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AHW Investment Partnership, MFS, Inc. v. CitiGroup Inc.

United States District Court, S.D. New York

October 30, 2013

AHW INVESTMENT PARTNERSHIP, MFS, INC., and ANGELA H. WILLIAMS as TRUSTEE of the ANGELA H. WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MARCH 24, 2006, the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD April 17, 2006, the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 9, 2006, the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 1, 2007, the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 1, 2008, the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD JULY 1, 2008, and the ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 21, 2008, Plaintiffs,
v.
CITIGROUP INC., CHARLES PRINCE, VIKRAM PANDIT, ROBERT RUBIN, ROBERT DRUSKIN, THOMAS G. MAHERAS, MICHAEL STUART KLEIN, DAVID C. BUSHNELL and GARY CRITTENDEN, Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Daniel Brecher, Plaintiff (1:09-md-02070-SHS), Pro se.

For Wendy Mackey, Sandra Stewart, Plaintiffs (1:09-md-02070-SHS): Bradley Syfrett Odom, Odom & Barlow Pa. - Pensacola Fl, Pensacola, Fl; Martin Bruce Sipple, PRO HAC VICE, Ausley & McMullen, P.A., Tallahassee, FL; Robert N. Clarke, Ausley & McMullen-Tallahassee Fl, Tallahassee, FL.

For Citigroup Global Markets, Inc., Defendant (1:09-md-02070-SHS): Victor H. Polk, Jr., PRO HAC VICE, Greenberg Traurig LLP, Boston, MA.

For Leslie G Shumsker, Defendant (1:09-md-02070-SHS): Michael B. Cosentino, Seegel, Lipshutz & Wilchins, P.C., Wellesley, MA.

For AHW Investment Partnership, MFS, Inc., Angela Williams, As Trustee of the Angela H. Williams Grantor Retained Annuity Trust UAD March 24, 2006, the Angel Williams Grantor Retained Annuity Trust UAD April 17, 2006, the Angel Williams Grantor Retained Annuity Trust UAD May 9, 2006, the Angel Williams Grantor Ret, Plaintiffs (1:10-cv-09646-SHS): Kevin Dugald Galbraith, LEAD ATTORNEY, Daniel Fried, Edward H. Glenn, Jr., Jacob H. Zamansky, Zamansky & Associates LLC, New York, NY; Kevin D. Galbraith, PRO HAC VICE, Zamansky & Associates L.L.C., New York, NY.

For CitiGroup Inc., Charles Prince, Vikram Pandit, Gary Crittenden, Defendants (1:10-cv-09646-SHS): Brad Scott Karp, Susanna Michele Buergel, Walter Rieman, LEAD ATTORNEYS, Jane Baek O'Brien, Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY), New York, NY.

For Robert Rubin, Robert Druskin, Thomas G. Maheras, Michael Stuart Klein, David C. Bushnell, Defendants (1:10-cv-09646-SHS): Walter Rieman, LEAD ATTORNEY, Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY), New York, NY.

OPINION

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OPINION & ORDER

SIDNEY H. STEIN, U.S. District Judge.

Table of Contents

I. BACKGROUND

II. DISCUSSION

A. The Claims are Direct, not Derivative.

B. New York Substantive Law Governs the Fraud and

Negligent Misrepresentation Claims.

1. New York and Florida Law Conflict

a. Negligent Misrepresentation

b. Common Law Fraud

2. New York has a Greater Interest in the Litigation than

Florida.

C. New York Law Requires Dismissal of the Action.

1. Plaintiffs' Negligent Misrepresentation Claim Fails

Because they have Not Alleged a " Special

Relationship."

2. Plaintiffs' Common Law Fraud Claim Fails Because

they have Not Alleged Cognizable Damages

Proximately Caused by the Fraud.

III. CONCLUSION

Plaintiffs raise common law claims of negligent misrepresentation and fraud that take the form of what are referred to as " holder" claims: i.e., they allege that they would have sold their Citigroup stock but instead held it to their detriment in reliance on defendants' misleading statements. Specifically, plaintiffs allege that they planned to sell 16.6 million shares of Citigroup stock in May 2007. However, believing defendants' misrepresentations that minimized Citigroup's exposure to its risk from holding residential mortgage-backed securities, they instead held the stock until March 2009 as its price fell by 95%. Defendants have moved to dismiss the action pursuant to Federal Rule of Civil Procedure 12(b)(6).[1]

Defendants principally assert that plaintiffs cannot state a valid claim based on an injury that derives from a contemplated sale in hypothetical market conditions. The motion presents a choice between New York law--which largely prohibits fraud claims by holders of publicly traded securities alleging such an injury--and Florida law--which likely permits those claims. Defendants contend, first, that New York law applies to plaintiffs' claims and, second, that New York law bars recovery here because the alleged damages are speculative and not proximately caused by the misrepresentations. See Starr Found. v. Am. Int'l Grp., Inc., 76 A.D.3d 25, 901 N.Y.S.2d 246 (1st Dep't 2010). Plaintiffs respond that Florida law applies and permits their claims, and, alternatively, that their claims are actionable pursuant to New York law because they have

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pled the contemplated sale with sufficient specificity.

