Wednesday, October 4, 2023
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Key Securities Issue Put to Delaware Justices

(CN) - Delaware's high court must decide if a Citigroup shareholder has a direct or derivative misrepresentation case over an $800 million downturn, the Second Circuit said Wednesday.

The case stems from 17.6 million shares of Citigroup Arthur Williams acquired in 1998 when Travelers Group merged with Citibank.

Williams says his financial advisers encouraged him to sell his shares in 2007, believing that the bank's shares were close to the top for the near-term, and he sold 1 million shares at $55 per share.

He delayed selling the rest of his stake, however, when Citigroup's share price began to decline.

Though Williams says he believed Citigroup's risk position was solid, and that market volatility caused the price decline, the subprime market crisis hit soon after, and Uncle Sam had to bail out Citi to the tune of $476 billion in cash and guarantees.

By the time Williams sold his stake, Citigroup's shares had fallen to $3.09 per share.

A corporation, partnership and seven grant-retained annuity trusts controlled by Williams and his wife filed suit in Manhattan, claiming to have lost more than $800 million by not selling their shares based on the misrepresentations of Citigroup executives that they now contend were fraudulent.

Citigroup "concealed the full extent and impairment of billions in 'toxic' assets, including [collateralized debt obligations] backed by subprime assets," the complaint says.

A federal judge dismissed the complaint, however, crediting Citi's claims that the Williamses lack standing because they sold their Citigroup shares.

Citigroup characterizes the suit as a derivative action that must be brought by current shareholders, but the Second Circuit found Wednesday that this represents a question for the Delaware Supreme Court to determine.

"The proper characterization of plaintiffs' claims as direct or derivative calls for an interpretation of an unsettled area of Delaware law in which there appear to be conflicting decisions, and we anticipate that the resolution of this issue will have significance well beyond the instant suit," Judge Susan Carney wrote for a three-person panel. "Accordingly, we respectfully certify to the Delaware Supreme Court the question whether, under Delaware law, 'holder' claims such as those plaintiffs attempt to assert are properly brought in a direct or derivative action."

The Manhattan-based federal appeals court noted that the Williamses, not Citigroup, would benefit from the recovery of the $809 million, supporting the couple's claim that they may sue directly, rather than derivatively.

"It would be a strange outcome indeed for Citigroup to pay itself for losses sustained by certain shareholders arising from alleged misrepresentations made to those shareholders by the Company and its officers," Carney wrote.

Since the core of the Williamses' injury is the decline in stock price, however, the corporation also suffered an injury.

"We therefore find it difficult to conclude that the Williamses' asserted injury is truly 'independent' of any injury to Citigroup," the 26-page opinion states.

Citing a need for caution, giving the potential consequences of its decision, the court certified the following question to the Delaware Supreme Court:

"Are the claims of a plaintiff against a corporate defendant alleging damages based on the plaintiff's continuing to hold the corporation's stock in reliance on the defendant's misstatements as the stock diminished in value properly brought as direct or derivative claims?"

The panel will make its decision after the state high court weighs in.

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