The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.
This action arises from Citigroup's alleged failure to disclose adequate truthful information about its exposures to subprime mortgages. Plaintiffs seek to represent a class of those who acquired Citigroup securities via the company's employee stock purchase program. They assert federal causes of action pursuant to Section 12(a)(2) of the Securities Act of 1933 and to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. They also bring several state statutory and common law claims.
Defendants have moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss plaintiffs' complaint in its entirety on the ground that it fails to set forth a claim for relief. Because plaintiffs' Section 12(a)(2) claims are untimely, because plaintiffs have not pled scienter for their Section 10(b) claims with the requisite particularity, and because plaintiffs have not adequately pled their state law claims, defendants' motion is granted.
The following facts are taken from plaintiffs' First Amended Consolidated Class Action Complaint ("Complaint"), unless otherwise noted. They are assumed to be true for purposes of this motion.
Plaintiffs Daniel Brecher, Scott Short, Chad Taylor, Jennifer Murphy, Paul Koch, and Mark Oelfke are current and former Citigroup employees residing in either California or Minnesota. (First Am. Consolidated Class Action Compl. ("Compl.") ¶¶ 18-23.) All purchased Citigroup securities via the company's Voluntary Financial Advisor Capital Accumulation Program ("FA CAP"), a Citigroup employee stock purchase program. (Id. ¶ 1.) They bring this action on behalf of a putative class of all Citigroup employees who acquired securities pursuant to FA CAP from November 2006 to October 8, 2009, when the Complaint was filed. (Id.¶ 39A.)
Citigroup Inc., a global diversified financial services firm, and its subsidiary, Citigroup Global Markets, Inc., are defendants in this action. (Id. ¶¶ 24, 25.) So too are six members of Citigroup's board of directors-C. Michael Armstrong, Alain J.P. Belda, Kenneth T. Derr, John M. Deutch, Richard D. Parsons, and Ann Dibble Jordan. (Id. ¶¶ 26-31.) All were allegedly on the board's Personnel and Compensation ("P&C") Committee, which administers FA CAP. (Id. ¶¶ 26-31, 33.) The P&C Committee itself is also named as a defendant.*fn1 (Id. ¶ 33.) Finally, thirty John Does who allegedly sold FA CAP securities are named as defendants. (Id. ¶32.)
FA CAP allows certain Citigroup and Citigroup Global Markets employees to allocate up to 25% of their pretax wages to the acquisition, at a discount, of restricted Citigroup common stock or stock options. (Id. ¶¶ 1, 14, 15.) These securities vest over a two-year period. (Id. ¶ 14.) If an FA CAP participant leaves Citigroup prior to vesting, he or she forfeits the securities as well as the wages that went toward their purchase. (Id.)
FA CAP participants received an annual prospectus from Citigroup. (Id. ¶ 16.) The prospectus incorporated by reference Citigroup's Securities and Exchange Commission ("SEC") filings. (Id.) The prospectus and materials incorporated therein compose the "offering documents" for the FA CAP securities.
C. Citigroup's Alleged Misstatements and Omissions
Plaintiffs' federal securities claims concern Citigroup's exposures to subprime mortgages. (Id. ¶ 8.) Subprime mortgages are characterized by borrowers with weak credit histories, low credit scores, high debt-to-income ratios, or high loan-to-value-of-home ratios. (Id. ¶ 51.) Plaintiffs allege that from 2001 to 2006, rising housing prices fueled a significant increase in the number of subprime mortgages. (Id. ¶¶ 6, 7.) By the time the housing "bubble" burst in 2007, "a staggering 43% of Citigroup's equity was tied up in subprime related assets." (Id. ¶ 8.)
Plaintiffs claim that throughout 2007, until some unspecified point in mid-2008, (id. ¶ 131), the offering documents for FA CAP "prevented investors from learning Citigroup's actual exposure to subprime losses," (id. ¶ 63; see id. ¶ 74). This alleged fraud's modus operandi was a series of materially misleading statements and omissions concerning Citigroup's subprime exposure, its overall business outlook, and its financial results. (Id. ¶¶ 59, 63, 65, 69, 70, 78, 87, 93, 96.)
1.Alleged misstatements and omissions concerning Citigroup's subprime exposure
The Complaint alleges that defendants failed to disclose material information about Citigroup's collateralized debt obligations ("CDOs"). A CDO contains an inventory of securities-the collateral-and sells the right to the cash flows those securities generate. (Id.¶ 52.) A CDO packages the rights to the cash flow into different tranches that vary in their risk and return. (Id.) Citigroup, allegedly "one of the biggest players" in the CDO market, profited from the fees it charged to manage the CDOs it created. (Id.) Its CDOs often contained securities that were backed by subprime mortgages.(Id.)
