about Citigroup's CDO operations that were either half-truths or affirmatively misleading.
First, plaintiffs claim that defendants failed to give a full and truthful account of the extent of Citigroup's CDO exposure. Second, plaintiffs allege that defendants made misleading statements that failed to convey the subprime-related risks inherent in its CDO portfolio. Finally, plaintiffs take issue with Citigroup's accounting practices, claiming that the company's SEC filings violated accounting rules -- and were thus misleading -- because they failed to report Citigroup's CDO exposure and failed to value Citigroup's CDO holdings accurately.
1. Pre-November 4, 2007 Statements
a. AllegedMisleading Statements and Omissions about the Extent of Citigroup's CDO Exposure
Citigroup's SEC filings did make certain disclosures related to Citigroup's exposure to losses from its CDO holdings, but plaintiffs claim that those disclosures were misleading and incomplete because they provided scant details about Citigroup's CDO operations and never disclosed the extent of Citigroup's massive CDO holdings. To put it simply, plaintiffs allege that defendants "concealed and misrepresented the simple and very material fact that Citi had $45 billion of CDO exposure." (Pls.' Mem. at 25.) The following alleged misstatements and omissions are all variations on this theme.
i. Citigroup Discloses the Value of Its "CDO-Type Transactions"
Citigroup did report the total value of the CDOs it had underwritten. For example, in Citigroup's August 3, 2007 Form 10-Q, Citigroup reported that it had underwritten "CDO-type transactions" whose assets totaled $74.4 billion.*fn1 (Compl. ¶ 545 (quoting Citigroup's Form 10-Q, at 63-67 (Aug. 3, 2007).) Plaintiffs claim that that disclosure was inadequate because it revealed only the size of Citigroup's underwriting activities, not the size of Citigroup's holdings of -- and thus exposure to -- the CDOs Citigroup underwrote. (Id. ¶¶ 560-62.) In other words, disclosing that Citigroup underwrote CDOs worth $74.4 billion did not, in plaintiffs' view, give any indication that it was Citigroup who owned a large quantity of the CDOs that Citigroup had underwritten.
ii. Citigroup Discloses Its "Maximum Exposure to Loss" from VIEs
Citigroup considered its CDOs to be "variable interest entities" ("VIEs"). In total, Citigroup underwrote over $200 billion of investments that it considered VIEs. For example, in its August 3, 2007 Form 10-Q, Citigroup reported that it had underwritten $134.3 billion of VIEs involving "investment-related transactions," $37.4 billion of VIEs involving "structured finance," $10.3 billion of VIEs involving "trust preferred securities," as well as $74.4 billion of VIEs involving "CDO-type transactions." (Id. ¶ 545 (quoting Citigroup's Form 10-Q, at 63-67 (Aug. 3, 2007).) The Form 10-Q then reported Citigroup's "maximum exposure to loss" in connection with all its VIEs:
Although actual losses are not expected to be material, the Company's maximum exposure to loss as a result of its involvement with VIEs that are not consolidated was $117 billion and $109 billion at June 30, 2007 and December 31, 2006, respectively. For this purpose, maximum exposure is considered to be the notional amounts of credit lines, guarantees, other credit support, and liquidity facilities, the notional amount of credit default swaps and certain total return swaps, and the amount invested where Citigroup has an ownership interest in the VIEs. (Id.)
Plaintiffs believe that that statement was misleading because it did not disclose Citigroup's exposure to CDOs, as opposed to Citigroup's exposure to other variable interest entities, and thus investors were given no indication that Citigroup had massive exposure to CDO losses. Plaintiffs also maintain that the disclosure was inadequate because it provided no details about the nature of Citigroup's exposure -- in particular, it did not disclose that Citigroup actually owned billions of dollars of CDOs and had through liquidity puts agreed to purchase back from investors $25 billion worth of commercial paper CDOs in the event the underlying collateral deteriorated.
iii. Citigroup Discloses an "Ownership Interest" in "Certain VIEs"
Citigroup further disclosed that it "may" have an "ownership interest" in VIEs and "may" provide certain services to its VIEs. Citigroup's August 3, 2007 Form 10-Q stated:
The Company may provide various products and services to the VIEs. It may provide liquidity facilities, may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of letters of credit and other guarantees to the VIEs, may be the investment manager, and may also have an ownership interest or other investment in certain VIEs. In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of the VIEs and do not have recourse to the Company, except where the Company has provided a guarantee to the investors or is the counterparty to a derivative transaction involving the VIE. (Id. ¶ 545 (quoting Citigroup's Form 10-Q, at 63-67 (Aug. 3, 2007).) Plaintiffs claim that that disclosure was misleading for two reasons. First, disclosing that Citigroup "may have an ownership interest or other investment in certain VIEs" was disingenuous in light of Citigroup's massive CDO holdings. In plaintiffs' view, the statement downplayed Citigroup's ownership of VIEs and failed to specify whether Citigroup's ownership interest was in "CDO-type" VIEs, "investment-related" VIEs, "structured finance" VIEs, or some other type of VIE. (Id. ¶ 569.) Second, the statement expressed Citigroup's exposure to CDOs in conditional, conjectural, or -- as plaintiffs put it -- "hypothetical" terms. (Id. ¶ 565.) Saying that Citigroup "may" own VIEs was, according to plaintiffs, deceptive in light of the fact that Citigroup did, in fact, own billions of dollars of CDOs. And saying that Citigroup "may provide liquidity facilities" and "commercial paper backstop lines of credit" was, as plaintiffs see it, misleading when Citigroup had, in fact, guaranteed that it would repurchase $25 billion of commercial paper super-senior CDOs. (Id. ¶¶ 565-69.)
