Odom v. Morgan Stanley Smith Barney LLC et al
Filing
40
OPINION AND ORDER. Odom's Section 10(b) and Rule 10-b(5) claim is dismissed with prejudice because holder claims are not cognizable pursuant to the Securities Exchange Act of 1934. Odom's common law fraud and negligent misrepresentation cla ims are dismissed as preempted by SLUSA. Last, finding little to no overlap between the facts and law underlying Odom's Florida Whistleblower's Act claim on one hand and the securities fraud issues that are the subject of the Citigroup MDL proceedings on the other, the Court recommends that the JPML remand this claim to the Northern District of Florida pursuant to Judicial Panel on Multidistrict Litigation Rule 10.1(b). (Signed by Judge Sidney H. Stein on 12/13/2013) Filed In Associated Cases: 1:09-md-02070-SHS, 1:11-cv-03827-SHS (rjm)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IN RE CITIGROUP INC. SECURITIES
LITIGATION
WESLEY ODOM,
Plaintiff,
‐against‐
MORGAN STANLEY SMITH BARNEY,
LLC and CITIGROUP, INC.,
LEAD CASE
09 MD 2070 (SHS)
This document relates to:
11 Civ. 3827 (SHS)
OPINION & ORDER
Defendants.
SIDNEY H. STEIN, U.S. District Judge.
Plaintiff Wesley Odom, a former employee of Smith Barney Asset
Management, LLC,1 brings this suit alleging violations of Section 10(b) and
Rule 10b‐5 of the Securities Exchange Act of 1934 (the “Exchange Act”);
common law fraud and negligent misrepresentation; and violations of the
Florida Whistleblower’s Act, Fla. Stat. §§ 448.101 et seq. Odom’s Exchange
Act and common law claims arise from alleged misrepresentations made
by Citigroup during 2007 and 2008—which were the subject of multiple
other lawsuits before this Court, including two securities fraud class action
litigations in which settlements were approved in August 2013. See In re
Citigroup Inc. Bond Litig., No. 08 Civ. 9522 (SHS), 2013 WL 4427195
(S.D.N.Y. Aug. 20, 2013); In re Citigroup Inc. Sec. Litig., Nos. 09 MDL 2070
(SHS), 07 Civ. 9901 (SHS), 2013 WL 3942951 (S.D.N.Y. Aug. 1, 2013).
Defendant Morgan Stanley Smith Barney, LLC is a successor‐in‐interest to Smith
Barney Asset Management, LLC and was, during the relevant time period, wholly
owned by defendant Citigroup, Inc.
1
Unlike the plaintiffs in those actions, however, Odom does not allege
that he purchased or sold Citigroup securities during the time period in
which these misrepresentations allegedly affected the stock price. Rather,
he asserts what are known as “holder” claims, alleging that he owned
Citigroup stock during this period and refrained from selling it—i.e. he
continued to hold the stock—due to Citigroup’s misrepresentations.
Odom’s Whistleblower’s Act claim is based upon his alleged forced
resignation in retaliation for advising his clients to opt out of premium
Citigroup accounts.
Citigroup has moved to dismiss Odom’s complaint, advancing a
number of theories. Odom’s federal securities fraud claims are dismissed
with prejudice because holder claims are not cognizable under the
Exchange Act. Odom’s state law fraud and negligent misrepresentation
claims also must be dismissed with prejudice because they are preempted
pursuant to the Securities Litigation Uniform Standards Act (“SLUSA”).
Even if SLUSA did not preempt these state‐law claims, however, they
would fail to state a claim on the merits based upon substantially the same
analysis this Court utilized in dismissing another litigation in this
multidistrict litigation (“MDL”), AHW Investment Partnership v. Citigroup
Inc., Nos. 09 MD 2070 (SHS), 10 Civ. 9646 (SHS), 2013 WL 5827643
(S.D.N.Y. Oct. 30, 2013). Finally, because the factual allegations relevant to
Odom’s Florida Whistleblower’s Act claim do not overlap with the facts
underlying the Citigroup securities claims consolidated before this Court,
the Court recommends that the Judicial Panel on Multidistrict Litigation
(“JPML”) remand that claim to the U.S. District Court for the Northern
District of Florida, from which this action was transferred, pursuant to
JPML Rule 10.1(b).
2
I.
BACKGROUND
A. Factual Allegations
According to the complaint,2 Odom was employed by Smith Barney as
a financial advisor in its Pensacola, Florida office from 1992 to 2009.
