Court: District Court, S.D. New York; May 13, 2015; Federal District Court
During the 2008 subprime mortgage crisis, Citigroup Inc. stock experienced a significant decline, prompting participants in the Citigroup 401(k) Plan and the Citibuilder 401(k) Plan for Puerto Rico to file a lawsuit against various defendants for breaching fiduciary duties under the Employee Retirement Income Security Act (ERISA). The plaintiffs, who are employees and beneficiaries of the Plans, allege that the defendants—including Citigroup, Citibank, and specific corporate officers—failed to limit investments in Citigroup common stock and violated their responsibilities by allowing continued investments despite clear indicators of the company's financial instability.
The plaintiffs seek recovery for losses incurred between January 16, 2008, and March 5, 2009, asserting five claims related to ERISA violations. They contend that the defendants acted imprudently by maintaining and purchasing Citigroup stock, ignoring abundant public information about the company's dire situation, as well as failing to act prudently in light of nonpublic information. The defendants have filed a motion to dismiss the complaint, arguing that the action is barred by ERISA's statute of limitations and that the claims lack plausibility regarding any breach of duty in adherence to the Plans' investment options. This is the second consolidated action against the defendants concerning Citigroup's stock price decline, following a prior action that was dismissed by Judge Stein and affirmed by the Second Circuit Court of Appeals.
Plaintiffs allege that Citigroup, Citibank, and the Director Defendants failed to monitor and inform other fiduciaries, asserting a claim for co-fiduciary liability against all defendants. The defendants have moved to dismiss the Third Consolidated Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), arguing it fails to state a claim. In evaluating this motion, the court accepts all allegations in the complaint as true and draws reasonable inferences in favor of the plaintiffs without weighing evidence. A claim is deemed plausible if the factual content allows the court to reasonably infer that the defendant is liable for the alleged misconduct. The court does not accept legal conclusions as true and may consider referenced documents and matters subject to judicial notice.
The plaintiffs, participants in the Citigroup Plan, claim that Citigroup and Citibank, as sponsors of the respective plans, had the authority to appoint trustees and committee members. Citigroup appointed Citibank as a trustee during part of the class period and, despite delegating certain duties, retained some fiduciary responsibilities, making them both named and de facto fiduciaries under ERISA. The Director Defendants, who were on the Citigroup Board during the class period, allegedly appointed committee members and failed to monitor them, thus also being de facto fiduciaries. The Administration Committee, the plan's administrator, holds extensive powers to manage the plans, including rule-making and decision-making authority regarding plan operations and administration.
The Investment Committee is authorized to manage the appointment and removal of investment managers and advisors for the Plans, as well as establish or eliminate investment funds. It can set limitations on account timing and frequency, including for the Citigroup Stock Fund. According to Section 7.09(e) of the Citigroup Plan, the Investment Committee is responsible for determining if modifications to investment requirements in the Citigroup Stock Fund are necessary. The Investment Committee must act within the Plan's terms and comply with ERISA regulations. Both Plans are ERISA-compliant employee pension benefit plans with individual accounts based on participant contributions, classified as defined contribution plans. The Citigroup Plan, established on January 1, 1987, includes a stock bonus plan and an employee stock ownership plan (ESOP), while the Citibuilder Plan, initiated on January 1, 2001, is a profit-sharing plan limited to eligible Puerto Rico employees. Participants can make elective contributions, with the Citigroup Plan allowing up to 50% of eligible pay, and the Citibuilder Plan allowing up to 10% until an amendment on January 1, 2009, increased this to 50%, both subject to statutory limits. Citigroup provides matching contributions in stock. The Investment Committee can add or remove investment funds, but the Citigroup Common Stock Fund must remain. Participants can allocate their accounts among available Investment Funds but bear full responsibility for their investment selections, except for required contributions to the Citigroup Common Stock Fund. As of January 2007, Citigroup stock represented approximately 32% of the total assets in both Plans.