Because New York state has the greater interest in applying its law to govern suits regarding misrepresentations made in New York about stock in a New York-based corporation that is traded on a New York exchange, New York law applies to these claims. Applying New York law, the Court finds that plaintiffs have failed to allege cognizable damages proximately caused by the alleged misrepresentations, and thus dismisses the action.

I. Background

According to the Amended Complaint (the " Complaint" )),[2] the Citigroup shares at issue trace to non-party Arthur Williams and the 1998 merger between Citicorp and Travelers Group that formed Citigroup. (Compl. ¶ ¶ 1-3.) Williams " acquired 17.6 million shares of Citigroup common stock valued at approximately $35 per share" as a result of that merger. ( Id. ¶ 3.) By 2007, Williams and his wife Angela had transferred these shares to the plaintiff entities--a partnership, a corporation and a series of trusts ( id.)--all of which the couple controlled ( id. ¶ ¶ 1, 14-16, 169).

In May 2007, Williams developed a plan " to sell out his entire Citigroup position." ( Id. ¶ 5.) In forming this plan, Williams and his financial advisors thoroughly " combed through Citigroup's filings and statements" ( id. ¶ 170), examining information that included " conference calls, investor slideshows, earnings releases, public filings and statements from senior officers" ( id. ¶ 169). Williams investigated " whether [Citigroup] had meaningful exposure to the subprime mortgage assets that were beginning to drag down other major players in the financial services sector." ( Id. ¶ 170.) Although Citigroup had substantial exposure to risky subprime assets throughout 2007, it failed to disclose that exposure until November 2007. ( See, e.g., id . ¶ ¶ 64-74, 103-09.) Although Williams thus believed that Citigroup's balance sheet was healthy, he nonetheless sold 1 million shares on May 17, 2007 at $55 per share. ( Id. ¶ 170.) However, " [t]rusting that [Citigroup]'s public pronouncements were forthright and that it had no exposure to those 'toxic' assets, Williams reversed course [on his plan to fully liquidate] and decided to hold the remainder of his shares." ( Id. ¶ 170.)

Williams " continually" reconsidered selling the remaining 16.6 million shares " [o]ver the next seventeen months," only to be deceived into holding them each time. ( Id. ¶ 177.) He reconsidered the sale in July 2007, for example, but decided against it after listening to an earnings call and reviewing " earnings releases and materials downloaded from [Citigroup]'s website." ( Id. ¶ 209.) Similarly, in January 2008, Williams decided not to sell in reliance on an earnings call in which executives explained further write-downs, but assured investors that " they had a complete understanding of their exposure, and that it was contained and under control." ( Id. ¶ 223.) The price of Citigroup stock steadily fell as market conditions worsened and news of its exposure to toxic assets, with associated accounting and liquidity issues, trickled out. ( See, e.g., id . ¶ 235 (discussing the effect of " enormous turmoil and uncertainty in the markets" .) " It was not until the end of 2008 that Citigroup's full exposure during the subprime crisis, and the consequences [of] its exposure,

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were revealed." ( Id. ¶ 115.) Williams finally sold the 16.6 million shares at issue for $3.09 per share on March 18, 2009. ( Id. ¶ 250.)

Although plaintiffs cite multiple instances of detrimental reliance on defendants' misstatements after May 2007, they allege that their losses stem in full from their having not sold 16.6 million shares at some time after the executed sale of 1 million shares on May 17, 2007. But plaintiffs claim as damages the price they would have received for all 16.6 million shares on May 17, 2007--the estimated " fraud-free price" of $51.59--less the $3.09 per share they actually received in 2009. ( Id. ¶ 171-72.) Alternatively, they claim out-of-pocket damages based on the $35 value of Citigroup shares at the time of the Travelers merger, not on the estimated May 2007 price. ( Id. ¶ 173.)

II. Discussion

The Court first analyzes whether plaintiffs' claims are actually shareholder derivative claims that they lack shareholder standing to assert on behalf of the corporation. The Court finds the claims are direct and determines that New York law applies to both claims. Finally, the Court ...


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