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International Fund Management S.A., et al v. Citigroup Inc.

September 30, 2011


The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.


Plaintiffs in these four actions are members of the putative classes in In re Citigroup, Inc. Bond Litigation and In re Citigroup, Inc. Securities Litigation that have opted to bring suit in their own name. They are investors in the securities of defendant Citigroup, Inc., and they allege that the company, and certain of its affiliates, officers, and directors violated federal securities laws and other statutory and common law duties. The substance of plaintiffs' complaints mirrors the complaints in the Bond and Securities actions. Defendants have moved to dismiss the complaints pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, that motion is granted in part and denied in part.


A. The Parties

Purchasers of Citigroup securities in both domestic and European offerings bring these four actions. The first of the four, International Fund Management et al. v. Citigroup et al., was initiated in October 14, 2009. Plaintiffs in this action are twelve European investment firms- International Fund Management S.A., Deka International S.A. Luxemburg, Deka Investment GmbH, BayernInvest Kapitalanlagegesellschaft mbH, HansaInvest Hanseatische Investment-GmbH, Metzler Investment GmbH, Nord/LB Kapitalanlagegesellschaft AG, INKA Internationale Kapitalanlagegesellschaft, Swiss Life Investment Management Holding AG, LGT Funds AGmvK, Kepler-Fonds Kapitalanlagegesellschaft mbH, ETFlab Investment GmbH-and the City of Richmond, Virginia. (Second Am. Compl. at ¶¶ 30-43, International Fund Management et. al v. Citigroup et al., No. 09 Civ. 8755 (S.D.N.Y. Nov. 17, 2010) (hereinafter IFM Compl.).)

Norges Bank, Norway's central bank, filed the second action on September 17, 2010. (First Am. Compl. at ¶ 30, Norges Bank v. Citigroup et al., No. 10 Civ. 7202 (S.D.N.Y. Dec. 15, 2010) (hereinafter Norges Compl.).) A pair of affiliated investment fund management companies, Swiss & Global Asset Management AG and Swiss & Global Asset Management (Luxembourg) SA, brought the third three months later. (Compl. at ¶¶ 30-32, Swiss & Global Asset Management AG et al. v. Citigroup et al., No. 10 Civ. 9325 (S.D.N.Y. Dec. 13, 2010).) And the plaintiffs in the final action, initiated on January 14, 2011, are a trio of German corporations-Universal-Investment-Gesellschaft mbH, an investment fund management company; Munchener Ruchversicherungs-Gesellschaft Aktiengesellschaft in Munchen, a reinsurance company; and MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH, an investment company. (Compl. at ¶¶ 30-32, Universal-Investment-Gesellschaft mbH et al. v. Citigroup et al., No. 11 Civ. 314 (S.D.N.Y. Jan. 14, 2011).)

These nineteen plaintiffs (collectively, "plaintiffs") have sued Citigroup, Inc., a global financial services holding company, and its subsidiary, Citigroup Global Markets, Inc., which underwrote many of the debt offerings at issue in these actions. (IFM Compl. ¶¶ 44-45.) They have sued the following directors and officers of Citigroup: Charles Prince, Vikram Pandit, Gary Crittenden, John C. Gerspach, Robert Druskin, Thomas Maheras, Michael Stuart Klein, Steven Freiberg, C. Michael Armstrong, Alain J.P. Belda, George David, Kenneth T. Derr, John M. Deutch, Roberto Hernandez Ramirez, Andrew N. Livers, Anne M. Mulcahy, Richard D. Parsons, Judith Rodin, Robert L. Ryan, and Franklin A. Thomas. (IFM Compl. ¶¶ 47-66.) With the exception of Norges Bank, all plaintiffs sue Arthur H. Tildesley, Jr., as well. (IFM Compl. ¶ 67.) Norges Bank alone sues Citigroup Capital XXI, a Delaware statutory trust. (Norges Compl. ¶ 32.)

B. The Complaints

"[T]he allegations in the four complaints are identical in most respects." (Pls.' Opp. to Motion to Dismiss ("Pls.' Opp.") at 6 n.8.) The complaints are also substantially similar to the complaints in the putative class actions In re Citigroup Inc. Securities Litigation and In re Citigroup Inc. Bond Litigation. They allege that plaintiffs suffered losses from alleged misrepresentations and omissions concerning: Citigroup's exposure to collateralized debt obligations ("CDOs"), structured investment vehicles ("SIVs"), alternative A class residential mortgage backed securities ("Alt-A RMBS"), and auction rate securities ("ARS"); the company's mortgage lending practices; and its solvency. The factual allegations underpinning these claims are set forth in this Court's opinions addressing motions to dismiss in the Securities and Bond litigation and need not be repeated here. See In re Citigroup Inc. Sec. Litig. ("Securities"), 753 F. Supp. 2d 206, 214-31 (S.D.N.Y. 2010); In re Citigroup Inc. Bond Litig. ("Bond"), 723 F. Supp. 2d 568, 574-82 (S.D.N.Y. 2010).

