Following its enormous settlement in the WorldCom case, Citigroup received a bit of relief last week when Judge Swain (S.D.N.Y.) dismissed a related securities class action against the company. In In re Citigroup, Inc. Sec. Litig., 2004 WL 1794465 (S.D.N.Y. August 10, 2004), the court addressed claims that Citigroup had failed, with respect to transactions with Enron, Dynegy, and WorldCom, to conduct its business in accordance with its risk management policies. The plaintiffs also alleged that Citigroup had permitted Solomon Smith Barney (a Citigroup subsidiary) analysts to color their public assessments of those companies to aid Citigroup’s investment banking business.
In its decision, the court found that the claims regarding the transactions with Enron, Dynegy, and WorldCom merely alleged “that Citigroup’s business would have been conducted differently had the company adhered to the management principles disclosed in its public filings.” The court held that under established law, “allegations of mismanagement, even where a plaintiff claims that it would not have invested in the an entity had it known of the management issues, are insufficient to support a securities fraud claim under section 10(b).”
As to the claims based on analyst statements, the court noted that the plaintiffs had failed to allege that any misleading statements were made “in connection with the market for Citigroup’s own securities.” The allegation that Citigroup’s failure to disclose the false nature of the analyst statements had the effect of misleading investors concerning the profitability of Citigroup’s investment banking activities was summarily rejected. First, the court found the “securities laws do not require a company to accuse itself of wrongdoing.” Second, the court found that to the extent the claims were “premised on the assertion that Citigroup breached a duty to disclose that its revenues were ‘unsustainable,” no such duty existed in the absence of any projections concerning those revenues.
Holding: Motion to dismiss granted with leave to amend.
The 10b-5 Daily 