IN RE CITIGROUP INC. SECURITIES LITIGATION.
MORGAN STANLEY SMITH BARNEY, LLC and CITIGROUP, INC., Defendants. WESLEY ODOM, Plaintiff,
OPINION & ORDER
SIDNEY H. STEIN, District Judge.
Plaintiff Wesley Odom, a former employee of Smith Barney Asset Management, LLC,  brings this suit alleging violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act"); common law fraud and negligent misrepresentation; and violations of the Florida Whistleblower's Act, Fla. Stat. §§ 448.101 et seq. Odom's Exchange Act and common law claims arise from alleged misrepresentations made by Citigroup during 2007 and 2008-which were the subject of multiple other lawsuits before this Court, including two securities fraud class action litigations in which settlements were approved in August 2013. See In re Citigroup Inc. Bond Litig., No. 08 Civ. 9522 (SHS), 2013 WL 4427195 (S.D.N.Y. Aug. 20, 2013); In re Citigroup Inc. Sec. Litig., Nos. 09 MDL 2070 (SHS), 07 Civ. 9901 (SHS), 2013 WL 3942951 (S.D.N.Y. Aug. 1, 2013).
Unlike the plaintiffs in those actions, however, Odom does not allege that he purchased or sold Citigroup securities during the time period in which these misrepresentations allegedly affected the stock price. Rather, he asserts what are known as "holder" claims, alleging that he owned Citigroup stock during this period and refrained from selling it-i.e. he continued to hold the stock-due to Citigroup's misrepresentations. Odom's Whistleblower's Act claim is based upon his alleged forced resignation in retaliation for advising his clients to opt out of premium Citigroup accounts.
Citigroup has moved to dismiss Odom's complaint, advancing a number of theories. Odom's federal securities fraud claims are dismissed with prejudice because holder claims are not cognizable under the Exchange Act. Odom's state law fraud and negligent misrepresentation claims also must be dismissed with prejudice because they are preempted pursuant to the Securities Litigation Uniform Standards Act ("SLUSA"). Even if SLUSA did not preempt these state-law claims, however, they would fail to state a claim on the merits based upon substantially the same analysis this Court utilized in dismissing another litigation in this multidistrict litigation ("MDL"), AHW Investment Partnership v. Citigroup Inc., Nos. 09 MD 2070 (SHS), 10 Civ. 9646 (SHS), 2013 WL 5827643 (S.D.N.Y. Oct. 30, 2013). Finally, because the factual allegations relevant to Odom's Florida Whistleblower's Act claim do not overlap with the facts underlying the Citigroup securities claims consolidated before this Court, the Court recommends that the Judicial Panel on Multidistrict Litigation ("JPML") remand that claim to the U.S. District Court for the Northern District of Florida, from which this action was transferred, pursuant to JPML Rule 10.1(b).
A. Factual Allegations
According to the complaint,  Odom was employed by Smith Barney as a financial advisor in its Pensacola, Florida office from 1992 to 2009. (Compl. ¶ 1, 7.) During the relevant time period, Smith Barney was part of the Citigroup Asset Management business unit and was wholly owned by Citigroup. ( Id. at ¶¶ 8-9.) Citigroup and Smith Barney encouraged employees to purchase Citigroup stock through various incentive programs, and Odom purchased shares of Citigroup during his employment. ( Id. at ¶¶ 12-13.) Specifically, he acquired approximately 10, 233 shares during or before 2006; he was awarded options to purchase 354 shares of stock in 1998, 1999, and 2000; and he purchased an unstated number of additional shares through his 401(k) account. ( Id. at ¶ 13.)
As set forth above, the Citigroup misrepresentations alleged in this action are based on the same conduct as those alleged in the Securities and Bond actions before this Court-although the class action complaints are considerably more detailed and include multiple additional allegations of misrepresentations or omissions. The allegations advanced in this litigation can be summarized as follows. Beginning in approximately 2005, Citigroup increased its exposure to subprime residential mortgages, both originating such loans and packaging them to form residential mortgage backed securities ("RMBS")-which in turn were packaged into collateralized debt obligations ("CDOs"). ( Id. at ¶ 14.) In mid-2007, Citigroup began making public statements in conference calls and press releases that seriously underrepresented its exposure to subprime RMBS. ( Id. at ¶¶ 16-20.) Specifically, Odom alleges that Citigroup made material misstatements during a July 20, 2007 telephone conference ( id. at ¶ 17); a July 27, 2007 conference call ( id. at ¶ 18); and an October 1, 2007 "press release and recorded telephone announcement" ( id. at ¶ 20). The Securities complaint references both the July 20 and October 1 statements. ( See, e.g., In re Citigroup Inc. Securities Litig., Nos. 09 MDL 2070 (SHS), 07 Civ. 9901 (SHS), Amended Consolidated Class Action Compl. (" Securities Compl.") ¶¶ 435, 827, 828, 890, 895, 1189-93; Dkt. No. 74.)
By November 2007, the company determined that downgrades in the ratings of certain tranches of subprime-RMBS-backed CDOs would have a negative effect on a significant portion of its CDO portfolio, at which point Citigroup "disclosed the actual amount of its subprime exposure" for the first time-a development that "shocked the market." (Compl. ¶¶ 22-26.) Citigroup's stock dropped precipitously following these disclosures. ( Id. at ¶ 26.) During the same time-fall of 2007-Citigroup had also been understating its exposure to RMBS in the form of financial products known as structured investment vehicles ("SIVs"). ( Id. at ¶¶ 27-29.) This exposure was disclosed in December 2007. ( Id. at ¶ 29.) The combined effect was "record-breaking" losses in the last quarter of 2007. ( Id. at ¶ 30.)
