In re Citigroup Inc. Sec. Litig..

Decision Date09 November 2010
Docket NumberNos. 07 Civ. 9901 (SHS),Nos. 09 md 2070 (SHS),Nos. 08 Civ. 135 (SHS),Nos. 08 Civ. 136 (SHS),Nos. 07 Civ. 10258 (SHS),s. 09 md 2070 (SHS),s. 07 Civ. 9901 (SHS),s. 07 Civ. 10258 (SHS),s. 08 Civ. 135 (SHS),s. 08 Civ. 136 (SHS)
Citation753 F.Supp.2d 206
PartiesIn re CITIGROUP INC. SECURITIES LITIGATION.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

OPINION & ORDER

SIDNEY H. STEIN, District Judge.

I. BACKGROUND
A.

Parties

B.

Financial Instruments

1.

Subprime and Alt–A Mortgages

2.

Residential–Mortgage–Backed Securities

3.

Collateralized Debt Obligations

4.

Structured Investment Vehicles

5.

Leveraged Loans and Collateralized Loan Obligations

6.

Auction Rate Securities

C.

CDO Allegations

1.

Pre–November 4, 2007 Statements

a.

Alleged Misleading Statements and Omissions about the Extent of Citigroup's CDO Exposure

i.

Citigroup Discloses the Value of Its “CDO–Type Transactions”

ii.

Citigroup Discloses Its “Maximum Exposure to Loss” from VIEs

iii.

Citigroup Discloses an “Ownership Interest” in “Certain VIEs”

iv.

Citigroup States that It Has “Limited Continuing Involvement” with CDOs

b.

Alleged Misleading Statements about the Nature of CDO Exposure

i.

Citigroup States that Securitizations Reduce Its “Credit Exposure”

ii.

Citigroup Presents Its “CDO–Type Transactions” as Distinct from Its “Mortgage–Related Transactions”

iii.

Citigroup Maintains its CDOs Contained Diverse Assets to Diversify Risk

c.

Alleged CDO–Related Accounting Violations

i.

Reporting CDO Exposure

ii.

Consolidating Commercial Paper CDOs

iii.

Valuing CDO Holdings

2.

November 4, 2007 and Later Statements

3.

Allegations of Fraudulent Intent with Respect to CDO–Related Misstatements and Omissions

a.

Citigroup Underwrote the CDOs It Owned

b.

The Market Believed that CDOs Were at Risk

c.

Citigroup Analysts Express Concern About Subprime Mortgages and CDOs

d.

Citigroup Creates CDOs to Buy Unwanted CDOs

e.

Citigroup Creates a Special Entity to Assume the Risks of Liquidity Puts

f.

Citigroup Makes Collateral Demands on Mortgage Originators

g.

Citigroup's CDO Prospectuses Warn of Risks

h.

Citigroup Purchases Insurance for Its CDO Holdings

i.

Citigroup Executives Hold Daily Risk Exposure Sessions

j.

Citigroup Makes a Margin Call on Basis Capital Funds

D.

Alt–A RMBS Allegations

E.

SIV Allegations

F.

Mortgage Allegations

1.

Alleged Mortgage–Related Misstatements

2.

Alleged Mortgage–Related GAAP Violations

3.

Allegations of Fraudulent Intent with Respect to Mortgage–Related Misstatements and Omissions

G.

ARS Allegations

H.

Leveraged Loan and CLO Allegations

I.

Solvency Allegations

II. DISCUSSION
1. Standard of Review
2.

Section 10(b) Claims

a.

Misstatements or Omissions of Material Fact

b.

Scienter Standard

c.

Loss Causation Standard

3.

Section 20(a) Claims

B.

CDO Allegations

1.

Pre–November 4, 2007 Statements

a.

Alleged misstatements and omissions

b.

Materiality and Loss Causation

c.

Scienter

i.

Citigroup

ii.

Individual Defendants

2.

November 4, 2007 and Later Statements

a.

Alleged Misstatements and Omissions

b.

Scienter

C.

Alt–A RMBS Allegations

1.

Alleged Misstatements and Omissions Concerning the Extent of Citigroup's Alt–A RMBS Exposure

2.

Alleged Misstatements and Omissions after the April 18, 2008 Disclosure of Citigroup's Alt–A RMBS Holdings

D.

SIV Allegations

1.

Citigroup's SIV Exposure

2.

SIV–Related GAAP Violations

3.

Other Misstatements

E.

Mortgage Allegations

1.

Mortgage–Related Misstatements and Omissions

2.

Mortgage–Related GAAP Violations

F.

ARS Allegations

G.

Leveraged Loan and CLO Allegations

H.

Solvency Allegations

I.

Control Person Liability

III. CONCLUSION

Plaintiffs bring these consolidated securities fraud actions on behalf of a proposed class of investors in Citigroup, Inc., against the company and fourteen of its officials alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Their claims span an array of Citigroup's business—from the mortgages it sold to consumers to the mortgage-backed securities it sold to institutional investors—but sound a similar note: Citigroup allegedly knowingly understated the risks it faced and overstated the value of the assets it possessed. In this way, plaintiffs claim, Citigroup materially misled investors about the company's financial health and caused them to suffer damages when the truth about Citigroup's assets was finally revealed.

Defendants move to dismiss plaintiffs' claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing primarily that plaintiffs' complaint fails to satisfy the heightened pleading standards applicable in securities fraud actions.

