Hershfang v. Citicorp, 90 Civ. 8178 (MBM).

• Decision Date: 24 June 1991
• Docket Number: No. 90 Civ. 8178 (MBM).,90 Civ. 8178 (MBM).
• Citation: 767 F. Supp. 1251
• Parties: Stanley HERSHFANG, on behalf of himself and all others similarly situated, Plaintiff, v. CITICORP, John S. Reed and Thomas Jones, Defendant.
• Court: U.S. District Court — Southern District of New York

767 F. Supp. 1251

Stanley HERSHFANG, on behalf of himself and all others similarly situated, Plaintiff, v. CITICORP, John S. Reed and Thomas Jones, Defendant.

No. 90 Civ. 8178 (MBM).

United States District Court, S.D. New York.

June 24, 1991.

Jules Brody, Stull, Stull & Brody, and Robert I. Harwood and Andrew Davidovits, Wechsler, Skirnick, Harwood, Halebian & Feffer, New York City, for plaintiff.

Kenneth A. Caruso, Joseph T. McLaughlin and Lawrence J. Slattery, Shearman & Sterling, New York City, for defendant.

OPINION AND ORDER

MUKASEY, District Judge.

Plaintiff Hershfang, on behalf of a purported class of similarly situated shareholders, claims that newspaper reports and dividend announcements were part of a scheme devised by defendants Citicorp, John S. Reed, Citicorp's Chairman, and Thomas Jones, Citicorp's Executive Vice President, to inflate the price of Citicorp stock, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1990). Defendants move to dismiss the complaint under Fed.R.Civ.P. 9(b) and 12(b)(6), for failure to plead fraud with particularity and to state a claim. Because the present complaint does nothing more than allege what Judge Friendly once called "fraud by hindsight," defendants' motion is granted.

I.

The following rendition is based entirely on the complaint, whose fact allegations must be accepted as true in connection with a motion to dismiss. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). As will be seen, the allegations consist of little more than unremarkable facts and excerpts from newspaper articles.

On March 19, 1990, Reed met with securities analysts, and cautioned that the then-current real estate slump could have an effect on the bank, but reassured the analysts by telling them that Citicorp expected to implement "a customary dividend increase" in the 8% to 10% range. Complaint ¶ 19. In response to this announcement, Richard Bove, an analyst at Dean Witter Reynolds, Inc., commented that he was particularly encouraged by the planned dividend increase because "regulators wouldn't let them increase if they were in big trouble." Id.

On April 17, 1990, at the bank's annual meeting, Reed again expressed pessimism about the real estate market and its possible effect on earnings, but confirmed his earlier statement to the securities analysts by announcing that Citicorp was increasing its annual dividend by 10% from $1.62 to $1.78 per share. Complaint ¶ 19. The next day, USA Today reported that "Reed's gloomy pronouncement about real estate and the bank company's weak earnings report didn't seem to phase Citicorp's directors. They voted Tuesday to raise the firm's dividend to an annual rate of $1.78, up 10% from the previous rate of $1.62." Complaint ¶ 21. Similarly, The Wall Street Journal reported that Citicorp was "signaling that the Company expects its operations to remain healthy" by boosting its dividend. Complaint ¶ 22.

On June 21, 1990, in an article partially titled "Citicorp's Chief Comes Under Fire as Earnings Remain Disappointing," The Wall Street Journal reported that "rather than knuckle under to calls for greater reserves and more emphasis on short-term profits, Mr. Reed takes a damn-the-torpedoes attitude ... he insists that reserves are adequate and that capital will be replenished through asset sales and retained earnings. New shares will be issued only for a major acquisition, he adds." The article further stated that "In April, Mr. Reed's bravado surfaced again. Citicorp thumbed its nose at critics by announcing a 9.9% increase in the dividend at the same time its write-offs of bad loans soared 79% and first-quarter earnings plunged 56%." Complaint ¶ 23 (brackets and ellipses in complaint).

On July 17, 1990, Citicorp reported net income of $248 million for the second quarter of 1990, compared with $231 million for the first quarter of 1990 and $395 million for the second quarter of 1989. Also, consistent with the decision taken at the annual meeting in April, the Board of Directors declared a quarterly dividend of $0.445 per share. Complaint ¶ 24.