The complaints bring causes of action pursuant to the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act"), the common law of New York, and, for the claims arising out of purchases in European offerings, the common law and statutory law of the United Kingdom.

Defendants seek dismissal of all four complaints pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court ordered consolidated briefing of the motions to dismiss. Though there are four of each, the opinion often refers to the "complaint" or "motion" for simplicity's sake. The Court adopts the parties' convention of citing to the Second Amended Complaint in International Fund Management for allegations common to all complaints. The Court cites the other complaints as necessary.


In evaluating a motion to dismiss pursuant to Rule 12(b)(6), a court accepts the truth of the facts alleged in the complaint and draws all reasonable inferences in the plaintiff's favor. Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir. 2006). A complaint should be dismissed if it fails to set forth "enough facts to state a claim for relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). The basic pleading burden of "facial plausibility" is met "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 556). Some of plaintiffs' claims are subject to a higher pleading burden, as discussed infra.

This motion to dismiss raises iterations of issues addressed in prior opinions in the Securities and Bond class actions. The discussion that follows presumes familiarity not only with the relevant factual background of those opinions, but with their legal analysis as well.

A. Securities Act Claims

Plaintiffs bring causes of action pursuant to Sections 11, 12(a)(2), and 15 of the Securities Act. Defendants seek to dismiss these claims on the grounds that 1) plaintiffs have failed to plead the existence of actionable misrepresentations or omissions and 2) claims related to certain securities are untimely.

1.Adequacy of the pleading Securities Act claims need only meet the standards of notice pleading, unless the allegations sound in fraud, in which event the heightened Rule 9 fraud standard applies. Bond, 723 F. Supp. 2d at 586. Contrary to defendants' position, a complaint does not sound in fraud simply by employing such terms as "misrepresented," "made untrue statements," and "failed to disclose." See id. Because this complaint sufficiently separates nonfraud claims from fraud claims, Rule 8 applies to the Securities Act claims. See In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 272-73 (3d Cir. 2006); In re Refco, Inc., Sec. Litig., 503 F. Supp. 2d 611, 632-33 (S.D.N.Y. 2007).

Under the Rule 8 standard, defendants' motion seeks dismissal of only the pre-consolidation SIV claims and the ARS claims.*fn1 The Court finds that those claims should be dismissed. (See Defs.' Mem. in Supp. of Mot. to Dismiss ("Defs.' Mem.") at 31.)

a. Pre-consolidation SIV claims In December 2007, Citigroup consolidated its affiliated structured investment vehicles (SIVs) on its balance sheet for the first time. (IFM Compl. ¶¶ 233-34.) According to plaintiffs, accounting rules required Citigroup to consolidate its SIVs and disclose certain aspects of its involvement with its SIVs prior to that date. (Id. ¶¶ 212-29.) Citigroup's failure to do so allegedly rendered financial statements for 2004 through 2007 misleading. (Id. ¶¶ 229, 232.)

The viability of these claims turns on whether plaintiffs have adequately alleged the existence of an "implicit guarantee" whereby Citigroup implicitly agreed to assume the SIVs' debts to prevent the SIVs from defaulting. Plaintiffs have failed to do so. Some of plaintiffs' allegations (see id. ¶ 584; Pls.' Opp. at 7 & n.10) rely on the same faulty hindsight inference the Court rejected in the prior opinions. See Bond, 723 F. Supp. 2d at 591; Securities, 753 F. Supp. 2d at 243. The remaining allegations are that ratings agencies relied on Citigroup's reputation when rating SIV securities and that Citigroup played multiple managerial roles for the SIVs, including managing liquidity risk. (IFM Compl. ¶¶ 217-25.) Neither Citigroup's administration of the SIVs nor the fact that the third-party ratings agencies' drew comfort from that fact plausibly support the inference that Citigroup implicitly guaranteed the SIVs debts. Plaintiffs have thus failed to plead a misstatement or omission for the period prior to Citigroup's consolidation of its SIVs.

b. ARS claims Plaintiffs allege Citigroup failed to disclose material information about its auction rate securities (ARS) exposures. Plaintiffs allege actionable omissions in two respects: 1) Citigroup's failure to disclose its own ARS holdings prior to April 2008, and 2) its failure to disclose liabilities to customers who owned illiquid ARS.

