Citigroup Dodges Investors' $800M RMBS Fraud Suit

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By Michael Greene

Aug. 5 — Citigroup Inc. investors can't revive a lawsuit alleging they were wrongfully induced to hold on to company stock during the financial crisis, the U.S. Court of Appeals for the Second Circuit ruled Aug. 5 ( AHW Inv. P’ship v. Citigroup Inc., , 2016 BL 253579, 2d Cir., No. 13-4488-cv(L), 8/5/16 ).

The stockholders claimed that the bank made fraudulent and negligent misrepresentations about residential mortgage-backed securities between May 2007 and March 2009. The plaintiffs alleged that they lost more than $800 million by holding on to their stock because of the misstatements.

In a non-binding summary order, the federal appeals court affirmed the dismissal of the “holder” claims based on alleged lost profits. Applying New York law, the three-judge panel concluded that the plaintiffs' damages were too speculative.

The court rejected the investors' argument that damages could be calculated based on a “fraud-free price” in which an expert determined what Citigroup's stock price would have been if the company had fully disclosed its financial condition.

Cloaking their arguments “in the mantle of pricing expertise does not alter the fact that Plaintiffs’ use of the ‘fraud-free price' is, in essence, still an effort to recover” the value they might have realized from selling their shares under hypothetical market conditions that never existed, the court wrote, citing New York law.

Direct Claims

The U.S. District Court for the Southern District of New York dismissed the case in October 2013 because the plaintiffs failed to link their damages to the alleged misrepresentations.

On appeal, the Second Circuit asked the Delaware Supreme Court to determine whether the claims must be brought in a shareholder derivative action on behalf of the corporation (229 SLD, 11/30/15). A derivative action has more procedural hurdles than a direct claim.

The Delaware Supreme Court clarified that the stockholders could sue Citigroup directly (101 SLD, 5/25/16). Following the state court ruling, the Second Circuit resolved the remaining issues in the case.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The court's order is available at http://src.bna.com/huR.

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