The Court finds that plaintiffs have stated a claim to relief only with respect to alleged misstatements and omissions occurring between February 2007 and April 2008 concerning Citigroup's collateralized debt obligation holdings. Plaintiffs' remaining allegations do not adequately state a claim for relief. Accordingly, for the reasons set forth below, defendants' motion is granted in part and denied in part.

I. BACKGROUND

The Amended Consolidated Class Action Complaint (“Complaint”), filed on February 20, 2009, is 536 pages long, contains 1,265 paragraphs and weighs six pounds. The following facts are extracted from that tome and are presumed to be true for the purposes of this motion.

A. Parties

Plaintiffs are current or former Citigroup shareholders. Plaintiffs claim they purchased Citigroup common stock on the open market for a price that was inflated by defendants' alleged fraud. (Compl. ¶¶ 21–27.) Plaintiffs purport to represent all persons who purchased Citigroup common stock between January 1, 2004 and January 15, 2009. ( Id. at 1.)

Citigroup is itself named as a defendant. Incorporated in Delaware with its principal place of business in New York, Citigroup is a financial services holding company operating in more than 100 countries. It employs over 300,000 people. ( Id. ¶ 28.)

Plaintiffs also bring this action against several current and former directors and officers of Citigroup. The Complaint describes the individual defendants as follows:

Charles Prince was Citigroup's Chief Executive Officer (“CEO”) from 2003 to 2007 and Chairman of Citigroup's Board of Directors from 2006 to 2007. Plaintiffs allege that Prince was “forced to resign” on November 5, 2007 as a result of substantial losses Citigroup reported. ( Id. ¶¶ 33, 1154.)

Robert Rubin served as a Citigroup director beginning in 1999 and was named Chairman of the Board of Directors after Prince's departure. ( Id. ¶ 36.)

Lewis Kaden, starting in 2005, was Citigroup's Chief Administrative Officer (“CAO”), responsible for “audit and risk review” at Citigroup. ( Id. ¶ 37.)

Sallie L. Krawcheck was Citigroup's Chief Financial Officer (“CFO”) from 2004 to 2007. ( Id. ¶ 38.)

Gary Crittenden replaced Krawcheck as CFO in March 2007. ( Id. ¶ 41.)

Steven Freiberg was the Chairman and CEO of Citigroup's Global Consumer Group and his responsibilities included consumer lending in the mortgage area. ( Id. ¶ 43.)

Robert Druskin was Citigroup's Chief Operating Officer from 2006 to 2007 and previously held other officer positions. ( Id. ¶ 44.)

Todd S. Thomson was Citigroup's CFO prior to 2004 and was the CEO of a Citigroup division between 2004 and 2007. ( Id. ¶ 46.)

Thomas G. Maheras held various officer positions with different Citigroup divisions, including the division responsible for Citigroup's collateralized debt obligation holdings. ( Id. ¶ 48.)

Michael Stuart Klein, like Maheras, held various officer positions with different Citigroup divisions, including the division responsible for Citigroup's collateralized debt obligation holdings. ( Id. ¶ 50.)

David C. Bushnell was Citigroup's Senior Risk Officer from 2003 to 2007 and served as CAO for two months in 2007. ( Id. ¶ 52.)

John C. Gerspach served as Citigroup's Chief Accounting Officer and Controller beginning in March 2005. ( Id. ¶ 54.)

Stephen R. Volk held various officer positions at Citigroup. ( Id. ¶ 57.)

Vikram Pandit became Citigroup's CEO following Prince's departure. He previously was the CEO of a Citigroup division. ( Id. ¶ 59.)

Plaintiffs allege that many of the individual defendants sold large amounts of stock during the class period. ( Id. ¶¶ 33–61.) Plaintiffs also allege that several individual defendants “signed and certified the accuracy of” Citigroup's SEC filings. ( Id. ¶¶ 35, 40, 42, 46, 55, 60.)

B. Financial Instruments

The theory of plaintiffs' case is that defendants materially misled them about the risks Citigroup was exposed to via various financial instruments, including CDOs, SIVs, Alt–A RMBS, CLOs and ARS. Understanding the allegations in this action requires understanding the nature of this gallimaufry of financial instruments. They are described in the Complaint as follows.

1. Subprime and Alt–A Mortgages

A “conforming” mortgage is a mortgage that meets certain requirements designed to reduce the risk of default and to mitigate losses in the event of default. These include requiring the borrower to meet minimum standards of creditworthiness, to document his or her income and to make a down payment of at least 20% of the value of the home. In a conforming mortgage, the borrower's debt-to-income ratio does not exceed 35%. If the loan's interest rate is adjustable over time (for example, if the interest rate starts low but later increases), the borrower's debt-to-income ratio must be gauged at the “fully indexed” rate, which is the highest interest rate the loan will reach. ( Id. ¶ 221.)

In the mid–2000s, banks increasingly issued “nonconforming” mortgages that departed from the requirements listed above. ( Id. ¶ 222). They issued mortgages to borrowers who were less creditworthy. ( Id. ¶ 231(a).) They did not verify borrower income. ( Id. ¶ 231(f).) They accepted lower down payments or eliminated the down-payment requirement altogether. This practice increased the loan-to-value (“LTV”) ratio—the ratio of the loan amount to the home's value—which enhanced the risk of default and the size of the loss upon default. ( Id. ¶ 231(b).) Banks...

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