In re Citigroup Securities Litigation

Background

The plaintiffs were Lead Plaintiff Public Sector Pension Investment Board and Named Plaintiff Anchorage Police & Fire Retirement System. They acted for a proposed class of purchasers of Citigroup securities. Their earlier Consolidated Amended Class Action Complaint asserted securities-fraud claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against Citigroup, three Citigroup officers—Michael L. Corbat, John C. Gerspach, and Mark A. L. Mason—and seventeen Citigroup directors. The plaintiffs also asserted control-person claims under Section 20(a) against the officer defendants.

The court had previously granted the defendants’ motion to dismiss the earlier complaint under Federal Rule of Civil Procedure 12(b)(6), finding that the plaintiffs had not adequately alleged a material misrepresentation or omission and the required mental state for securities fraud, known as scienter. The court also previously stated that the Section 20(a) claim failed because the plaintiffs had not established a primary securities-law violation.

Proposed amendment

The plaintiffs asked to file a Second Amended Complaint. The proposed complaint reduced nearly sixty alleged misstatements to eight, shortened the proposed class period, dropped the previously named director defendants, and added information attributed to twelve former Citigroup employees. The allegations concerned statements in Citigroup annual reports, a statement by Corbat, and statements about a risk-management and technology initiative called Project Rainbow.

The plaintiffs argued that the revised allegations showed Citigroup’s risk-management systems were deficient, that the defendants concealed those deficiencies, and that the defendants knew or recklessly disregarded that their statements were misleading. The defendants opposed amendment, arguing that the proposed changes would be futile and that the plaintiffs had delayed seeking amendment without adequate explanation.

Court’s analysis

Under Rule 15, a court may deny permission to amend when the proposed amendment would be futile. Futility means that the proposed complaint would still fail to correct earlier deficiencies or state a claim under Rule 12(b)(6). Securities-fraud claims under Section 10(b) and Rule 10b-5 must identify a material and misleading statement or omission and plead particularized facts creating a strong inference that the defendant acted with intent to deceive, manipulate, or defraud.

The court held that the annual-report statements remained too general and vague to be material to a reasonable investor. It also found that Corbat’s statement about Citigroup becoming a simpler, safer, and stronger institution was immaterial and was not adequately alleged to be false. The additional allegations from former employees did not change those conclusions.

As to Project Rainbow, the court said that the project’s abandonment did not establish that Citigroup’s statements were false when made. The court found that the statements about the project’s benefits and a holistic view of customers were too general, were made in contexts that did not concern risk management or regulatory compliance, or amounted to corporate optimism rather than actionable statements of fact. The court also rejected the plaintiffs’ theory that Citigroup’s disclosures were actionable as misleading half-truths because the underlying statements were not material.

The court separately considered scienter and found that the new allegations did not create a strong inference of the required state of mind. Allegations about audits, reports, meetings, regulatory concerns, and employee complaints did not identify specific contradictory information that the individual defendants had when they made the challenged statements. The court also found that the plaintiffs’ use of an Office of the Comptroller of the Currency declaration lacked sufficient context and timing. A later statement by Mr. Dugan, considered in full, did not establish the defendants’ state of mind during the relevant period.

Ruling

The court concluded that the proposed Second Amended Complaint would fail to withstand a Rule 12(b)(6) motion and therefore would be futile. Judge Loretta A. Preska denied the plaintiffs’ motion for leave to amend. The court stated that the Section 20(a) claim was dismissed for failure to establish a primary violation of the securities laws. The court did not decide the defendants’ undue-delay argument because the futility finding resolved the motion, and it directed the Clerk of Court to close the motion.