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Smith Barney Lead Plaintiff Thrown Out, Never Owned Shares

Citigroup Inc.’s Smith Barney unit can’t be sued by the union pension fund that’s the lead plaintiff in a six-year-old shareholder fraud class action because it never owned any of the shares that are the basis of the lawsuit, a judge said.

U.S. District Judge William H. Pauley III in Manhattan, citing “epic failures” by the lawyers on both sides of the case, today dismissed Operating Local 649 Annuity Trust Fund from the suit. The pension fund’s attorneys told the judge that their client bought more than 75,000 shares of a similarly named security and not those involved in the case.

Pauley called the effect of the error “seismic,” and said it has caused the litigation to take on “Sisyphean dimensions.”

“After six years of litigation, including extensive motion practice, an appeal to the Second Circuit, remand, more motion practice, and discovery, lead counsel learned that the lead plaintiff never purchased any of the securities at issue in this action,” Pauley wrote in today’s decision.

The suit was filed against Smith Barney Fund Management LLC and Citigroup Global Markets Inc. in 2005, after Citigroup agreed to pay $208 million to settle claims by the U.S. Securities and Exchange Commission that its subsidiaries kept fees that should have been turned over to Smith Barney’s mutual funds.

Two Funds

In a letter to Pauley Aug. 31, Bernstein Liebhard LLP, which represents Local 649, said the union had purchased shares in Smith Barney Capital Preservation Collective Trust, not Smith Barney Capital Preservation Fund, the mutual fund that is the subject of the litigation.

“Lead counsel’s failure to confirm the most basic fact -- that its client purchased the securities at issue in this action -- has resulted in a considerable waste of time and resources,” Pauley said.

Bernstein Liebhard partner Stanley Bernstein said the lawyers relied on the union’s certification that it had bought the mutual fund shares and brokerage statements that mistakenly reflected the mutual fund shares along with their ticker symbol.

“We did not just rely on somebody’s word,” Bernstein said in a phone interview today. “We had the underlying core documentation from the broker. And it was wrong.”

In addition to the union’s attorneys, Pauley also criticized Citigroup’s lawyers in his opinion.

’Failed to Ask’

“Astonishingly, defense counsel failed to ask their clients whether Local 649 had invested in any of the Smith Barney funds and, if so, specifically which one,” Berman said. “Had Smith Barney simply checked its records, it would have avoided six years of sparring with a phantom opponent.”

Charles Platt, a partner in the New York office of Wilmer Cutler Pickering Hale and Dorr LLP, which represents Citigroup, declined to comment on Pauley’s opinion today.

The mistake will require several motions to be rebriefed, the filing of another amended complaint and the exchange of additional evidence in the case, according to Pauley.

“In retrospect, it was something so obvious that every lawyer in the case should have recognized the problem and reacted immediately,” Pauley wrote. “But no one did.”

The case is In re Smith Barney Transfer Agent Litigation, 05-cv-07583, U.S. District Court, Southern District of New York (Manhattan).

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