NEW YORK (CN) – The 2nd Circuit decertified a class action accusing Citigroup’s former top research analyst in the telecommunications sector of defrauding investors by issuing false reports on Metromedia Fiber Network in order to line his own pockets.
Shareholders claim that Jack Grubman, a former research analyst at Salomon Smith Barney, now owned by Citigroup, issued favorable reports on Metromedia in order to attract the company’s business for the investment banking division of Salomon Smith Barney, “which would increase Grubman’s personal compensation,” the ruling states.
Grubman allegedly hid the fact that a $350 million credit deal between Citigroup and Metromedia was plagued with major problems and delays.
U.S. District Judge Gerald E. Lynch certified the class action, relying on the fraud-on-the-market presumption of Basic Inc. v. Levinson. Lynch said the plaintiffs met the requirements for claiming that Grubman’s actions constituted fraud on the market. Under Basic, a presumption for fraud on the market assumes investors relied on public statements when buying or selling stock at market prices.
However, Lynch never gave Citigroup a chance to rebut that claim prior to class certification, the federal appeals court ruled. Citigroup argued that the presumption in Basic does not apply to statements made by research analysts.
Judge Pooler rejected Citigroup’s notion that a heightened evidentiary showing is needed for research analysts, but said the lower court should have considered Citigroup’s rebuttal before certifying the class. Remanded for further proceedings.