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AHW Inv. P'ship v. Citigroup Inc.

United States Court of Appeals, Second Circuit

November 25, 2015

AHW INVESTMENT PARTNERSHIP, MFS, INC., ANGELA H. WILLIAMS, AS TRUSTEE OF THE ANGELA H. WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MARCH 24, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD APRIL 17, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 9, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 1, 2007, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 1, 2008, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD JULY 1, 2008, AND THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 21, 2008, Plaintiffs-Appellants-Cross-Appellees,
v.
CITIGROUP INC., CHARLES PRINCE, VIKRAM PANDIT, GARY CRITTENDEN, ROBERT RUBIN, ROBERT DRUSKIN, THOMAS G. MAHERAS, MICHAEL STUART KLEIN, DAVID C. BUSHNELL, Defendants-Appellees-Cross-Appellants

Argued January 9, 2015

QUESTION CERTIFIED.

Plaintiffs--a corporation, partnership, and seven grantor-retained annuity trusts controlled by Angela and Arthur Williams--appeal from an October 30, 2013 judgment of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge), dismissing their amended complaint for failure to state a claim. Plaintiffs allege that they suffered losses in excess of $800 million when, from May 2007 through March 2009, they refrained from selling their shares of Citigroup stock based on the fraud and negligent misrepresentations of defendants Citigroup and Citigroup executives. Defendants cross-appeal, arguing that the District Court erred simply by addressing the adequacy of plaintiffs' substantive claims as " holders" of the shares during a period of decline in share value: According to defendants, Delaware law mandates that such claims be brought in a shareholder derivative action, not as direct claims. If defendants are correct, plaintiffs--who are no longer Citigroup shareholders--lack standing to maintain this suit. The characterization of plaintiffs' claims as direct or derivative calls for an interpretation of an unsettled area of Delaware law, and we anticipate that the issue's resolution will have significance well beyond the instant suit. 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.

STEVEN F. MOLO (Robert K. Kry and Hassan A. Shah, on the brief), MoloLamken LLP, New York, NY, and Jacob H. Zamansky, Zamansky LLC, New York, NY, for Plaintiffs-Appellants-Cross-Appellees.

WALTER RIEMAN (Brad S. Karp, Susanna M. Buergel, Jane B. O'Brien, and Stephen P. Lamb, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, for Defendants-Appellees-Cross-Appellants.

Before: HALL, LYNCH, and CARNEY, Circuit Judges.

OPINION

Page 696

Susan L. Carney, Circuit Judge

Plaintiffs--a corporation, partnership, and seven grantor-retained annuity trusts (" GRATs" ) controlled by Florida residents Angela and Arthur Williams -- appeal from an October 30, 2013 judgment of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge ), dismissing their amended complaint for failure to state a claim. Plaintiffs allege that they suffered losses in

Page 697

excess of $800 million when, from May 2007 through March 2009, they refrained from selling their shares of Citigroup stock based on the fraudulent and negligent misrepresentations of defendants Citigroup and Citigroup executives. Defendants cross-appeal, arguing that the District Court erred by addressing the adequacy of plaintiffs' substantive claims as " holders" of the shares during a period of decline in share value: According to defendants, Delaware law mandates that such claims be brought in a shareholder derivative action, not as direct claims (as plaintiffs have done).

If defendants are correct, plaintiffs--who are no longer Citigroup shareholders--lack standing to maintain this suit. 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. See Del. S.Ct. R. 41. 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.

BACKGROUND

I. Factual Background[1]

In 1977, Arthur L. Williams founded an insurance company that by 1989 had become very successful and merged with Travelers Group. In 1998, Travelers Group merged with Citibank to become Citigroup. In the 1998 merger, Williams acquired 17.6 million shares of Citigroup common stock, then valued at approximately $616 million, or $35 per share. By early 2007, " for tax, estate and investment-planning purposes," the shares had been transferred to a partnership, a corporation, and various GRATs controlled by Arthur and his wife, Angela. Am. Compl. ¶ 3.

In May 2007, Williams made a plan to sell his entire Citigroup position, based on the shared recommendation of his financial advisors at that time. In the advisors' view, the Citigroup stock price was then " close to the 'top' for the near-term and [it was] a good time for Williams to sell." Id. ¶ 202. He began implementing this plan on May 17, 2007, when he sold one million of his 17.6 million shares at $55 per share.

Against the counsel of his advisors and despite his plans to sell, Williams " delayed executing his sales" of the remainder of his shares when, later in 2007, " Citigroup's stock price declined as the markets began to experience volatility from the subprime mortgage crisis." Id. ¶ 174. Williams believed that Citigroup had " little downside risk and its shares were likely being dragged down by the fortunes of other players" and that " once the market understood . . . the different--and far superior--risk posture of Citigroup, its shares would recover and he could complete his planned sale as intended." Id. ¶ 175. Plaintiffs allege that Williams formulated this belief in reliance on Citigroup's " public statements and financial reports" that " concealed the full extent and impairment of billions in 'toxic' assets, including [collateralized debt obligations] backed by subprime assets." Id. ¶ 51; see also ¶ ¶ 175, 176. Plaintiffs further allege that Citigroup " gave investors the impression that it was reducing and prudently managing

Page 698

its risks, which was simply not true." Id. ¶ 51.

In the sixteen months that followed his initial sale of one million shares, Williams " continually tried to choose the appropriate time to complete the liquidation of his position in order to minimize his damages." Id. ¶ 177. But, allegedly misled by Citigroup's misrepresentations in " conference calls, investor slideshows, earnings releases, public filings and statements from senior officers," Williams held on to his remaining 16.6 million shares as the stock price plummeted to $3.09 per share. Id. ¶ ¶ 169, 172. He " considered" selling in December 2007, on August 20, 2008, and on December 2, 2008. Id. ¶ ¶ 178-80. It was not until March 2009, however, " by which time William's [sic] faith in the truthfulness of the Company had finally been erased, [that] he sold his remaining 16.6 million shares at a price of $3.09 per share." Id. ¶ 172. Plaintiffs maintain that, had Williams received truthful and accurate information from Citigroup, he would have sold his entire position on May 17, 2007, when the " true value" of the stock was $51.59.[2] Id. ¶ 171.

Williams thus calculates that his reliance on Citigroup's misrepresentations resulted in losses to him, his wife, and their controlled entities of over $800 million.

II. Procedural Background

Having filed their original complaint in December 2010, in July 2011 plaintiffs filed the amended complaint at issue here. In it, they seek damages for negligent misrepresentation and for common law fraud. Defendants moved to dismiss, arguing first that plaintiffs lack standing because under Delaware law their claims are derivative, ...


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