(Compl. ¶ 1, 7.) During the relevant time period, Smith Barney was part of
the Citigroup Asset Management business unit and was wholly owned by
Citigroup. (Id. at ¶¶ 8‐9.) Citigroup and Smith Barney encouraged
employees to purchase Citigroup stock through various incentive
programs, and Odom purchased shares of Citigroup during his
employment. (Id. at ¶¶ 12‐13.) Specifically, he acquired approximately
10,233 shares during or before 2006; he was awarded options to purchase
354 shares of stock in 1998, 1999, and 2000; and he purchased an unstated
number of additional shares through his 401(k) account. (Id. at ¶ 13.)
As set forth above, the Citigroup misrepresentations alleged in this
action are based on the same conduct as those alleged in the Securities and
Bond actions before this Court—although the class action complaints are
considerably more detailed and include multiple additional allegations of
misrepresentations or omissions. The allegations advanced in this
litigation can be summarized as follows. Beginning in approximately 2005,
Citigroup increased its exposure to subprime residential mortgages, both
originating such loans and packaging them to form residential mortgage
backed securities (“RMBS”)—which in turn were packaged into
collateralized debt obligations (“CDOs”).3 (Id. at ¶ 14.) In mid‐2007,
Citigroup began making public statements in conference calls and press
releases that seriously underrepresented its exposure to subprime RMBS.
(Id. at ¶¶ 16‐20.) Specifically, Odom alleges that Citigroup made material
misstatements during a July 20, 2007 telephone conference (id. at ¶ 17); a
July 27, 2007 conference call (id. at ¶ 18); and an October 1, 2007 “press
release and recorded telephone announcement” (id. at ¶ 20). The Securities
“In evaluating a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts the
truth of the facts alleged in the complaint and draws all reasonable inferences in the
plaintiffsʹ favor.” AHW, 2013 WL 5827643, at *1 n.2.
2
The various financial instruments discussed here are explained in detail in In re
Citigroup Inc. Securities Litigation, 753 F. Supp. 2d 206, 214‐17 (S.D.N.Y. 2010).
3
3
complaint references both the July 20 and October 1 statements. (See, e.g.,
In re Citigroup Inc. Securities Litig., Nos. 09 MDL 2070 (SHS), 07 Civ. 9901
(SHS), Amended Consolidated Class Action Compl. (“Securities Compl.”)
¶¶ 435, 827, 828, 890, 895, 1189‐93; Dkt. No. 74.)
By November 2007, the company determined that downgrades in the
ratings of certain tranches of subprime‐RMBS‐backed CDOs would have a
negative effect on a significant portion of its CDO portfolio, at which point
Citigroup “disclosed the actual amount of its subprime exposure” for the
first time—a development that “shocked the market.” (Compl. ¶¶ 22‐26.)
Citigroup’s stock dropped precipitously following these disclosures. (Id. at
¶ 26.) During the same time—fall of 2007—Citigroup had also been
understating its exposure to RMBS in the form of financial products
known as structured investment vehicles (“SIVs”). (Id. at ¶¶ 27‐29.) This
exposure was disclosed in December 2007. (Id. at ¶ 29.) The combined
effect was “record‐breaking” losses in the last quarter of 2007. (Id. at ¶ 30.)
Notwithstanding its previous disclosures, Citigroup continued to
understate its ongoing exposure to RMBS throughout 2008; repeatedly
failed to take necessary write‐downs or increase its loan‐loss reserves to
account for the risk associated with the mortgage‐backed securities it had
retained; and insisted that its position in the financial markets remained
strong. (Id. at ¶¶ 32‐37.) Odom points to two specific examples in the
complaint: a “mid‐September 2008” statement by then‐Citigroup‐CEO
Vikram Pandit, in which he called Citigroup “a pillar of strength in the
markets” (id. at ¶ 35); and a November 17, 2008 “employee Town Hall”
meeting, during which Pandit “again noted Citi’s strong capital position”
(id. at ¶ 36). Again, the Securities complaint references these statements.
(See Securities Compl. ¶¶ 926, 930, 963, 992, 1099, 1101, 1239.)
In August 2008, Citigroup agreed to repurchase $7.3 billion in auction
rate securities (“ARS”)—which it had secretly been propping up for
months by injecting capital liquidity into the ARS market when demand
fell short—pursuant to a settlement agreement with the New York
Attorney General. (Compl. ¶ 34.) Finally, in November 2008, Citigroup
accepted a $326 billion bail‐out package from the federal government,
intended “largely to guarantee the at‐risk subprime mortgages and toxic
assets Citi could not sell.” (Id. at ¶ 37.) By January 16, 2009, the company’s
4
stock was trading at $3.50 per share—an “almost 93 percent” decrease
from October 2007. (Id. at ¶ 40.)