Plaintiffs allege that Citigroup's risky investments in the subprime mortgage market, including acquiring subprime loan originators, purchasing dubious loans, and creating high-risk Collateralized Debt Obligations (CDOs), led to its financial collapse. The company reportedly increased its leverage and faced significant losses, resulting in inadequate capital and liquidity. By January 16, 2008, the plaintiffs claim that Citigroup's fiduciaries should have recognized the imprudence of maintaining Citigroup stock in retirement plans, given numerous public and internal warnings regarding the company's deteriorating financial health.
The complaint details Citigroup's role in the subprime mortgage crisis from 2006 to 2009, highlighting decisions made under executives like Rubin that escalated risk-taking. Employees had raised concerns about purchasing defective loans as early as 2006, and a March 2007 conference acknowledged Citigroup's high exposure to subprime mortgages. Following a series of negative press reports and significant stock declines, Citigroup reported a $9.83 billion net loss for the fourth quarter of 2007 and announced a 41% dividend cut.
The plaintiffs argue that by the class period's start, fiduciaries were aware or should have been aware of the risky investment status of Citigroup stock. Analyst Meredith Whitney further criticized Citigroup throughout 2008 for having the largest net exposure to U.S. subprime positions and needing to raise capital.
Citigroup reported significant financial losses of $5.1 billion, $2.5 billion, and $2.8 billion in the first, second, and third quarters of 2008, respectively, and announced plans to cut 52,000 jobs by 2009. On November 17, 2008, the company decided not to mark-to-market $80 billion of mortgage-related assets, thereby concealing their low value. During this period, Citigroup borrowed over $740 billion from the Federal Reserve and received multiple rounds of government assistance under the Troubled Assets Relief Program (TARP), including $25 billion on October 14, 2008, and an additional $20 billion on November 23, 2008, with guarantees on $306 billion of its loans and securities. The federal government ultimately acquired a 36% stake in Citigroup, referred to as a "Third Bailout." Despite the financial aid, Citigroup continued to post losses, including an $8.29 billion loss for Q4 2008 and a total net loss of $27.7 billion for the year, causing its stock to plummet to $0.97 per share by March 5, 2009.
Plaintiffs allege that the fiduciaries of the Plans should have recognized the excessive risk associated with Citigroup stock and acted to fulfill their fiduciary duties by ceasing to purchase or divesting the stock. Instead, they did not take action, resulting in substantial losses for the Plans. The Citigroup Plan's holdings increased from approximately 72.9 million shares valued at $2.147 billion in early 2008 to 91.3 million shares valued at $613 million by early 2009. Similarly, the Citibuilder Plan increased its holdings but saw the value drop from $4.262 million to $1.4 million. A separate complaint was filed against Citigroup on November 5, 2007, leading to a consolidated class action on September 15, 2008, alleging breaches of fiduciary duties under ERISA, including failures to manage the Plans’ assets prudently and to adequately inform participants.
On August 31, 2009, the court dismissed the Complaint in its entirety, ruling that the defendants were not obligated to override the Plans' investment requirement in Citigroup stock, rendering the plaintiffs' claims meritless. Judge Stein did not address the plaintiffs' request to amend the Complaint mentioned in a footnote. The Second Circuit affirmed this dismissal on October 19, 2011, determining that only the Administration and Investment Committees were fiduciaries and that the plaintiffs failed to demonstrate Citigroup and Citibank were de facto fiduciaries. Although the Court disagreed with the district court's view that fiduciaries lacked discretion to divest employer stock, it applied the Moench presumption, which supports ESOP fiduciaries' decisions to invest in employer stock under ERISA. The Court concluded that the plaintiffs did not sufficiently show Citigroup's dire circumstances to necessitate overriding the Plans' terms.
