Ray v. Citigroup Global Markets, Inc.

• Citation: 482 F.3d 991
• Decision Date: 12 April 2007
• Docket Number: No. 05-4362.,05-4362.
• Parties: Sherwin I. RAY, et al., Plaintiffs-Appellants, v. CITIGROUP GLOBAL MARKETS, INC., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

482 F.3d 991

Sherwin I. RAY, et al., Plaintiffs-Appellants, v. CITIGROUP GLOBAL MARKETS, INC., et al., Defendants-Appellees.

No. 05-4362.

United States Court of Appeals, Seventh Circuit.

Argued September 7, 2006.

Decided April 12, 2007.

Steven S. Biss (argued), Johnson & Bell, Catherine M. Chapman, Baum, Sigman, Auerbach, Neuman & Katsaros, Chicago, IL, for Plaintiffs-Appellants.

Ellen S. Robbins, Andrew W. Stern (argued), Sidley Austin, New York, NY, for Defendants-Appellees.

Before RIPPLE, KANNE, and WOOD, Circuit Judges.

WOOD, Circuit Judge.

This is a case brought by a group of disappointed investors who lost millions of dollars after the shares they had purchased of SmartServ Online, Inc. (SSOL) collapsed in value. They blame their losses on John Spatz, an investment advisor, his employer, Citigroup Global Markets, Inc., and the employer's parent company, Citigroup, Inc. (collectively, Citigroup). The district court, however, granted summary judgment in the defendants' favor, finding that the federal claims the plaintiffs were hoping to assert under § 10(b) and § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5, were doomed because plaintiffs had no evidence of loss causation. The district court also dismissed plaintiffs' state claims, on the ground that they were preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f)(1). The latter ruling is not before us, but plaintiffs would like to convince us that they may proceed with the federal theories of recovery. Although we have applied the favorable de novo standard of review to the district court's ruling, we conclude that plaintiffs' claims cannot succeed. We therefore affirm.

I

The plaintiffs are more than a hundred retail investors who purchased millions of dollars' worth of stock in SSOL between 2000 and 2002. SSOL was a small company in the wireless data services business. The value of its shares had soared during the late 1990s, going from less than $1 per share in early October 1999 to more than $170 in February 2000. By early April 2000, the price had settled down to a range between $70 and $90 per share. Defendant John Spatz is an institutional stockbroker employed by Citigroup (in an entity formerly known as Salomon Smith Barney, Inc.). Spatz worked with retail brokers Howard Borenstein, Mel Stewart, and Angelo Armenta, who in most cases were the people who directly advised the plaintiffs to buy SSOL stock. Citigroup is a global financial services firm that, as relevant here, provides investment and asset management services. Spatz, according to plaintiffs, was Citigroup's top institutional salesman, and thus his opinions carried great weight with others in the industry.

The plaintiffs alleged that Spatz, along with two other Citigroup stockbrokers (Francis X. Weber, Jr., and Anthony Louis DiGregorio, Jr., neither of whom was named as a defendant) fraudulently induced the plaintiffs to purchase ever-increasing amounts of SSOL stock by making misrepresentations both to plaintiffs and to their retail brokers, Borenstein, Stewart, and Armenta. The rub was this: throughout the time period at issue—2000 to 2002—the stock market as a whole was declining. Publicly available information tells us that the Dow Jones Industrial Average stood at 11,723 on January 14, 2000, which at the time was an all-time high; by December 31, 2002, after interim ups and downs, it was 8,341. See Chart of the Dow Jones Industrial Average since 1974, at http://www.the-privateer.com/ chart/dow-long.html (visited March 14, 2007). Nevertheless, Spatz and Citigroup falsely told the plaintiffs that SSOL was still a great deal. They claimed that SSOL had signed substantial contracts with large corporations like Microsoft, Swisscom, Qualcomm, Verizon Wireless, IBM, and Citigroup itself. These contracts, they said, would produce millions of dollars in revenue for SSOL over time. They claimed that the institutional analysts at Citigroup thought highly of SSOL and were prepared to initiate "research coverage," and they represented that SSOL had obtained large sources of financing.