In addition to these misrepresentations aimed at the market generally,
Odom represents that he was the recipient of additional false information
as a Smith Barney employee. Specifically, in early 2007, the regional
director of Smith Barney assured the Pensacola employees that Citigroup
“was not involved in that type of business”—meaning subprime
mortgages—that employees “had nothing to fear from the fallout,” and
that they should “be patient about their holdings.” (Id. at ¶ 41.) By mid‐
2007, “Smith Barney no longer allowed its employees to access” outside
analyst opinions about the company, instead providing them with
research from “a little known outside analyst who expressed confidence in
the strength of Citi and predicted that the stock should be priced at $60‐
$65 within a matter of months.” (Id. at ¶ 42.) When Odom inquired about
the state of the ARS market in late 2007, he was told by his boss and by the
Citigroup ARS sales desk “that the market was fine and that ARS
continued to present great investment vehicles for clients.” (Id. at ¶ 43.) In
2008, “[w]hen the financial crisis [had] worsened,” Smith Barney
management allegedly continued to assure employees about the bright
future of Citigroup and that “the best was yet to come.” (Id. at ¶¶ 45‐46.)
Odom alleges that he held his stock throughout 2007 in reliance on
these optimistic representations about Citigroup’s current status and
future. (Id. at ¶ 47.) In 2008, he “attempted” to sell some of his holdings,
but was told by the Pensacola office’s acting manager “that only the ‘real’
manager could authorize the sale.” (Id.) Odom was “eventually” able to
sell his stock, but “only after the price of the stock had further decreased.”
(Id.) Odom alleges that he “lost in excess of $600,000 due to the decline in
value of his Citi stock.” (Id. at ¶ 56.)
Throughout 2008, Smith Barney “strongly encouraged its financial
advisors to market Citi preferred securities to their clients,” and in 2009
“when the preferred market began to collapse,” it “prohibited” advisors
from counseling clients to sell preferred securities. (Id. at ¶ 51.) The
company also, in spring of 2009, told advisors to market Citigroup “Gold”
accounts—which “offer competitive CD rates, but are burdened with very
high monthly charges”—to clients. (Id. at ¶ 52.) Odom nonetheless chose
5
to inform clients about those higher fees and explain what Odom refers to
as an “opt out procedure.” (Id. at ¶ 53.) After confirming that he had been
doing this, Odom was asked to resign by his manager, “or she would have
to fire him.” (Id.) Odom resigned on May 4, 2009. (Id.)
B. Procedural History
Odom filed a complaint in the First Judicial Circuit, Escambia County,
Florida in January 2011. He asserted six causes of action: unpaid wages;
conversion; violation of the Florida Whistleblower’s Act; common law
fraud; negligent misrepresentation; and violation of Section 10(b) and Rule
10b‐5 of the Exchange Act. Defendants removed the action to the U.S.
District Court for the Northern District of Florida the next month.
In March 2011, following a notice of tag‐along action by defendants,
the JPML conditionally transferred this action to this Court as part of the
Citigroup MDL. Odom moved to vacate the conditional transfer order or,
in the alternative, for severance of the first three counts and their remand
to the Northern District of Florida. The JPML ordered the first two
counts—unpaid wages and conversion—severed and transferred back to
the Northern District of Florida; it transferred the Florida Whistleblower’s
Act, common law fraud, negligent misrepresentation, and Exchange Act
claims to the MDL.
In its order, the JPML stated that the fraud, negligent
misrepresentation, and Exchange Act claims “clearly involve common
questions of fact with the actions previously transferred to MDL No.
2070”—which “centralized actions involving allegations that the Citigroup
defendants unlawfully misled investors, with material misstatements or
omissions in Citigroup’s disclosures, among other things, about the nature
of . . . in particular, [Citigroup’s] holdings in and exposures to subprime‐
related assets”—and that transfer of these claims would “serve the
convenience of the parties and witnesses and promote the just and efficient
conduct of the litigation.” (Order of Transfer dated May 23, 2011, Ex. 2 to
Decl. of Susanna M. Buergel dated July 22, 2011; Dkt. No. 21.) It also
observed that although “[t]he question of transfer of the whistle‐blower
claim . . . is a closer call,” it would grant the transfer to allow this Court “to
determine the level of overlap between that claim and the claims pending
6
in the MDL and whether the whistle‐blower issues should be separately
remanded to the transferor court in advance of the other claims.” (Id.)
Citigroup’s motion to dismiss the complaint is currently before this
Court.