iv. Citigroup States that It Has "Limited Continuing Involvement" with CDOs
Citigroup's SEC filings stated that Citigroup had only "limited continuing involvement" with its CDOs. Citigroup consolidated some of its VIEs on its balance sheet (id. ¶ 545), but, as discussed below, Citigroup did not consolidate other VIEs, including its CDOs. Explaining its decision not to consolidate certain VIEs, Citigroup's August 3, 2007 Form 10-Q stated:
The Company typically receives fees for structuring and/or distributing the securities sold to investors.... A third-party manager is typically retained by the VIE to select collateral for inclusion in the pool and then actively manage it, or, in other cases, only to manage work-out credits. The Company may provide other financial services and/or products to the VIEs for market-rate fees. These may include the provision of liquidity or contingent liquidity facilities; interest rate or foreign exchange hedges and credit derivative instruments; and the purchasing and warehousing of securities until they are sold to the SPE. The Company is not the primary beneficiary of these VIEs under FIN 46-R due to its limited continuing involvement and, as a result, does not consolidate their assets and liabilities in its financial statements. (Id. ¶ 545 (quoting Citigroup's Form 10-Q, at 63-67 (Aug. 3, 2007).) That disclosure was misleading, plaintiffs claim, because it implied that Citigroup maintained only trivial ties to its CDOs after the underwriting process was complete. In plaintiffs' view, the assertion that Citigroup had "limited continuing involvement" with its VIEs was deceptive in light of the fact that Citigroup actually owned tens of billions of dollars of its own CDOs. It was also allegedly deceptive in light of the fact that Citigroup had, through liquidity puts, agreed to purchase back from investors tens of billions of dollars of commercial paper CDOs. As plaintiffs see it, Citigroup's "continuing involvement" in its CDOs was far from "limited." (Id. ¶ 558.)
b. Alleged Misleading Statements about the Nature of CDO Exposure
In addition to withholding information about the extent of Citigroup's CDO holdings -- or making only inadequate disclosures about those holdings -- plaintiffs also allege that Citigroup's SEC filings affirmatively misled investors about the nature of the CDOs themselves: namely that defendants failed to convey in their statements the subprime related risks inherent in Citigroup's CDO portfolio.
i. Citigroup States that Securitizations Reduce Its "Credit Exposure"
Citigroup's SEC filings made the following statement regarding Citigroup's securitization of mortgages:
Mortgages and Other Assets
The Company provides a wide range of mortgage and other loan products to its customers. In addition to providing a source of liquidity and less expensive funding, securitizing these assets also reduces the Company's credit exposure to the borrowers. (Id. ¶ 543 (quoting Citigroup's Form 10-Q, at 42 (Aug. 3, 2007).) The SEC filings also made the following statement:
The Company primarily securitizes credit card receivables and mortgages.... The Company's mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchaser of the securities issued by the trust. (Id. ¶ 545 (quoting Citigroup's Form 10-Q, at 63-67 (Aug. 3, 2007).)
Plaintiffs claim that those statements were misleading because they suggested that Citigroup had, through securitization, reduced its exposure to losses from residential mortgage defaults. Plaintiffs maintain that, even if Citigroup had created RMBS from the mortgages it had originated, Citigroup then created CDOs of those and other RMBS and retained substantial CDO holdings. Thus, in plaintiffs' view, Citigroup's claim that securitization "reduces the Company's credit exposure to borrowers" was misleading in light of the fact that Citigroup's CDO operations exposed the company to billions of dollars of risk from mortgage defaults. Moreover, plaintiffs contend that Citigroup's claim that "loan securitizations... effectively transfer the risk of future credit losses to the purchaser of the securities" was misleading because Citigroup did not disclose that Citigroup itself was effectively "the purchaser" of billions of dollars of securities backed by loans.
ii. Citigroup Presents Its "CDO-Type Transactions" as Distinct from Its "Mortgage-Related Transactions"
Plaintiffs further allege that Citigroup's SEC filings misled investors about the extent to which Citigroup's CDO were backed by subprime mortgages. Plaintiffs claim that Citigroup's SEC filings were misleading because they presented Citigroup's underwriting of CDOs as distinct from Citigroup's securitizing of mortgages, giving a false impression that Citigroup's CDOs were backed by assets unrelated to mortgages. (Id. ¶¶ 550-53.)
In a section titled "Off-Balance Sheet Arrangements," Citigroup's August 3, 2007 Form 10-Q stated:
Mortgages and Other Assets
The Company provides a wide range of mortgage and other loan products to its customers.... The Company recognized gains related to the securitization of mortgages and other assets.... (Id. ¶ 543 (quoting Citigroup's Form 10-Q, at 42 (Aug. 3, 2007).) A later passage from the same section stated:
Creation of Other Investment and Financing Products
The Company packages and securitizes assets purchased in the financial markets in order to create new security offerings, including arbitrage collateralized debt obligations (CDOs) and synthetic CDOs for institutional clients and retail customers, which match the clients' investment needs and preferences.
(Id.) Those statements were misleading, plaintiffs claim, because they placed Citigroup's "gains related to the securitization of mortgages" under a different heading from Citigroup's "new security offerings, including... CDOs." That, in plaintiffs view, falsely implied that Citigroup's CDOs did not involve assets tied to subprime mortgages.
In another section of the Form 10-Q, entitled "Securitizations and Variable Interest Entities," Citigroup disclosed the total assets of the CDOs it had underwritten in a table reporting the total value of Citigroup's VIEs:
[T]he following table represents the total assets of unconsolidated VIEs where the Company has significant involvement:
In billions of dollars June 30, 2007
December 31, 2006 CDO-type transactions 74.4 52.1
Investment-related transactions 134.4 122.1
Trust preferred securities 10.3 9.8
Mortgage-related transactions 5.0 2.7
Structured finance and other ...