Subsequently, the first Complaint was filed on December 8, 2011, alleging a class period starting January 16, 2008. The current Third Consolidated Amended Complaint, filed on July 30, 2014, includes five counts of breach of fiduciary duties under ERISA against the defendants:
1. Count I claims failure to manage Plan assets prudently based on public information.
2. Count II alleges failure to manage based on nonpublic information.
3. Count III asserts inadequate monitoring of other fiduciaries.
4. Count IV concerns failure to disclose necessary information to co-fiduciaries.
5. Count V claims co-fiduciary liability against all defendants.
The defendants seek to dismiss all claims under Federal Rule of Civil Procedure 12(b)(6) and argue that the claims are barred by ERISA's statute of limitations, which stipulates that actions must commence within either six years after the last act constituting a breach or three years after the plaintiff's actual knowledge of the breach. The statute allows for six years from the date of discovery in cases of fraud or concealment. Actual knowledge is defined as awareness of all material facts necessary to understand a fiduciary's breach of duty or violation of ERISA.
A plaintiff must possess knowledge of all facts necessary to establish a claim, rather than knowledge of the relevant law. The plaintiffs initiated their action on December 8, 2011, meaning that if they had knowledge of the facts supporting their ERISA claims prior to December 8, 2008, their claims are time-barred. Most of the events described in their Complaint occurred before this date, with the plaintiffs asserting that Citigroup's financial troubles were evident as early as January 2008. The plaintiffs argue that only fiduciaries could have been aware of these issues, but their own pleadings highlight that the circumstances surrounding Citigroup's decline were public and well-known. Despite being aware that Citigroup stock remained an investment option in their Plans, the plaintiffs claimed ignorance of the publicly available information before December 2008. However, actual knowledge cannot be evaded through willful blindness.
The plaintiffs contend that they lacked actual knowledge of the defendants' investment evaluation process until after December 2008, citing reports released later as revealing necessary information. Nevertheless, their Complaint fails to detail the imprudent processes alleged against the defendants, undermining their claims. The later reports only supplemented already available information and did not clarify the decision-making regarding Citigroup stock investments. The plaintiffs cannot extend the statute of limitations by introducing additional facts that merely reiterate what they already knew.
Furthermore, the plaintiffs assert their delay in filing the complaint was due to awaiting the outcome of the Citi I case, which they claim should toll their claims. However, the Citi I case pertained to a different class period, and no reasonable expectation existed for the class members in this case to rely on it. The plaintiffs also argue that Citigroup misrepresented its financial health, citing a November 2008 statement from defendant Pandit claiming a stronger position entering 2009. Nonetheless, this statement contradicts public knowledge of Citigroup's deteriorating financial state at the time, as evidenced by a significant drop in stock value.
Pandit’s statement does not constitute concealment under the ERISA statute of limitations, as it did not obscure the plaintiffs' actual knowledge of Citigroup’s declining condition, significant stock price drop, and the ongoing availability of the Citigroup Common Stock Fund in the Plans. Consequently, the plaintiffs' ERISA claims are untimely and must be dismissed. Additionally, the plaintiffs lack a valid claim for breach of fiduciary duty under ERISA because no named plaintiff has standing under the Citibuilder Plan, as none are participants in that Plan. ERISA Section 502(a)(3) permits only participants, beneficiaries, or fiduciaries to bring civil actions for violations, and the Citibuilder Plan is restricted to employees residing or primarily working in Puerto Rico, with no named plaintiffs meeting these criteria. Thus, claims related to the Citibuilder Plan are not actionable. The court will only evaluate claims under the Citigroup Plan, where establishing fiduciary status is critical. ERISA defines fiduciaries as those named in the plan or those exercising discretionary authority over plan management or assets. The settlor doctrine protects actions taken in a settlor capacity from breach of fiduciary duty claims. While employers are fiduciaries in plan administration, they are not considered fiduciaries when making business decisions that impact employees. Previous rulings in Citi I identified the Administration Committee and the Investment Committee as the sole fiduciaries of the Plans, as they were granted specific authority over investment fund management and participant investment selection rules, while Citigroup and Citibank did not hold veto power over these decisions and were not proven to act as de facto fiduciaries.
