Citi Prevails Against $805M Claim by Wealthy Investor
A wealthy investor who claims to have lost $805 million from a sale of Citigroup Inc. stock has been blocked for now in his attempt to pursue fraud claims against the bank. On Wednesday Manhattan U.S. District Judge Sidney Stein dismissed so-called holder claims by longtime Citi stockholder Arthur Williams, who maintained he would have sold his stock at a higher price in 2007 if he had known then the true extent of Citi's financial troubles.
In contrast, last August, Stein approved a $590 million class action settlement for investors who claim they were deceived when they bought Citigroup stock before the financial crisis. That class didn't include Williams because it only covered investors who bought the bank's stock in 2007 and 2008. Williams, a wealthy insurance executive who cofounded the company now known as Primerica Financial Services, had owned his stock since 1998.
Williams sued the bank and current and former top Citi executives over the drop in value of 16.6 million shares of Citi stock that he owned. He claimed he considered selling his stock in 2007, but didn't because the company assured investors that its exposure to potential losses from mortgage-backed securities was "contained and under control." Williams eventually sold his stock in March 2009 for $3.09 per share. (The stock closed Wednesday near $50.) The $805 million in claimed damages represents the difference between that selling price and the stock's price in May 2007. (Technically, the plaintiffs are a group of investment vehicles that Williams controlled.)
The dispute turned on whether New York or Florida law applied. Florida law appears to allow for holder claims like this, while New York law is more limiting. Williams argued that Florida law should apply because that's where he lived when he sold the stock. But Stein disagreed, noting that the defendants are located in New York, and finding that New York had a greater interest in regulating its securities industry. Applying New York law, he dismissed the plaintiff's claim for negligent misrepresentation because there was no special relationship between Williams and Citi. The fraud claims also fell because they were too speculative, according to the judge.
Stein relied heavily on a 2010 New York intermediate appellate court ruling in a case brought by Maurice Greenberg's Starr Foundation against American International Group Inc. There, Starr also claimed it had been deceived about AIG's condition, but the court rejected Starr's attempt to recover the price it would have received if it had sold its stock during a specified period of time.
Williams' attorney, Jacob Zamansky of New York's Zamansky & Associates, said his client will appeal. "We respectfully believe Judge Stein was incorrect when he applied New York law, but we don't concede that there's no claim under New York law," he said. He plans to ask the U.S. Court of Appeals for the Second Circuit to certify a question to New York's top appellate court to resolve if state law recognizes holder claims. Zamansky said he believes the intermediate court misapplied the law in the Starr case. "We're taking aim at that case," he said.
Citigroup is represented by a Paul, Weiss, Rifkind, Wharton & Garrison team led by Brad Karp. A spokesperson for Citigroup said the company is pleased with the decision.