Citigroup Inc. investors either fell on their faces or cleared a high hurdle when a federal judge this week killed (part of) their securities fraud case.
So contradictory were the spins on the ruling that both sides declared victory. Each side won something, so each lost something, too.
The ruling underscores how tough it is to hold firms or people liable for the financial disaster that Wall Street helped visit on families and funds across the country. It also shows that the task isn’t impossible, although two recent U.S. Supreme Court rulings and a 1995 law make it harder.
Bankers and brokers can be dead wrong about what securities are worth, they can be made stupid by greed, and still stave off a civil suit for securities fraud.
To lose, they have to have been so reckless that they abandoned ordinary standards of care, the danger so obvious that they knew of it or should have, as U.S. District Judge Sidney Stein wrote in the Nov. 9 Citigroup ruling.
Even then, or even if bankers outright lied to shareholders, the investor lawsuit still can’t jump that first hurdle without pretty good evidence of extreme recklessness or intentional deceit.
You’ve got to have something resembling a smoking gun to sue for securities fraud, plus a claim that you were shot by it. And you have to find that evidence before you can delve into the company’s records or question its people.
That’s according to the Private Securities Litigation Reform Act, specifically aimed at making it tougher to sue. It works.
Given that high bar, it’s remarkable that any such case survives. This year judges have tossed out other shareholder suits against Citigroup and Bank of America Corp.’s Merrill Lynch unit.
And yet, investors suing Countrywide Financial Corp. for alleged securities fraud made that jump and then won class-action status late last year. Before things got worse, Countrywide parent Bank of America and accounting firm KPMG agreed to a $624 million settlement.
In the current case, Citigroup investors sued in 2007 hoping to represent everyone who bought shares in the bank during a five-year period when the stock price dropped from $50 to less than $4. They claimed Citigroup and 14 officers or directors deliberately understated the bank’s risks and overstated the value of its assets.
Of the many financial instruments that posed risk for Citigroup, Stein threw out the claims pertaining to all but one of them -- collateralized debt obligations. He reduced the covered period from five years to 15 months and dismissed the case against seven of the 14 accused individuals.
What’s left are claims that the bank and seven officers misled investors about the value and risk of CDOs. The company allegedly concealed the fact that, beyond underwriting CDOs, Citigroup itself owned more than $45 billion of the stuff.
“The claims that were sustained clearly represent the heart of our complaint,” investors’ lawyer Ira Press of the Kirby McInerny firm in New York said in a telephone interview. “We certainly are happy that investors are allowed to proceed.”
There was cheer all around.
“We are pleased the court has dismissed the great majority of plaintiffs’ claims and substantially reduced the class period at stake,” Citigroup said in a statement.
It has taken three years to get to this point in the case, and yet it is in an early stage.
Looks Like Smoke
The plaintiffs have yet to win the right to turn it into a class action for other Citigroup investors to join. And, of course, they haven’t yet proven their claims.
They have only shown that they’ve got what looks like a smoking gun, but only for claims involving CDOs.
By denying or understating Citigroup’s CDO exposure in public statements during 2007 and 2008, the company and some officers showed an “incongruity between word and deed,” the judge wrote.
By then, the bank had to have known its situation was risky and was working internally to try to stabilize, if evidence the plaintiffs have so far offered is borne out, he said.
They don’t have to prove “that defendants were clairvoyant,” and were certain of future losses, Stein wrote.
Citigroup says it’s confident it can fend off those claims as the case proceeds.
But then, Press says he’s confident investors will win. Already they’ve made it through a course that defeated others, with at least a little weight left to carry them on.
It shouldn’t have been this hard.
(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)
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