According to the plaintiffs, what Spatz and Citigroup did not say was that SSOL had problems (about which it knew) with its current contracts with companies such as GoAmerica, Hutchison Telecom, and Sunday Telecommunications. Moreover, plaintiffs say, Spatz urged them to invest in SSOL to the exclusion of almost all other companies. (This may well have been poor portfolio design; whether it was fraud is a different question.) The information about research coverage lured plaintiffs into thinking that Citigroup (and Spatz) genuinely believed that SSOL was a safe investment and that there was little risk in directing their money to SSOL. In fact, according to plaintiffs, Citigroup thought no such thing and was well aware that SSOL was a risky investment. One clue might have been the fact, disclosed in SSOL's public filings, that the company had yet to derive any significant revenue from its wireless data business. Had plaintiffs been told the truth about the risk they were incurring, they claim, they would have sold the shares they had and refrained from purchasing any more shares. When the truth finally emerged, the stock price of SSOL, which had been more than $80 per share in June 2000, plunged to only $1 per share. As the district court pointed out, the undisputed facts showed that SSOL's competitors suffered the same fate: 724 Solutions lost 98.9% of its value over that time; Aether Systems lost 98.39% of its value, and Openwave Systems lost 94.35% of its value.

The district court found that the defendants were entitled to summary judgment. It looked to the Supreme Court's decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), for the elements of a claim under § 10(b) and Rule 10b-5. In Dura, the Court summarized those elements as follows, for cases involving publicly traded securities and purchases or sales in public securities markets:

(1) a material misrepresentation (or omission);

(2) scienter, i.e., a wrongful state of mind;

(3) a connection with the purchase or sale of a security;

(4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as "transaction causation," see Basic [Inc. v. Levinson, 485 U.S. 224,] 248-249, 108 S.Ct. 978, 99 L.Ed.2d 194 (nonconclusively presuming that the price of a publicly traded share reflects a material misrepresentation and that plaintiffs have relied upon that misrepresentation as long as they would not have bought the share in its absence);

(5) economic loss; and

(6) "loss causation," i.e., a causal connection between the material misrepresentation and the loss.

544 U.S. at 341-42, 125 S.Ct. 1627 (most citations omitted). The loss causation element was the most obvious missing link, in the district court's view: plaintiffs had no evidence that, if believed, would show that the particular misrepresentations they accused Spatz and Citigroup of making had a causal connection with the loss in value of the SSOL shares. See also Bastian v. Petren Resources Corp., 892 F.2d 680, 683 (7th Cir.1990).

II

On appeal, plaintiffs have pointed to evidence in the record that, they believe, provides that missing link. They acknowledge that the stock price of SSOL's competitors fell just as precipitously as the SSOL price, but they urge us to take another look at the evidence. The affidavits, depositions, and documentary evidence in the record reveal, they argue, that Spatz's and Citigroup's misrepresentations were the reason (plaintiffs' emphasis) for the decline in SSOL's share price. This is because SSOL never had the contracts, revenues, or funding that Spatz repeatedly said that it did.

The question we must answer is whether this additional information was enough to show that the loss in value of SSOL's shares was proximately caused by the defendants' alleged misrepresentations. See Dura, 544 U.S. at 343, 125 S.Ct. 1627. As the Court explained in Dura, it is not enough to show that shares were purchased at a high price (whether inflated or not) and later sold at a much lower price. The reason is that many different factors might account for the drop in value:

If the purchaser sells later after the truth makes its way into the marketplace, an initially inflated purchase price might mean a later loss. But that is far from inevitably so. When the purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price.

544 U.S. at 342-43, 125 S.Ct. 1627. If the plaintiff cannot prove "loss causation"— that is, the fact that the defendant's actions had something to do with the drop in value—then the claim must fail.

This court made the same point years before Dura in Bastian, where we wrote, "[W]hat securities lawyers call loss causation is the standard common law fraud rule . . . merely borrowed for use in federal securities fraud cases." 892 F.2d at 683. This element of the claim attempts to distinguish cases where the misrepresentation was responsible for the drop in the share's value from those in which market forces are to blame. See Law v. Medco Research, Inc., 113 F.3d 781, 786-87 (7th Cir.1997); Ryan v. Wersi Elec. GmbH & Co., 59 F.3d 52, 54 (7th Cir.1995).

Although they try mightily to convince us otherwise, it seems to us that plaintiffs here are confusing loss causation, which we have just described, with transaction causation. Transaction causation is nothing but proof that a...