II. ANALYSIS
Citigroup has advanced a number of theories pursuant to which it
claims that Odom’s complaint should be dismissed. Specifically,
defendants contend that the federal securities laws do not cover holder
claims; that SLUSA preempts Odom’s common law fraud and negligent
misrepresentation claims; that, even if SLUSA does not apply, plaintiff
fails to state a cognizable claim for common law fraud and negligent
misrepresentation; and finally, that plaintiff has not stated a claim
pursuant to the Florida Whistleblower’s Act.4 For the most part, the Court
finds defendants’ arguments persuasive.
A. Motion to Dismiss Standard
The court accepts all factual allegations in the complaint to be true and
draws all reasonable inferences in the plaintiff’s favor on this motion. ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). To survive
a motion to dismiss, however, the complaint must state a facially plausible
claim to relief, meaning plaintiff must “plead[] factual content that allows
the court to draw the reasonable inference that the defendant is liable for
the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Such a
showing “requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007).
Defendants also argue that Odom’s holder claims are derivative in nature and
should be dismissed because he fails to plead compliance with the demand
requirements necessary to state a claim for a derivative action. For the same reasons
set forth in AHW, the Court holds that Odom’s claims are direct, not derivative. See
2013 WL 5827643, at *2‐4.
4
7
B. Section 10(b) and Rule 10b‐5
1.
No Private Remedy for Holder Claims Exists Pursuant to the
Exchange Act.
As both parties recognize, the U.S. Supreme Court has held that “one
asserting a claim for damages based on the violation of Rule 10b‐5 must be
either a purchaser or seller of securities,” and therefore, no private right of
action exists pursuant to the Exchange Act based on allegations that a
person would have sold a security, but did not do so based on a company’s
misrepresentations. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,
749 (1975). Odom clearly attempts to assert holder claims pursuant to
Section 10(b) and Rule 10b‐5. (See Compl. ¶¶ 98, 99 (alleging that Odom
“held Citi stock at artificially high prices and was damaged thereby” and
that “[h]ad Odom and the marketplace known of the truth concerning
Citi’s exposure to the subprime market, Odom would not have held his
Citi stock”).) Because such claims are not available pursuant to the
Exchange Act, Odom’s holder claims are dismissed. See, e.g., Caiola v.
Citibank, N.A., New York, 295 F.3d 312, 322 (2d Cir. 2002) (“[Section 10(b)
and Rule 10b‐5] standing is limited to actual purchasers or sellers of
securities.”); First Equity Corp. of Fla. v. Standard & Poorʹs Corp., 869 F.2d
175, 180 n.2 (2d Cir. 1989) (“Under Blue Chip, plaintiffs suing under Section
10(b) of the Securities Exchange Act of 1934 may recover only for losses
that result from decisions to buy or to sell, not from decisions to hold or
refrain from trading.”).
2.
Odom Has Not Otherwise Stated a Claim Pursuant to the
Exchange Act.
Defendants contend that Odom’s complaint alleges only that he held
Citigroup stock to his detriment, and that Blue Chip Stamps thus requires
the dismissal of his Section 10(b) and Rule 10‐5 claim in its entirety. Odom
insists that he sufficiently states more than holder claims, insofar as he
alleges once in a 101 paragraph complaint that he “purchased Citi stock
through his 401(k) account in amounts currently unknown” on some
unspecified date or dates. (See Compl. ¶ 13.)
Odom at no point, however, claims the purchase or sale of a security
during the time period when Citigroup’s stock price was allegedly affected
8
by its misrepresentations—according to the complaint, approximately July
2007 to November 2008. (Compl. ¶¶ 16‐17, 36.) The only purchases of
Citigroup stock specifically alleged occurred “during 2006 or in earlier
years.” (Id. at ¶ 13.) Odom’s post hoc attempt to give content to an
allegation about possible purchases of Citigroup stock at unknown prices
of unknown amounts at unknown times through his 401(k) account does
not rectify this deficiency. This single sentence simply does not provide
sufficient factual content to support a reasonable inference that Odom
purchased Citigroup stock during the relevant period.5 (See id.) Accord, e.g.,
Fraser v. Fiduciary Trust Co., Int’l, No. 04 Civ. 6958 (RMB)(GWG), 2005 WL
6328596, at *4 (S.D.N.Y. June 23, 2005) (finding plaintiff’s general
allegations that he bought stock insufficient to state a purchase of
securities when he “fail[ed] to allege the date(s) on which he acquired
stock, the number of shares acquired, or the consideration given (if any)”);
Quantum Overseas, N.V. v. Touche Ross & Co., 663 F. Supp. 658, 667
(S.D.N.Y. 1987).
Even if Odom had properly alleged the acquisition of Citigroup
securities during the relevant period, he has not stated an actionable claim
for securities fraud. To state a valid Section 10(b) claim, a plaintiff must
allege “(1) a material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or omission and
In response to defendants’ argument that his claims should be dismissed as holder
claims, Odom asks for discovery in order to “obtain information . . . regarding the
precise dates and amounts of his purchases of Citi stock.” (Def.’s Mot. in Opp. 10.)
