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Markey v. Citigroup, Inc.

United States District Court, Second Circuit

December 20, 2013



SIDNEY H. STEIN, District Judge.

Plaintiffs Wendy Markey and Sandra Stewart, former employees of defendant Citigroup, Inc.[1] bring this suit alleging solely state law claims of common law fraud; negligent misrepresentation; and violations of the Florida Securities and Investor Protection Act ("FSIPA"), Fla. Stat. § 517.301. Plaintiffs assert no federal claims for relief. Plaintiffs' claims arise from alleged misrepresentations made by Citigroup during 2007 and 2008. These claims 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 MD 2070 (SHS), 07 Civ. 9901 (SHS), 2013 WL 3942951 (S.D.N.Y. Aug. 1, 2013). The allegations concerning these misrepresentations are essentially carbon copies taken from the complaint in another action in this multidistrict litigation ("MDL") that was brought by a plaintiff represented by the same attorneys as here. That action, entitled Odom v. Morgan Stanley Smith Barney, LLC, Nos. 09 MD 2070, 11 Civ. 3827 (SHS) (S.D.N.Y.), was dismissed by this Court last week. See Odom v. Morgan Stanley Smith Barney, LLC, Nos. 09 MD 2070, 11 Civ. 3827, 2013 WL 6569875, at *7-9 (S.D.N.Y. Dec. 13, 2013).

Citigroup moved to dismiss plaintiffs' complaint on essentially the same grounds it advanced successfully to support the dismissal of Odom's complaint. As with Odom's complaint, the Court finds that plaintiffs' state law claims alleging misrepresentations or omissions in connection with the sale or purchase of securities are preempted pursuant to the Securities Litigation Uniform Standards Act ("SLUSA").


A. Factual Allegations

According to the complaint, [2] Markey was hired by Citigroup Global Markets, Inc.'s ("CGMI") predecessor, Smith Barney, in 1995. (Compl. ¶ 8.) Stewart was hired by Smith Barney's predecessor, Shearson American Express, in 1984. ( Id. at ¶ 9.) Both plaintiffs were financial advisors, and both became employees of CGMI when it acquired Smith Barney. ( Id. at ¶¶ 8-9.) During the relevant time period, CGMI was wholly owned by Citigroup. ( Id. at ¶ 11.)

Citigroup and CGMI encouraged employees to purchase Citigroup stock through various incentive programs, and both Markey and Stewart purchased or otherwise obtained shares of Citigroup stock during their employment. ( Id. at ¶¶ 13-15.) Specifically, Markey received a compensation bonus of $15, 000 in Citigroup stock in December 1998; she was awarded an unstated number of stock options that vested five years after an unspecified date; she began participating in "the CAP plan" in 2003 or 2004 and contributed 5-10 percent of her salary to it each year through 2007[3]; she purchased approximately 10, 233 shares of Citigroup stock "during 2006 or in earlier years"; and she acquired unspecified amounts of Citigroup securities for unknown amounts at unknown times through her 401(k) account. ( Id. at ¶ 14.) Similarly, Stewart received options to purchase Citigroup stock that vested five years after an unspecified date; she, too, contributed 5-10 percent of her salary each year to "the CAP plan" beginning in an unspecified year "through 2007"; and she, too, purchased unspecified amounts of Citigroup stock for unknown amounts at unspecified times through her 401(k) account. ( Id. at ¶ 15.)

The Citigroup misrepresentations alleged in this action are the same as a few of the considerably more extensive and detailed allegations advanced in the Securities and Bond actions; they are essentially verbatim copies of the misrepresentations alleged in the complaint in Odom. The allegations advanced in this litigation, just as in Odom, 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 ¶ 16.) In mid-2007, Citigroup began making public statements in conference calls and press releases that seriously underrepresented its exposure to subprime RMBS. ( Id. at ¶¶ 18-22.) Specifically, Markey and Stewart allege that Citigroup made material misstatements during a July 20, 2007 telephone conference ( id. at ¶¶ 18-19); a July 27, 2007 conference call ( id. at ¶¶ 20-21); and an October 1, 2007 "press release and recorded telephone announcement" ( id. at ¶ 22). Identical or similar statements are referenced in the Securities litigation. ( 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. ¶¶ 24-28.) Citigroup's stock dropped precipitously following these disclosures. ( Id. at ¶ 28.) 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") by keeping the SIVs off of its balance sheet. ( Id. at ¶¶ 29-31.) This exposure was disclosed in December 2007. ( Id. at ¶ 31.) The combined effect was "record-breaking" losses in the last quarter of 2007. ( Id. at ¶ 32.)

Plaintiffs allege that, 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 ¶¶ 34-39.) Markey and Stewart point 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 ¶ 37); and a November 17, 2008 "employee Town Hall" meeting, during which Pandit "again noted Citi's strong capital position" ( id. at ¶ 38). Again, the Securities complaint, filed years before this action, also 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. ¶ 36.) 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 ¶ 39.) 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 ¶ 42.)

In addition to these misrepresentations aimed at the market generally, Markey and Stewart represent that they were the recipient of additional false information as employees of CGMI's Pensacola, Florida office. Although plaintiffs style these allegations as "Particularized Allegations Involving Plaintiffs, " they, too, are essentially verbatim repetitions of allegations in the Odom complaint. Specifically, in early 2007, the regional director of CGMI 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 ¶ 43.) By mid-2007, "CGMI no longer allowed its employees to access research via Standard & Poor's, " 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 ¶ 44.) In 2008, "[w]hen the financial crisis [had] worsened, " CGMI's divisional director informed financial advisors that "Citi was very solvent and that the advisors should continue to remain optimistic." ( Id. at ¶ 45.)

Plaintiffs allege that they held their Citigroup stock throughout 2007 and 2008 in reliance on these representations to the point where "the price of the securities dropped below their price on the dates they were acquired and the securities became substantially worthless." ( Id. at ¶ 48.) The decline in value of Markey and Stewart's Citigroup holdings resulted in losses of "hundreds of thousands of dollars." ( Id. at ¶ 53.)

Citigroup's announcement of the November 2008 cash infusion from the government was the "last straw" for Markey and Stewart, and the two "began taking steps to form their own company." ( Id. at ¶ 51.) When CGMI discovered this plan, management asked plaintiffs to resign or ...

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