Notwithstanding its previous disclosures, Citigroup continued to understate its ongoing exposure to RMBS throughout 2008; repeatedly failed to take necessary write-downs or increase its loan-loss reserves to account for the risk associated with the mortgage-backed securities it had retained; and insisted that its position in the financial markets remained strong. ( Id. at ¶¶ 32-37.) Odom points to two specific examples in the complaint: a "mid-September 2008" statement by then-Citigroup-CEO Vikram Pandit, in which he called Citigroup "a pillar of strength in the markets" ( id. at ¶ 35); and a November 17, 2008 "employee Town Hall" meeting, during which Pandit "again noted Citi's strong capital position" ( id. at ¶ 36). Again, the Securities complaint references these statements. ( See Securities Compl. ¶¶ 926, 930, 963, 992, 1099, 1101, 1239.)
In August 2008, Citigroup agreed to repurchase $7.3 billion in auction rate securities ("ARS")-which it had secretly been propping up for months by injecting capital liquidity into the ARS market when demand fell short-pursuant to a settlement agreement with the New York Attorney General. (Compl. ¶ 34.) Finally, in November 2008, Citigroup accepted a $326 billion bail-out package from the federal government, intended "largely to guarantee the at-risk subprime mortgages and toxic assets Citi could not sell." ( Id. at ¶ 37.) By January 16, 2009, the company's stock was trading at $3.50 per share-an "almost 93 percent" decrease from October 2007. ( Id. at ¶ 40.)
In addition to these misrepresentations aimed at the market generally, Odom represents that he was the recipient of additional false information as a Smith Barney employee. Specifically, in early 2007, the regional director of Smith Barney assured the Pensacola employees that Citigroup "was not involved in that type of business"-meaning subprime mortgages-that employees "had nothing to fear from the fallout, " and that they should "be patient about their holdings." ( Id. at ¶ 41.) By mid-2007, "Smith Barney no longer allowed its employees to access" outside analyst opinions about the company, instead providing them with research from "a little known outside analyst who expressed confidence in the strength of Citi and predicted that the stock should be priced at $60-$65 within a matter of months." ( Id. at ¶ 42.) When Odom inquired about the state of the ARS market in late 2007, he was told by his boss and by the Citigroup ARS sales desk "that the market was fine and that ARS continued to present great investment vehicles for clients." ( Id. at ¶ 43.) In 2008, "[w]hen the financial crisis [had] worsened, " Smith Barney management allegedly continued to assure employees about the bright future of Citigroup and that "the best was yet to come." ( Id. at ¶¶ 45-46.)
Odom alleges that he held his stock throughout 2007 in reliance on these optimistic representations about Citigroup's current status and future. ( Id. at ¶ 47.) In 2008, he "attempted" to sell some of his holdings, but was told by the Pensacola office's acting manager "that only the real' manager could authorize the sale." ( Id. ) Odom was "eventually" able to sell his stock, but "only after the price of the stock had further decreased." ( Id. ) Odom alleges that he "lost in excess of $600, 000 due to the decline in value of his Citi stock." ( Id. at ¶ 56.)
Throughout 2008, Smith Barney "strongly encouraged its financial advisors to market Citi preferred securities to their clients, " and in 2009 "when the preferred market began to collapse, " it "prohibited" advisors from counseling clients to sell preferred securities. ( Id. at ¶ 51.) The company also, in spring of 2009, told advisors to market Citigroup "Gold" accounts-which "offer competitive CD rates, but are burdened with very high monthly charges"-to clients. ( Id. at ¶ 52.) Odom nonetheless chose to inform clients about those higher fees and explain what Odom refers to as an "opt out procedure." ( Id. at ¶ 53.) After confirming that he had been doing this, Odom was asked to resign by his manager, "or she would have to fire him." ( Id. ) Odom resigned on May 4, 2009. ( Id. )
B. Procedural History
Odom filed a complaint in the First Judicial Circuit, Escambia County,
Florida in January 2011. He asserted six causes of action: unpaid wages; conversion; violation of the Florida Whistleblower's Act; common law fraud; negligent misrepresentation; and violation of Section 10(b) and Rule 10b-5 of the Exchange Act. Defendants removed the action to the U.S. District Court for the Northern District of Florida the next month.
In March 2011, following a notice of tag-along action by defendants, the JPML conditionally transferred this action to this Court as part of the Citigroup MDL. Odom moved to vacate the conditional transfer order or, in the alternative, for severance of the first three counts and their remand to the Northern District of Florida. The JPML ordered the first two counts-unpaid wages and conversion-severed and transferred back to the Northern District of Florida; it transferred the Florida Whistleblower's Act, common law fraud, negligent misrepresentation, and Exchange Act claims to the MDL.
In its order, the JPML stated that the fraud, negligent misrepresentation, and Exchange Act claims "clearly involve common questions of fact with the actions previously transferred to MDL No. 2070"-which "centralized actions involving allegations that the Citigroup defendants unlawfully misled investors, with material misstatements or omissions in Citigroup's disclosures, among other things, about the nature of... in particular, [Citigroup's] holdings in and exposures to subprimerelated assets"-and that transfer of these claims would "serve the convenience of the parties and witnesses and promote the just and efficient conduct of the litigation." (Order of Transfer dated May 23, 2011, Ex. 2 to Decl. of Susanna M. Buergel dated July 22, 2011; Dkt. No. 21.) It also observed that although "[t]he question of transfer of the whistle-blower claim... is a closer call, " it would grant the transfer to allow ...