Plaintiffs allege that Citigroup possesses discretion in managing the Plans, specifically the ability to direct Citibank to accept company stock instead of cash dividends and to sell those shares at market price. This claim mirrors allegations made in a previous case (Citi I). However, the Court of Appeals has determined that similar allegations do not equate to fiduciary conduct under ERISA. Even if Defendants had full discretion regarding company contributions, such discretion does not imply fiduciary responsibility unless it pertains to plan management or administration. The Court maintains that neither Citigroup nor Citibank are considered fiduciaries for these Plans, and the plaintiffs have not provided evidence to establish that any Director Defendants are fiduciaries. The only recognized fiduciaries are the Investment Committee and the Administration Committee. Consequently, claims against any defendants other than these committee members must be dismissed, as they are based on alleged breaches of fiduciary duties that those defendants do not hold.
ERISA mandates that fiduciaries adhere to a prudence standard, requiring them to act solely in the interest of participants and beneficiaries, with a focus on providing benefits and managing reasonable administration costs. Fiduciaries must exercise care, skill, and diligence akin to a prudent person in similar circumstances, diversify investments to mitigate significant losses, and comply with governing documents consistent with ERISA provisions. The Supreme Court has clarified that the same prudence standard applies to all ERISA fiduciaries, including those overseeing Employee Stock Ownership Plans (ESOPs), and clarified that ESOP fiduciaries are not obligated to diversify holdings. The Court also acknowledged Congress's intent to promote the establishment of ESOPs.
Conflicts may arise for ESOP fiduciaries, often company insiders, regarding their duty of prudence when it comes to inside information. The Court established limits on duty-of-prudence ERISA claims, stating that for publicly traded stock, claims that fiduciaries should have acted upon publicly available information suggesting market over- or undervaluation are generally implausible unless special circumstances exist. Fiduciaries are permitted to rely on market price as an unbiased reflection of security value based on public data. To successfully claim a breach of the duty of prudence based on inside information, a plaintiff must plausibly suggest an alternative action that a prudent fiduciary would not have deemed more harmful than beneficial to the fund.
The Supreme Court vacated a lower court's ruling that supported the plaintiffs' allegations of prudence violations based on public information. The Sixth Circuit had previously concluded that the allegations regarding Fifth Third's lending practices and associated risks constituted a viable claim. However, the Supreme Court found no special circumstances to make reliance on the market price imprudent, thereby overturning the lower court's dismissal, which was deemed to stem from a misunderstanding of market price reliance prudence.
In the case involving Citigroup, the plaintiffs contended that the fiduciaries should have recognized the imprudence of investing in Citigroup stock due to its substantial exposure to subprime mortgages based on available public information. Despite these claims, the plaintiffs failed to identify any special circumstances that would impair the reliability of market price. The Supreme Court affirmed that such risk is reflected in market pricing, rejecting the notion that knowing the stock was "excessively risky" alone suffices to establish a breach of the duty of prudence. The fiduciaries were positioned in a challenging situation as noted in Dudenhoeffer, where the likelihood of outperforming the market based solely on public information appeared minimal.
Fiduciaries may face legal action for imprudently continuing to invest in stock that declines, violating 29 U.S.C. § 1104(a)(1)(B). Conversely, if they halt investments and the stock appreciates, they risk being sued for not adhering to plan documents, violating 29 U.S.C. § 1104(a)(1)(D). The Supreme Court rejected a broad presumption of prudence, emphasizing that claims alleging fiduciaries should have outperformed the market are generally implausible. The plaintiffs did not demonstrate special circumstances that would make reliance on market prices imprudent, leading to dismissal of their duty-of-prudence claim based on publicly available information.
Additionally, the plaintiffs’ claim regarding fiduciaries' failure to act prudently on nonpublic information was also dismissed, as they did not adequately allege the existence of material nonpublic information. Although they referenced Citigroup’s financial conditions and liquidity issues, they characterized this information as widely publicized at the start of the class period. The plaintiffs argued that disclosing nonpublic information would not significantly affect stock prices, indicating its immateriality. The court referenced relevant case law to support that if disclosed information does not impact stock prices, it is deemed immaterial. Consequently, since the plaintiffs failed to prove that any nonpublic information would have altered the overall knowledge available to investors, their claims were dismissed.