According to the Complaint, Citigroup's CDO operations exposed it to subprime risk that the company did not timely disclose. Prior to November 2007, Citigroup failed to disclose that it held $11.7 billion in subprime-related securities for use as collateral in new CDOs, (id. ¶ 55, 84), and $43 billion of CDOs in which the primary collateral was subprime-backed securities, (id.¶¶ 55, 84). Of these CDO holdings, $25 billion were liquidity-put CDOs, which allowed purchasers of CDO securities to sell them back to Citigroup at their original value, an option the purchasers took advantage of in the summer of 2007. (Id. ¶¶ 53, 54, 87.)
b. SIV-related misstatements and omissions
Structured investment vehicles ("SIVs") are the other alleged source of Citigroup's subprime exposure at issue. (Id. ¶¶ 56, 71-73.) An SIV invests in long-term assets. (Id. ¶ 57.) It finances its asset purchases by issuing short-term debt that typically comes due in 90 days or less. (Id.) SIVs thereby engage in a form of arbitrage, "sell[ing] short-term debt to buy longer-term, higher-yielding assets." (Id.)
An SIV must continually raise money to satisfy its recurring obligations on the short-term debt it issues. (Id. ¶ 72.) It usually accomplishes this by issuing new short-term debt. (Id.) The market for an SIV's short-term debt may dry up, however, if investors perceive weakness in the SIV's long-term assets. (Id. ¶¶ 71-72.) In the event the SIV cannot cover its short-term debt obligations by issuing new debt, it must instead sell off long-term assets. (Id. ¶ 71.) The weakness in those long-term assets results in their sale at a loss. (Id. ¶ 72.) Large enough losses can result in the SIV's total collapse. (Id. ¶ 71.)
Prior to the end of 2007, "Citigroup acted as an advisor to seven SIVs that held approximately $80 billion in assets." (Id. ¶ 70.) Starting in early 2006, Citigroup "placed  under-performing and/or non-performing" subprime-related assets into its SIVs. (Id. ¶ 56.) Citigroup did so "without full disclosure in the Offering Documents of the risks associated with this practice, including the real possibility that Citigroup was ultimately responsible to stabilize the SIVs either through cash infusions or by recapturing the SIVs' assets" in the event the SIVs could not cover their short-term debts. (Id.) In other words, Citigroup allegedly failed to inform investors that Citigroup ultimately could be held responsible for the SIVs if they collapsed.
The Complaint alleges that certain statements actually concealed this possibility. For instance, Citigroup stated that it only managed its SIVs at "arm's length." (Id. ¶ 96.) Also, in a Form 8-K*fn2 filed on October 1, 2007 in which Citigroup announced disappointing third quarter results stemming from "dislocations in the mortgage-backed securities and credit markets, " (id. ¶ 76), Citigroup CEO Charles Prince attributed the poor results to "weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs" and stated that Citigroup expected a "return to a normal earnings environment in the fourth quarter," (id. ¶ 77; Citigroup Oct. 1, 2007 Form 8-K, Ex. 8 to Decl. of Richard Rosen ("Rosen Decl.") dated Nov. 23, 2009). The Complaint alleges that this was misleading because "[w]hile Prince was informing the public that he expected Citigroup to return to a normal earnings environment in short order, on October 13, 2007, the media reported that a number of banks, including Citigroup, had discussions with the United States Treasury Department regarding the creation of a superfund to create liquidity for SIVs and conduits that were facing liquidity problems." (Compl. ¶ 78.)
c. Further misstatements concerning Citigroup's subprime exposure
Plaintiffs further complain of more general statements that allegedly misled investors by failing to provide "timely and accurate information regarding Citigroup's exposure to catastrophic credit risk." (Pls.' Mem. in Opp. to Mot. to Dismiss ("Pls.' Mem.") at 13.) Two appeared in the FA CAP offering documents. The first was a February 23, 2007 Form 10-K that stated that from 2004 to 2005 Citigroup's "[subprime] mortgage originations declined 20%, reflecting the Company's decision to avoid offering teaser rate and interest-only mortgages to lower FICO score customers" and that Citigroup's "mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust." (Id. ¶¶ 64, 65; Citigroup Feb. 23, 2007 Form 10-K, Ex. 4 to Rosen Decl.) The other was a July 20, 2007 Form 8-K in which Citigroup's Securities and Banking segment reported decreasing costs in the second quarter of 2007 "reflecting a stable global corporate credit environment." (Compl. ¶75.)
Other statements of this variety were not contained in the offering documents but were made during conference calls or interviews with the press. First, in a January 19, 2007 conference call, an unnamed Citigroup representative explained that the company believed that it had "adequate [loan loss] reserves." (Id. ¶ 61.) Second, in an April 16, 2007 investor conference call, Citigroup's Chief Financial Officer indicated that certain subprime mortgages in Citigroup's portfolio had "very good delinquency performance associated with them." (Id. ¶ 68.) Third, Citigroup CEO Charles Prince told the Financial Times in July 2007 that "[w]hen the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." (Id. ¶ 74.)
2.Alleged misstatements concerning Citigroup's overall business outlook
The offering documents also included statements that allegedly misrepresented Citigroup's overall business outlook. In a January 19, 2007 Form 8-K reporting Citigroup's year-end results for 2006, the company stated that it "continued to see positive trends from [its] strategic actions." (Id. ¶ 60.) In its 2006 Form 10-K, filed on February 23, 2007, Citigroup announced that it was entering 2007 with "good business momentum." (Id. ¶ 62; Citigroup Feb. 23, 2007 Form 10-K, Ex. 4 to Rosen Decl.) And on April 16, 2007, a Citigroup press release claimed that the company "generated strong momentum" in the first quarter of 2007 and articulated its intention to "invest to grow ...