Without more than unfounded speculation that such purchases occurred, there is no
basis to order that discovery.
5
Moreover, pursuant to the stipulation of settlement in the Securities action, notice was
sent to all potential class members who could be identified through reasonable
effort—a group that consisted of all purchasers of Citigroup common stock between
February 26, 2007 and April 18, 2008 and totaled more than 2.4 million notices. See In
re Citigroup Inc. Sec. Litig., 2013 WL 3942951, at *6 (“The claims administrator sent
notices to over 2.4 million potential class members.”); see id. at *7 (“The Court further
finds that the claims administrator provided individual notice to those class members
who could be identified through reasonable effort.” (quotation marks and citation
omitted)). If Odom did not receive such a notice, it is highly unlikely that he acquired
any Citigroup stock during that period—which covers the majority of the time during
which the alleged misrepresentations took place.
9
the purchase or sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv.
Partners, LLC v. Scientific‐Atlanta, 552 U.S. 148, 157 (2008). He must also
meet two heightened pleading standards. Pursuant to Federal Rule of Civil
Procedure 9(b), such a complaint must “state with particularity the
circumstances constituting fraud.” Fed. R. Civ. P. 9(b). And pursuant to
the Private Securities Litigation Reform Act (“PSLRA”), it must also
“specify each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation regarding
the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is
formed,” as well as “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind” with
regard to “each act or omission alleged to violate this chapter.” 15 U.S.C.
§§ 78u‐4(b)(1), (2); see also In re Citigroup Inc. Sec. Litig., 753 F. Supp. 2d 206,
231 (S.D.N.Y. 2010). Odom’s complaint fails by a wide margin to achieve
such specificity.
Finally, Odom’s purported Exchange Act cause of action fails for two
reasons in addition to the deficiency of his pleadings. First, the majority of
any possible claims—those based on purchases that occurred between
February 26, 2007 and April 18, 2008—have been released in the settlement
of the Securities action. (See In re Citigroup Inc. Sec. Litig., Nos. 09 MD 2070,
07 Civ. 9901, Final Judgment and Order of Dismissal with Prejudice ¶¶
1(r), 1(v), 1(w); Dkt. No. 267.) Second, this Court has long since found the
misrepresentations Odom alleges to have occurred subsequent to the
Securities class period—optimistic statements made by Vikram Pandit in
fall of 2008 (see Compl. ¶¶ 35‐36)—to be nonactionable “expressions of
‘puffery and corporate optimism’ that ‘do not give rise to securities
violations.’” In re Citigroup Inc. Sec. Litig., 753 F. Supp. 2d at 248 (quoting
Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004)).
In sum, Odom has alleged only holder claims, for which Section 10(b)
and Rule 10b‐5 provide no private right of action. Even if his allegations
regarding purchases of Citigroup stock through his 401(k) were specific
enough to properly state a purchase of securities during the relevant
period—which they are not—his claim fails for a number other reasons.
Thus, Odom’s Exchange Act claim is dismissed with prejudice.
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C. SLUSA Preempts Odom’s State Law Fraud and Negligent
Misrepresentation Claims.
Pursuant to SLUSA, “[n]o covered class action based upon the
statutory or common law of any State . . . may be maintained in any State
or Federal court by any private party alleging . . . a misrepresentation or
omission of a material fact in connection with the purchase or sale of a
covered security.” 15 U.S.C. § 78bb(f)(1).
Here, there is no dispute that Citigroup common stock is a “covered
security” or that Odom has alleged violations of state law based on
misrepresentations and omissions of material fact. In addition, although
Odom has not alleged that he purchased or sold Citigroup securities
during the relevant time period, the Supreme Court has held in plain
terms that “SLUSA pre‐empts state‐law holder class‐action claims.” See
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 87 (2006). In
the face of this statute and Supreme Court decision, Odom contends that
his claims are not preempted by SLUSA because this lawsuit does not fall
within the definition of a “covered class action.” Odom stresses that he “is
asserting his claims on behalf of himself only.” (Def.’s Mot. in Opp. 12.)
SLUSA defines a “covered class action,” as relevant here, as
any group of lawsuits filed in or pending in the same court and
involving common questions of law or fact, in which (I) damages
are sought on behalf of more than 50 persons; and (II) the lawsuits
are joined, consolidated, or otherwise proceed as a single action
for any purpose.
