Citigroup Wins Auction-Rate Securities Ruling

     (CN) – A federal judge in Manhattan dismissed as too vague a lawsuit accusing Citigroup of manipulating the auction-rate securities market.

     U.S. District Judge Laura Taylor Swain tossed the five consolidated class actions, but gave lead plaintiff Michael Passidomo, a shareholder, until Oct. 1 to re-file the complaint.
     Judge Swain separately dismissed a shareholder derivative action against Citigroup a day earlier, because the plaintiffs in that case failed to ask the bank to bring the suit itself.
     In this case, she ruled that the charges were too vague.
     “Plaintiff’s complaint does not include specific allegations as to which defendants performed what manipulative acts at which times and with what effect,” Judge Swain wrote.
     “Instead, plaintiff relies on general and conclusory allegations regarding defendants’ practices in connection with ARS (auction-rate securities) auctions.”
     Auction-rate securities are debt instruments in which the interest rate is periodically reset through auctions.
     They were touted as safe and liquid investments.
     The $300 billion ARS market collapsed in February 2008 when brokerages stopped supporting the auctions, leaving investors unable to unload their securities, rendering them illiquid.
     In 2006, the SEC reached a $13 billion settlement with 15 firms, including Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch and Morgan Stanley, after investigators determined that the firms failed to properly inform investors of the risks involved in ARS.
     The Citigroup investors claimed that the firm regularly intervened in the auctions to keep them from failing, without their knowledge.
     Citigroup’s intervention effectively propped up the market for the securities, despite supply surpassing demand.
     This was done to offset the negative impact of the subprime mortgage crisis, and to generate underwriting, broker-dealer and auction dealer fees, according to investors.
     Judge Swain rejected the market manipulation charge, citing investors’ “failure to allege particularized facts.”
     The plaintiffs could only show that Citigroup “engaged in bad (in hindsight) business judgments in connection with ARS, and did not engage in the alleged conduct with an intent to deceive investors,” the judge wrote.
     Swain said the allegations were “based on circumstantial evidence.”
     “Accordingly, a manipulation complaint must plead with particularity the nature, purpose, and effect of the fraudulent conduct and the roles of the defendants.”
     She also called the plaintiff’s loss-causation allegations “insufficient.”
     “Plaintiff does not specifically allege that he tried to sell his ARS, nor does he allege that interest rates set through Defendants’ allegedly manipulative conduct were lower than they would have been absent of such conduct,” Judge Swain ruled.
     In August 2008, Citigroup agreed to buy back about $7.3 billion of auction-rate securities it sold to charities, small businesses and individual investors. It also pledged to help institutional customers liquidate $12 billion of securities by the end of 2009.
     The Louisiana retirement system, which brought the other auction-rate securities lawsuit against Citigroup, also has until Oct. 1 to file an amended complaint.

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