In re Citigroup Inc. Securities Litigation

Citations: 199 F. Supp. 3d 845; 2016 U.S. Dist. LEXIS 105106; 2016 WL 4198194Docket: 07-Cv-9901 (SHS)

Court: District Court, S.D. New York; August 9, 2016; Federal District Court

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A securities fraud class action was initiated by current and former Citigroup shareholders against Citigroup and fourteen officials, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs claimed Citigroup misrepresented the risks associated with its financial instruments, leading to significant damages when the true nature of its assets was revealed. After extensive litigation, a settlement of $590 million was approved in 2013, designed to compensate class members and cover litigation costs. The settlement agreement stipulated that any unclaimed funds would be donated to non-sectarian charitable organizations certified under 501(c)(3) of the Internal Revenue Code, rather than reverting to Citigroup.

The lead counsel was authorized to hire Garden City Group, Inc. to administer the settlement fund, which successfully distributed over $483 million to claimants. Recently, class member Theodore H. Frank moved for reconsideration of the Court’s order regarding the final distribution of settlement funds, specifically the designation of cy pres beneficiaries. The Court granted the reconsideration but upheld its earlier decision, affirming the appropriateness of the selected cy pres designees and confirming the distribution of funds, including $374,820 to these entities.

GCG undertook extensive efforts to ensure the distribution of settlement checks, including a calling campaign for Authorized Claimants with uncashed checks and reissuing checks as necessary. By July 2015, approximately $27 million remained in the settlement fund, leading to a second distribution of $26,779,189.30 to 55,345 claimants, with nearly all checks being cashed. Post-distribution, around $735,780 remained in the fund, primarily allocated for administrative fees and expenses. On February 5, 2016, class counsel informed the Court that $374,820 remained undistributed and further distributions were deemed impractical. This amount represented 0.064 percent of the original $590 million fund. Lead plaintiffs proposed that the remaining funds be donated to three nonprofit organizations: South Brooklyn Legal Services, National Consumers League, and Consumer Federation of America, which the Court approved on February 16, 2016. Shortly thereafter, Ted Frank, a Senior Attorney with the Competitive Enterprise Institute and class member, moved for reconsideration of this decision. After filing, the Court stayed the order pending further review. No objections were raised against the cy pres distribution method, but there was disagreement over the designated recipients. The cy pres doctrine allows the reallocation of unspent trust funds to purposes aligned with the original intent, a principle rooted in trust law.

The cy pres doctrine is applicable in class action cases when two conditions are met: first, further distributions to class members are not feasible; and second, the designee must have a relationship to the original class. The first condition parallels trust law, which prohibits cy pres designations unless the trust's original purpose cannot be fulfilled. The second condition requires that the designee's interests "reasonably approximate" those of the class, reflecting the trust law principle that new beneficiaries should be related to the original beneficiaries to uphold the settlor's intent. Frank does not oppose the use of cy pres but argues that the proposed designees lack a sufficient connection to the class, claiming they do not qualify as the "next best" recipients. Conversely, lead plaintiffs assert that their designees meet the "reasonable approximation" standard supported by the American Law Institute's Principles of the Law of Aggregate Litigation, which many courts have referenced. The Second Circuit has not yet definitively established which standard—Frank's "next best" or ALI's "reasonable approximation"—is applicable.

In the context of class action lawsuits, cy pres designees must align with the interests of the class and the litigation's objectives. The court has determined that the "next-best" rule is impractical and resource-intensive, favoring a "reasonable approximation" test instead. While some courts adhere to the "next-best" standard based on the trust law origins of the cy pres doctrine—which aims to closely match the original beneficiaries—this standard is not suitable for class actions due to differing purposes. The fundamental goal of trust law is to preserve the settlor's intent, whereas, in class actions, the primary aim is to compensate injured plaintiffs, a goal that is typically achieved before cy pres distributions are necessary.

In the discussed case, 99.937% of the settlement fund has already been disbursed, significantly diminishing the need to honor the original purpose of compensating class members. Consequently, the justification for limiting cy pres designees to the "next-best" entity is weakened, as the original purpose has nearly been fulfilled. The stringent "next-best" standard is also seen as a means to prevent potential conflicts of interest among class counsel, who might otherwise undercompensate class members to favor a personally selected designee.

To maximize recovery for class members, the focus should be on timing rather than the selection of recipients for cy pres awards. Cy pres designations should only be made as a last resort, specifically when distributing funds directly to class members is no longer feasible, which the parties agree is the case here. Tightening the definition of eligible groups for cy pres awards does not effectively enhance class member compensation. The "next-best" standard does not provide better protection for silent class members compared to the reasonable-approximation standard. The inherent risk of silent class members being overlooked is mitigated by the court's responsibility to appoint competent class counsel and its discretion in monitoring settlements. The flexible settlement approval standard under Rule 23, which assesses whether a settlement is "fair, reasonable, and adequate," safeguards all class members' rights. The approval of cy pres designations does not harm class members, as any remaining funds cannot be further distributed. Although there is concern regarding potential conflicts of interest for class counsel in choosing cy pres designees, such concerns are diminished by the trust counsel has earned through their performance during litigation. The absence of evidence indicating conflicts of interest means that class counsel should have reasonable discretion in designating cy pres recipients. Overall, a reasonable-approximation standard is adequate for cy pres designations, as experienced class action counsel have diligently represented the class's interests.