15 U.S.C. § 78bb(f)(5)(B)(ii). It is undisputed that, at the time of this
motion’s filing, this suit had been transferred to this Court by the JPML for
inclusion in the Citigroup Subprime Mortgage MDL, which includes the
Citigroup Securities and Bond class actions; that it has questions of law and
fact central to those two class actions; and that, although Odom here seeks
damages for himself, the suits, if combined, seek damages on behalf of
over two million persons.
The parties disagree, however, about whether the actions should be
grouped for the purpose of determining whether Odom’s lawsuit is a
covered class action. Defendants assert that this lawsuit was proceeding as
11
a single action for pretrial purposes alongside the Securities and Bond class
actions in the Citigroup MDL, and, therefore, Odom’s suit falls within the
SLUSA definition. Odom counters that his suit was never formally joined
or consolidated with any of the other actions in the MDL and, for this
reason, should not be grouped with those cases for the purposes of
SLUSA. Defendants respond that the suits were in fact proceeding “as a
single action for any purpose.” Whether this action is preempted pursuant
to SLUSA thus depends on whether this lawsuit was “joined, consolidated,
or otherwise proceed[ed] as a single action for any purpose” with the MDL
class actions.
A number of courts within this district have held that individual
lawsuits raising state law claims of fraud or negligent misrepresentation
should be grouped together with class action suits advancing the same
allegations for SLUSA purposes when those actions are proceeding before
one judge as part of an MDL. See, e.g., Amorosa v. Ernst & Young LLP
(Amorosa II), 682 F. Supp. 2d 351, 373‐77 (S.D.N.Y. 2010) (“[T]his Court
holds that an action need not have been formally joined or consolidated
with other actions in order to be a ‘covered class action’ and subject to
SLUSAʹs preemption provision.”); Amorosa v. Ernst & Young LLP (Amorosa
I), 672 F. Supp. 2d 493, 517 (S.D.N.Y. 2009) affʹd sub nom. Amorosa v. AOL
Time Warner Inc., 409 F. Appʹx 412 (2d Cir. 2011); In re Adelphia Commcʹns
Corp. Sec. & Derivative Litig., 03 MDL 1529 (LMM), 2010 WL 3528872, at *5
(S.D.N.Y. Aug. 30, 2010) (“The present action is one of more than 50
actions pending in this district as a multidistrict litigation in which
damages are sought for more than 50 people. It is plainly a covered class
action which cannot be maintained in this or any state court.”); In re AOL
Time Warner, Inc. Sec. Litig., 503 F. Supp. 2d 666, 671‐72 (S.D.N.Y. 2007)
(“[T]he ‘individual actions,’ once aggregated per SLUSAʹs instructions, are
a ‘covered class action’ for purpose of SLUSA and are properly subject to
the Actʹs limitations on mass actions.”); Gordon Partners v. Blumenthal, No.
02 Civ. 7377 (LAK), 2007 WL 1438753, at *3 (S.D.N.Y. May 16, 2007) aff’d
293 F. App’x 815 (2d Cir. 2008) (adopting Report and Recommendation in
Gordon Partners v. Blumenthal, No. 02 Civ. 7377 (LAK) (AJP), 2007 WL
431864 (S.D.N.Y. Feb. 9, 2007)); In re WorldCom, Inc. Sec. Litig., 308 F. Supp.
2d 236, 245‐47 (S.D.N.Y. 2004) (ten suits, several of which alleged only
individual claims, were proceeding as a single action when their
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complaints were virtually identical and they were consolidated for pretrial
purposes in the same court). 6 Cf. In re Refco Inc. Sec. Litig., 859 F. Supp. 2d
644, 649 (S.D.N.Y. 2012) (observing that an “MDL proceeding coordinates
discovery and other pretrial proceedings, and the actions in it are
accordingly proceeding as a single action for numerous purposes”). Accord
In re Enron Corp. Sec., Derivative, & ERISA Litig., 535 F.3d 325, 340 (5th Cir.
2008).
Amorosa is the closest analogue to Odom’s situation. In that litigation,
a single plaintiff who had opted out of a class action filed a complaint
materially the same as those of approximately 200 other opt‐out plaintiffs,
who had filed identical complaints and were represented by common
counsel. Amorosa, 672 F. Supp. 2d at 499, 517‐18. Amorosa’s action was
“never formally coordinated or consolidated” with these other opt‐out
actions, which Judge Shirley Kram had aggregated and adjudicated
collectively. Id. at 499, 517. The JPML had transferred Amorosa’s case to
the MDL Judge Kram was supervising, “where it would necessarily be
handled in coordination” with those cases. Id. The Amorosa court
concluded that Amorosa’s lawsuit was proceeding as a single action with
the other opt‐out lawsuits, holding that “an action need not have been
formally joined or consolidated with other actions in order to be a ‘covered
class action’ and subject to SLUSAʹs preemption provision.” Id. at 517‐18.
