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Marya J. Leber, Sara L. Kennedy, and All Others Similarly Situated v. Citigroup

November 8, 2011

MARYA J. LEBER, SARA L. KENNEDY, AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
CITIGROUP, INC., THE PLAN'S ADMINISTRATIVE COMMITTEE OF CITIGROUP INC., THE 401(K)
PLAN INVESTMENT COMMITTEE AND DOE DEFENDANTS 1-20, DEFENDANTS.



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

OPINION & ORDER

Plaintiffs bring this putative class action for alleged violations of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. This Court previously granted in part and denied in part defendants' motion to dismiss the amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Leber v. Citigroup, Inc., 07 Civ. 9329, 2010 U.S. Dist. LEXIS 25097 (S.D.N.Y. Mar. 16, 2010). Plaintiffs now move pursuant to Federal Rule of Civil Procedure 15(a) for leave to file a second amended complaint. For the reasons set forth below, plaintiffs' motion is granted in part and denied in part.

I.BACKGROUND

The Court presumes familiarity with the facts in this action but will summarize the procedural history.

A. The Amended Complaint and this Court's Prior Opinion

Plaintiffs filed the initial complaint in October 2007 and an amended complaint in July 2008, alleging three counts of wrongdoing. First, the amended complaint alleged that the Administrative Committee and the Investment Committee of Citigroup's 401(k) retirement plan (the "Plan") as well as the individual members of those committees (collectively, the "committee defendants")-all of whom are fiduciaries of the Plan- violated section 406 of ERISA by (1) selecting mutual funds offered and managed by subsidiaries of Citigroup (the "Affiliated Funds") for inclusion in the Plan, and (2) purchasing the services of Citigroup, a party in interest. Second, the amended complaint asserted that the committee defendants, through the same acts, violated the fiduciary duties imposed by section 404 of ERISA by putting the interests of Citigroup ahead of Plan participants and by failing to act with the prudence required of them. Third, the amended complaint alleged that Citigroup itself knowingly participated in each of the above alleged ERISA violations.

In August 2008, defendants moved to dismiss the amended complaint, contending that ERISA's statute of limitations barred plaintiffs' claims and, in the alternative, that plaintiffs had failed to state a claim upon which relief could be granted. The Court granted in part and denied in part defendants' motion in March 2010, dismissing all claims except for one section 404 claim. The section 404 claim that survived alleged "that the committee defendants acted imprudently by steering Plan assets to affiliated mutual funds with higher investment advisory fees than those of competing funds." Leber, 2010 U.S. Dist. LEXIS 25097 at *4. The Court noted, however, that the survival of that claim would "turn on resolution of the timeliness of this action, an issue that cannot be resolved on this Rule 12(b)(6) motion." Id. at *42.

In an April 2010 Order, the Court directed the parties to conduct discovery related to the timeliness of plaintiffs' sole remaining claim and set a briefing schedule for defendants' motion for summary judgment. (See Order dated April 9, 2010, Dkt. No. 63.) That discovery closed in June 2010. Plaintiffs then moved for leave to file a second amended complaint in August 2010. Shortly thereafter, defendants moved for summary judgment on the ground that this action is time-barred. The Court has stayed the briefing on defendants' motion until after the Court decides plaintiffs' motion for leave to amend. (See Endorsed Letter dated Oct. 22, 2010, Dkt. No. 83.)

B. The Proposed Second Amended Complaint

Plaintiffs' proposed second amended complaint asserts four section 404 fiduciary duty claims, set forth in Counts Two, Four, Five, and Six.*fn1

Count Two alleges that throughout the class period-October 18, 2001 to September 4, 2007-the committee defendants breached their duties of loyalty and prudence by failing to remove, replace, and adequately monitor the Affiliated Funds offered in the Plan. (Proposed Sec. Am. Compl. ("SAC") ¶¶ 3, 9, 86.) Plaintiffs contend that the committee defendants should have replaced the Affiliated Funds with comparable funds that charged lower fees and performed better than the Affiliated Funds, but that the committee defendants did not do so because retaining the Affiliated Funds generated income to Citigroup affiliates. (Id. ¶ 87.)

Count Four alleges that the committee defendants breached their duties of loyalty and prudence in April 2003 by selecting three Affiliated Funds as investment options in the Plan, even though these Affiliated Funds charged higher fees and performed worse than other comparable unaffiliated funds. (Id. ¶¶ 96-98.) Plaintiffs assert that the committee defendants selected the Affiliated Funds because the funds were managed by Citigroup affiliates and selecting the funds would bring revenue to these affiliates. (Id. ¶¶ 97-98.)

Count Five alleges that the committee defendants breached their duties of loyalty and prudence in March 2003 by approving the transfer of "tens of millions of dollars that 401(k) Plan participants had invested in unaffiliated funds" to Affiliated Funds when the unaffiliated funds were eliminated from the Plan. (Id. ¶¶ 6, 102.) This automatic transfer-which is called "mapping"-occurred "without [Plan] participants taking action." (Id. ¶ 6.) Plaintiffs contend that the committee defendants approved the mapping not because it would benefit Plan participants, but because it benefited Citigroup affiliates by increasing their fee revenue. (Id. ¶¶ 6, 102.) The mapping was not prudent, according to plaintiffs, because the Affiliated Funds had high fees and poor returns relative to comparable unaffiliated funds. (Id.)

Finally, plaintiffs seek to add Count Six, an entirely new claim, which alleges that the committee defendants breached their duties of loyalty and prudence by failing to disclose to Plan participants an illegal scheme involving the provision of transfer agent services-recordkeeping services for investment companies-which hurt the returns of the Affiliated Funds from 1999 to 2005. (Id. ¶¶ 7, 56.) According to plaintiffs, Citigroup Asset Management ("CAM")*fn2 -a division of Citigroup consisting of mutual fund businesses-had a contract with First Data, CAM's transfer agent, that was extremely profitable to First Data. (Id. ¶¶ 41, 56.) The fees for the services that First Data provided to CAM were paid out of the assets of the Affiliated Funds. (Id. ¶ 56.) Plaintiffs allege that when the contract between CAM and First Data expired in 1999, CAM created a subsidiary-Citigroup Trust Bank-to act as the transfer agent. The Affiliated Funds paid Citigroup Trust Bank for their transfer agent services at close to the same rate that First Data had been paid under its previous contract. But "Citigroup Trust Bank performed almost none of the work in exchange for the money it received." (Id. ¶ 57.) Instead, CAM purportedly ...


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