An omission gives rise to liability under the securities law only if "defendants had an affirmative duty to disclose the [omitted] information" or "where disclosure was necessary so as to prevent other information contained in the registration statements from being misleading." Bond, 723 F. Supp. 2d at 593. In both Bond and Securities, the Court dismissed claims that Citigroup misled investors by failing to disclose ARS-related information because the plaintiffs in those failed to allege a duty to disclose. Id.; Securities, 753 F. Supp. 2d at 245-46. The Court does the same here.

Failure to disclose ARS holdings. Plaintiffs allege that Item 303 of SEC Regulation S-K required Citigroup to disclose its ARS holdings and the liquidity problems associated with them in its November 5, 2007 Form 10-Q and its 2007 Form 10-K, filed February 22, 2008. (IFM Compl. ¶ 295.) Item 303 "imposes a disclosure duty where a trend, demand, commitment, event or uncertainty is both [1] presently known to management and [2] reasonably likely to have material effects on the registrant's financial condition or results of operations." Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 716 (2d Cir. 2011) (internal quotation marks omitted).

Plaintiffs allege that "a known trend in the collapse of [Citigroup's] ARS business, and the inability to sell ARS securities on its books" triggered Citigroup's disclosure obligation pursuant to Item 303. (IFM Compl. ¶ 306.) The complaint fails to establish the existence of any alleged trend or its likelihood of materially impacting Citigroup's financial condition as of the relevant dates. The following facts are pled in support of the trend:

 Summer 2007: Citigroup purchases more ARS as investor demand wanes. (Id. ¶¶ 288- 92.)  Late January -- February 2008: ARS auctions increasingly fall, with the entire market seizing up by the end of February. (Id. ¶ 296.) Some major corporations announce write-downs on their ARS holdings, (id. ¶ 300), and lawsuits against ARS brokers-dealers are filed in late February, (id. ¶ 297).  March -- April 2008: Regulators reportedly open ARS investigations. (Id.)  First quarter 2008: Citigroup has difficulty selling its ARS position. (Id. ¶299.)

Most of these events, and certainly the most salient ones, occur after November 5, 2007; they do not plausibly establish the existence of a trend as of November 5, 2007, the date of the first alleged omission. Accordingly, plaintiffs have failed to allege a rising trend that would have required Citigroup to disclose its ARS holdings in the Form 10-Q issued that date. As to the second omission, alleged to have occurred on February 22, 2008, plaintiffs have not pled that Citigroup reasonably expected a trend to have a material impact on its financial results: Plaintiffs alleged that Citigroup knew its ARS could not be sold, but the complaint states that the ARS market did not become illiquid until the end of February, and that between mid-February and mid-April Citigroup still sold $3 billion of its ARS inventory. (IFM Compl. ¶¶ 296, 299.) Plaintiffs have thus failed to allege that Item 303 required an ARS disclosure prior to April 2008, and therefore they have not pled an actionable omission.

Disclosure of liabilities to ARS customers. In August 2008, pursuant to a settlement with the Securities and Exchange Commission and the New York Attorney General, Citigroup "agreed to repurchase $7.3 billion of ARS from its disgruntled clients" and disclosed this fact publicly. (Id. ¶ 303.) Plaintiffs allege that Citigroup's failure to divulge this liability at some unspecified earlier point is an actionable omission. (Id. ¶¶ 307, 308, 356, 402.) The duty to disclose this information, according to the complaint, arises from Statement of Financial Accounting Standards ("SFAS") No. 115 ¶ 3, which provides that "unrealized holding gains and losses for trading securities shall be included in earnings," (id. ¶ 307), and No. 5, which requires a company to "record contingent liabilities when the occurrence of a possible claim is probable and can be reasonably estimated," (id. ¶ 309).

Plaintiffs have not adequately established that either accounting standard required Citigroup to disclose the contingent liability before August 2008, when Citigroup repurchased its customer ARS. Plaintiffs have failed to allege or explain how SFAS No. 115's requirement to post "unrealized holding gains and losses for trading securities" could plausibly require Citigroup to make disclosures regarding securities it did not yet own. As to SFAS No. 5, plaintiffs have not adequately alleged at what point prior to August 2008, if ever, the liability Citigroup assumed in August 2008 became "probable" and "reasonably estima[ble]," and thus have not adequately alleged that Citigroup violated this rule. See Charter Tp. of Clinton Police & Fire Ret. Sys. v. ...

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