The "next-best" standard for selecting cy pres designees in legal settlements is criticized for potentially leading to judicial impropriety by involving courts in evaluating the merits of public interest organizations. Frank argues that the National Consumers League (NCL) is an unsuitable designee due to its involvement in drafting the Dodd-Frank Act, which he believes may not serve investors' interests. This contention risks necessitating a judicial review of policy matters that are more appropriately addressed by Congress. The court prefers to approve designees that "reasonably approximate" the interests of the class, thus maintaining its supervisory role in settlement fund allocation and preserving flexibility in reviewing counsel's proposals. The court's goal is to ensure that settlements are fair, reasonable, and adequate, rather than striving for the "best" settlement. 

The three proposed nonprofit organizations for the distribution of the settlement fund—South Brooklyn Legal Services (SBLS), NCL, and the Consumer Federation of America—are evaluated for their appropriateness as cy pres designees. SBLS is highlighted for its work in combating abusive lending practices and aiding homeowners affected by mortgage fraud, making it a relevant recipient of the funds, particularly in relation to the risks faced by Citigroup.

Lead counsel argues that increased intervention from organizations like SBLS could have mitigated subprime mortgage lending practices, potentially preventing losses for Citigroup investors. Frank counters that SBLS is unsuitable as a cy pres recipient due to its limited focus on Brooklyn, which does not encompass the nationwide class. However, the court finds that targeting funds to a specific geographic area may be more effective given the limited resources available. Frank also claims that SBLS's foreclosure prevention efforts conflict with the interests of Citigroup investors by increasing costs and reducing profits. Nonetheless, SBLS’s work may ultimately benefit investors by curbing poor lending practices.

The National Consumers League (NCL) is also proposed as a cy pres designee. NCL, recognized as the oldest consumer advocacy organization, aims to protect consumers from scams and promote fair regulations in the marketplace. Frank argues against NCL’s suitability, citing a disconnect with the class and alleging that NCL’s public statements may contradict the interests of shareholders. However, the court considers NCL’s mission to enhance market conditions relevant to the plaintiffs’ injuries. Frank further raises concerns about a potential conflict of interest, pointing out that class counsel’s law firm had previously donated to NCL. The court acknowledges that such affiliations could disqualify a proposed designee if a conflict is established.

The donation in question does not present any impropriety, indicating class counsel's belief in the legitimacy and alignment of NCL's interests with those of the class. There is no evidence of any benefit to class counsel from NCL, and no conflict of interest that would warrant disqualification of NCL as a cy pres recipient. The court finds NCL to be an appropriate cy pres recipient. Additionally, lead plaintiffs intend to allocate 25 percent of remaining funds to the Consumer Federation of America (CFA), which is actively engaged in investor protection. The CFA's involvement includes contributions from a director who helped draft significant financial legislation. Class counsel has designated these funds specifically for the CFA's Investor Protection division, which aims to enhance corporate disclosures benefiting shareholders.

Opposition from Theodore H. Frank argues that the CFA's lobbying efforts misalign with shareholder interests. However, the court maintains that nonprofit lobbying organizations are valid recipients if their goals align with the class's interests as demonstrated in the litigation. The CFA's focus on regulating the financial industry supports the interests of the investor group involved in this case. Frank's alternative designee proposals are dismissed as the court affirms lead counsel's authority to propose cy pres designees, a process previously approved without objection from Frank. Ultimately, the court, exercising its supervisory authority, confirms the approval of the selected organizations: South Brooklyn Legal Services, NCL, and CFA, as they closely relate to the lawsuit's nature and the class's interests. Frank's motion to reconsider the prior distribution order is granted, but the court stands by its initial decisions regarding the cy pres designees.

Lead plaintiffs' motion for the distribution of settlement funds is granted, allocating 37.5% to South Brooklyn Legal Services, 37.5% to the National Consumers League, and 25% to the Consumer Federation of America. The distribution aligns with the ALI Principles, which stipulate that settlement proceeds should first be allocated to identifiable class members when feasible and that further distributions should continue until the amounts become economically non-viable. These criteria have been satisfied in this case. The court in Masters v. Wilhelmina Model Agency, Inc. emphasized the purpose of Cy Pres distribution as serving the indirect and prospective benefit of the class. Designation of recipients must be done by Lead Counsel with court approval, ensuring the court does not excessively involve itself in this process. This structure is intended to prevent undue judicial influence in selecting fund recipients.