That court also noted that the facts that (1) Amorosa had agreed to a stay
of proceedings in his action pending the resolution of motions to dismiss
the class action and the opt‐out complaints and (2) that he had filed an
amended complaint “identical in all material respects” to the other
plaintiffs’ complaint each could have alone supported the conclusion that
the lawsuits were proceeding as a single action. Id. at 518.
One two‐page decision held that an individual lawsuit did not proceed as a single
action with a class action that alleged the same misrepresentations for SLUSA
purposes because the two were “neither joined nor consolidated” and were on
“separate procedural track[s].” Ventura v. AT&T Corp., 05 Civ. 5718 (LLS), 2006 WL
2627979, at *1 (S.D.N.Y. Sept. 13, 2006). That short decision, however, ignores the
statutory directive that two lawsuits should be grouped when they proceed “as a
single action for any purpose,” and this Court has found no S.D.N.Y. case that adopts
the reasoning of Ventura. See Amorosa, 672 F. Supp. 2d at 517.
6
13
This Court agrees with this view of SLUSA preemption: that, even if
two actions have not been formally joined or consolidated, they are
proceeding “as a single action for any purpose” within the meaning of
SLUSA when they are grouped together as part of an MDL. Such an
interpretation adheres to Congress’s purpose in enacting SLUSA, which
was to make federal courts “the exclusive venue for class actions alleging
fraud in the sale of certain covered securities and mandating that such
class actions be governed exclusively by federal law.” Amorosa, 672 F.
Supp. 2d. at 515 (quoting Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d
101, 108 (2d Cir. 2001)). Congress further intended SLUSA to “be
interpreted broadly to reach mass actions and all other procedural devices
that might be used to circumvent the class action definition.” WorldCom,
308 F. Supp. 2d at 242 (quoting S. Rep. No. 105–182, at 8 (1998)); see also In
re Fed. Natʹl Mortgage Assʹn Sec., Derivative, & ERISA Litig., 503 F. Supp. 2d
25, 32 (D.D.C. 2007) (“[T]he legislative history for SLUSA overwhelmingly
demonstrates that although Congress recognized that it would sometimes
be used to preempt individual state law claims, on balance, that was a
price worth paying.”). And “‘[f]or any purpose’ is about as broad a
provision as Congress could draft.” Refco, 859 F. Supp. 2d at 649 (emphasis
in original).
Following these precepts, the procedural history of Odom’s lawsuit
demonstrates that it should be grouped with the other actions in this MDL
for SLUSA purposes. Odom’s action was transferred to this Court
pursuant to an order of the JPML assigning it “for inclusion in the
coordinated or consolidated pretrial proceedings.” (Order of Transfer.) In
June 2011, Odom’s suit was accepted as “related” to the other cases in the
MDL, and an association to the MDL was created on the docket. (See Ex. 3
to Buergel Decl., Entries for June 6, 2011.) As in Amorosa, it would
therefore “necessarily be handled in coordination” with the other lawsuits
in the MDL—most importantly, the Securities and Bond class actions. See
672 F. Supp. at 517. In addition, the misrepresentations alleged in the
Odom complaint involve many of the same Citigroup statements alleged
in the Securities and Bond complaints, as well as the same financial
products, and the same alleged failures to disclose.
It is true that Odom did not purposefully direct his lawsuit to this
Court, nor is his complaint a verbatim copy of the other complaints, nor is
14
he represented by the same counsel as other plaintiffs.7 SLUSA, however,
does not instruct the Court to consider any of these factors. Accord Instituto
De Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1347 (11th Cir. 2008)
(finding that a “bona fide individual action” was proceeding as a single
action with a class action “for any purpose” and therefore, was subject to
SLUSA preemption based on “the provision’s unambiguous language”).
Instead, it directs the Court to consider whether the lawsuits proceeded
“as a single action for any purpose.”
Because Odom’s lawsuit proceeded with the Securities and Bond class
actions as “a single action for any purpose” at the time this motion was
filed, and the other statutory elements are met, it is a covered class action
within the meaning of SLUSA. All of the elements of SLUSA preemption
are therefore present, and the proper course is to dismiss. The Court
hereby dismisses Odom’s fraud and negligent misrepresentation claims
with prejudice.
D. Even if SLUSA Did Not Preempt Odom’s Common Law Claims,
They Fail on the Merits.
Even if Odom’s suit were not considered to be proceeding as a single
action with the other lawsuits in this MDL—and his fraud and negligent
misrepresentation claims were therefore not preempted by SLUSA—these
claims for relief should nevertheless be dismissed because they fail to state
claims.