The defendants' motion to dismiss Counts I and II was granted. Additionally, the plaintiffs alleged that Citigroup and its affiliates failed to properly monitor certain committees (Count III) and did not share information with co-fiduciaries (Count IV).
Defendants are jointly liable as co-fiduciaries (Count V). The Court of Appeals previously dismissed similar claims, noting that they cannot stand without an underlying breach of fiduciary duty. Claims for breach of the duty to monitor and co-fiduciary liability depend on prior breaches. Plaintiffs assert that defendants failed to share information with co-fiduciaries but do not adequately outline this claim, referencing cases about information sharing with participants instead. Without an antecedent breach, the claim of failing to share information cannot be substantiated. Consequently, there can be no breach of co-fiduciary duties if no underlying fiduciary breaches are alleged. The defendants’ motion to dismiss Counts III, IV, and V is granted. The Court has reviewed all other arguments and finds them either moot or without merit, leading to the dismissal of the Complaint and closure of the case. The Clerk is instructed to enter judgment accordingly and close all pending motions. The individual defendants include members from the Director, Administration, and Investment Committees, along with unidentified John Doe Defendants. Prior to January 1, 2009, Citibuilder Plan participants could only contribute 10% of their eligible pay. While other banks received TARP funds, plaintiffs claim Citigroup was the only major bank that would have failed without the bailout. The Supreme Court's ruling in Fifth Third Bancorp v. Dudenhoeffer clarified that there is no presumption of prudence for ERISA fiduciaries managing ESOPs, which abrogated part of the prior appellate decision. The original complaint was filed on October 28, 2011, with an asserted class period beginning November 3, 2008, although plaintiffs now claim the bar date is October 28, 2008.
The December 8 Complaint establishes the current class period, with a bar date of December 8, 2008. Both parties agree that the difference in dates does not impact the case's outcome. The plaintiffs cite United States v. Mason Tenders Dist. Council of Greater New York to support their claim of lacking actual knowledge of material facts, contrasting their situation with that case, where defendants referenced a single newspaper article. Here, plaintiffs highlight extensive adverse publicity regarding Citigroup’s financial condition prior to the bar date. The plaintiffs' motion to amend was merely a footnote in their opposition brief and did not present new facts; neither Judge Stein nor the Court of Appeals acknowledged this request.
The plaintiffs argue that their prudence claim remains timely due to defendants' ongoing duty to review the Plans' assets, as established in Bona v. Barasch. However, they cannot invoke the six-year ERISA window if they had actual knowledge of breaches more than three years before filing. The statute of limitations under ERISA commences from the earliest date the plaintiff had actual knowledge of a breach. Awareness of one breach does not provide new information for later breaches. The plaintiffs focus on class standing principles, but statutory standing under ERISA is limited to participants, beneficiaries, or the Secretary of Labor.
Citigroup's current stock price is approximately $52 per share, with a comparable adjusted value of about $5 due to a reverse stock split. While stock values have risen since the end of the class period, they remain lower than at the beginning. The plaintiffs reference post-Dudenhoeffer cases that recognized duty-of-prudence claims, but those cases do not directly relate to the circumstances at hand.
The Ninth Circuit Court of Appeals addressed a situation where reliance on the market price of stock was deemed inappropriate due to the defendant fiduciaries' awareness of the Amgen Common Stock Fund purchasing stock at an artificially inflated price, influenced by material misrepresentations and illegal off-label marketing. The court referenced Gedek v. Perez, where distinctions were made between cases involving companies that appeared healthy but had underlying issues, and those like Kodak, which were clearly facing bankruptcy. Additionally, the court noted a dispute regarding whether plaintiffs had proposed a plausible alternative action that the defendants could have taken based on nonpublic information, which would comply with securities laws and be prudent for fiduciaries. However, the court determined it unnecessary to address this issue because the plaintiffs failed to allege any material, nonpublic information.