On September 22, 1990, in an article discussing possible dividend cuts by major companies, The Dallas Morning News reported that "Citicorp, the nation's largest banking group, said it was in no such trouble. `Will we have losses resulting from large provisions in the third and fourth quarters? No,' said a Citicorp spokesman. `No dividend cut is planned.'" Complaint ¶ 25. On September 24, 1990, The Wall Street Journal quoted Michael A. Callen, an executive in charge of Citibank's wholesale banking division, as saying "no one around here is talking about a dividend cut" and that "I don't think we will have change in the pattern of reserving and write-offs that's in place; I think we've got a hold on it." Complaint ¶ 26. On September 25, 1990, the American Banker similarly reported that "a spokesman for Citicorp said `there's been no talk about a dividend cut.'" Complaint ¶ 27.

On October 16, 1990, Citicorp announced that its profits for the third quarter of 1990 had fallen 38% from the level reported in the third quarter of 1989 and 10% from the level reported in the second quarter of 1990 to $221 million. Complaint ¶ 28. On October 23, 1990, The Wall Street Journal, in an article discussing a meeting between Citicorp executives and securities analysts, reported that:

"with pens poised on note pads, more than 150 analysts hung on every word Citicorp's Chief Financial Officer Thomas Jones had to say about problem loans, dividends and earnings last Wednesday ... Mr. Jones appeared Wednesday to be measuring his words carefully when he said `I personally doubt' Citicorp would cut its dividend. After the meeting, he also responded to rumors about layoffs in the consumer banking sector, which has 72,000 employees. He said the number of employees there is likely to remain `stable to slightly down. I can assure you that there are not going to be a lot of firings'."

Complaint ¶ 29 (ellipses in complaint).

On December 7, 1990, The Wall Street Journal reported that at a Goldman, Sachs & Co. banking conference, Reed

"confirmed that the nation's largest banking company is seeking to raise new capital through a private placement. Mr. Reed didn't specify the amount or type of the hoped-for private placement, but argued that any resulting dilution for current shareholders would be preferable to a dividend cut on common shares. According to a report yesterday by Goldman Sachs, Mr. Reed told the conference that he believes cutting dividends is a `highly inefficient' means of raising capital."

Complaint ¶ 30. The Wall Street Journal also reported that a "Citicorp spokesman said the Goldman Sachs report is `a generally accurate reflection' of Mr. Reed's remarks." Complaint ¶ 31.

On December 18, 1990, in what the complaint describes as a "stunning about-face," Citicorp announced that:

(a) the bank would increase its reserve for troubled loans by $340 million;

(b) it would cut its staff by 8,000 employees and take a fourth quarter charge of nearly $300 million to cover costs related to these terminations;

(c) as a result of the increase in loan loss reserves and the anticipated employee terminations, the bank expected to post a fourth-quarter loss of $300-400 million (d) management recommended that the Company slash its annual dividend by 44% from $1.78 to $1.00 per share.

Complaint ¶ 32.

Plaintiff filed this suit two days later. The complaint alleges both that the price of Citicorp stock immediately declined "in response" to the December 18 announcement and that the announcement had been "timed to coincide" with the Federal Reserve Bank's statement that it would lower the discount rate—"a move which is anticipated to have a positive affect sic on the price of bank stocks." Complaint ¶ 33.

The complaint then quotes an article in The New York Times which allegedly stated that "analysts assume the dividend cut was a result of prompting by regulators who were upset early this year when Citicorp increased its dividend, despite weak earnings" and that "earlier this month Mr. Reed said reducing the dividend was an inefficient way of raising capital because the money saved was too little compared with the lower price the company would receive when it next tried to sell stock." Complaint ¶ 34 (brackets in complaint). The complaint then quotes a December 20, 1990 article in the Financial Times which reported that Reed "made an unusual mae culpa sic recently. `We were warned about real estate two years ago, we were warned again a year ago, and we pooh-poohed it,' said the chairman of Citicorp in an interview last month. `Now I'm damn embarrassed because the critics were right and we were wrong.'" Complaint ¶ 35 (emphasis in complaint).

The body of the complaint concludes with an allegation that "defendants knew or were reckless in not knowing, based on facts available to them, that their statements made and disseminated during the Class Period were false and misleading in that there was no reasonable basis for their statements concerning the financial condition of Citicorp, its future prospects, and its dividend." Complaint ¶ 36.

Plaintiff alleges the above events were part of a scheme to inflate the price of Citicorp stock by "falsely portraying the financial condition of Citicorp, ... falsely projecting the Company's profitability and continued payment level of dividends— indeed of customary sic increasing dividends — to its shareholders in good or bad cycles and ... failing to correct prior statements and forecasts," and that defendants thereby violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 or aided and abetted such violations. Complaint ¶¶ 38-39. The complaint further alleges that the scheme had its intended effect of inflating the price of Citicorp stock and that the members of the purported class suffered damages as...