Time Is on Banks’ Side|in Fund Fee Ruling

MANHATTAN (CN) - Nearly all class-action claims against Citigroup, Smith Barney and their officials have been scuttled by two interim Supreme Court rulings, a federal judge ruled, quoting Virgil's "time bears away all things."

"Virgil's maxim applies to legal theories as well," U.S. District Judge William Pauley III wrote in his 23-page order.

"As the parties sparred over seven years before this Court and the Court of Appeals, the law underlying plaintiffs' claims changed considerably," he wrote.

A class of investors who bought shares in Smith Barney mutual funds accused the investment adviser of negotiating a contract for transfer agent services that "saddled the funds with excessive, misleadingly disclosed fees," a recent 2nd Circuit ruling summarized.

The fees were then steered to a Smith Barney affiliate, according to investors.

The mutual funds were sponsored and managed by Citigroup Asset Management, which contracted with First Data Investor Services Group to perform transfer agent services for the funds. Transfer agents process transactions, calculate daily net asset values, distribute proxy materials and operate customer service centers, among other things.

Citigroup publicly disclosed this arrangement, investors claimed, but then created a subsidiary called Citicorp Trust Banks and started farming out some of the transfer agent services to the new subsidiary. Citigroup allegedly paid Citicorp a portion of the fees collected from investors without telling the funds' board.

Investors said Citigroup began paying First Data less for its services and then pocketed the difference between what it charged the funds and what it paid First Data.

The 2nd Circuit revived claims against Smith Barney in February 2010.

On remand, Judge Pauley tossed all claims against Citigroup, Smith Barney and investment manager Thomas Jones. He indicated that those claims may once have been viable before two Supreme Court decisions limited the liabilities of mutual funds, lawyers and accountants accused of securities fraud.

"When this action began, the Supreme Court had not decided Stoneridge or Janus," Pauley wrote. "And plaintiffs are largely unable to surmount the new hurdles erected by those decisions."

Both rulings limited the reach of securities fraud statutes, and scraped by on 5-4 and 5-3 margins.

But Pauley said investors still have a claim against Citigroup investment adviser Lewis Daidone, whose signature appears on allegedly misleading statements.

"[T]he Citi Defendants' and Jones's motions to dismiss are granted in their entirety," Pauley concluded. "Daidone's motion to dismiss is denied with respect to misleading statements in documents on which his signature appears."

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