Central to this determination is this Court’s recent holding in AHW
Investment Partnership, another litigation proceeding as part of the MDL,
which presented the same factual scenario as Odom’s suit: holder claims
for fraud and negligent misrepresentation advanced by Florida‐based
investors pursuant to state law. As in this litigation, the parties in AHW
disagreed about whether New York or Florida law applied to the
plaintiffs’ common law fraud and negligent misrepresentation claims. This
The plaintiffs in one of the suits pending before this Court in the Citigroup MDL—
Markey v. Citigroup, Inc., No. 11 Civ. 9080 (SHS) (S.D.N.Y.)—are in fact represented by
the same counsel as represents plaintiff in this litigation. The Markey complaint copies
almost verbatim the sections of Odom’s complaint setting forth Citigroup’s alleged
misrepresentations.
7
15
Court found, in relevant part, that: (1) New York and Florida law conflict
with regard to both fraud and negligent misrepresentation causes of
action; (2) pursuant to a New York choice‐of‐law analysis, New York had a
greater interest in the litigation than Florida, and New York law therefore
applied; and (3) plaintiffs failed to state a claim for either fraud or
negligent misrepresentation pursuant to New York law. AHW, 2013 WL
5827643, at *5‐12.
The analysis in this action is essentially the same, with one important
difference: the jurisdiction whose rules must be applied to determine
which jurisdiction’s substantive law governs is Florida, rather than New
York. As a general rule, “[a] federal court exercising diversity jurisdiction
must apply the choice of law analysis of the forum state.” GlobalNet
Financial.Com Inc. v. Frank Crystal & Co., Inc., 449 F.3d 377, 382 (2d Cir.
2006). When a lawsuit is transferred as part of an MDL proceeding, the
state in which the transferor court sits is the forum state, and that state’s
choice‐of‐law rules apply. See In re Methyl Tertiary Butyl Ether (“MTBE”)
Prods. Liab. Litig., 175 F. Supp. 2d 593, 606 n.20 (S.D.N.Y. 2001). Odom
initially filed his complaint in Florida state court, meaning that Florida’s
choice‐of‐law rules apply here. Because, for the reasons explained below,
New York law applies—as it did in AHW—the remainder of AHW’s
analysis is applicable to this case.
Florida follows the principles stated in Section 145 of the Restatement
(Second) of Conflict of Laws, applying the law of the state with “the most
significant relationship to the occurrence and the parties” in tort actions.
See Green Leaf Nursery v. E.I. DuPont De Nemours and Co., 341 F.3d 1292,
1301 (11th Cir. 2003) (quoting Garcia v. Pub. Health Trust of Dade Cnty., 841
F.2d 1062, 1064‐65 (11th Cir. 1988)). Section 145 instructs courts to base
their determination of which state has the most significant relationship on,
inter alia, the principles stated in Section 6 of the Restatement:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative
interests of those states in the determination of the particular
issue,
16
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be
applied.
Restatement (Second) of Conflict of Laws § 6. The parties agree that
Florida courts would additionally take into account the six considerations
listed in Section 148 of the Restatement—which is specific to claims of
fraud and misrepresentation—to determine which state had the most
significant contacts: (1) “where the plaintiff acted in reliance upon the
defendant’s representations”; (2) “where the plaintiff received the
representations”; (3) “where the defendant made the representations”; (4)
the parties’ domicile, residence, place of business, and place of
incorporation; (5) “the place where a tangible thing which is the subject of
the transaction between the parties was situated at the time”; and (6) “the
place where the plaintiff is to render performance under a contract which
he has been induced to enter by the false representations of the
defendant.” Trumpet Vine Invs., N.V. v. Union Capital Partners I, Inc., 92 F.3d
1110, 1118 (11th Cir. 1996). Plaintiff contends that these considerations lead
to the conclusion that Florida law applies, and defendants counter that
these factors counsel in favor of the application of New York law.
Considering all of these factors, the Court finds that New York has the
more significant relationship with the occurrence and the parties. The
considerations listed in Section 6 of the Restatement, in particular, counsel
in favor of the application of New York law. The comparatively strong
interest of New York in determining this issue, the protection of parties’
justified expectations, and a concern for uniformity and predictability are
important to this determination. As explained in AHW, “common law
fraud rules seek to deter the intentional deception of stockholders[,] . . .
[a]nd New York has the greater interest in regulating its vast securities
industry to ensure that application of the law leads to the appropriate
admonitory effects on industry participants.” 2013 WL 5827643, at *10.
Moreover, the majority of the allegedly fraudulent statements or
omissions, as well as the business practices and decisions that precipitated
the misrepresentations, occurred in New York. (See, e.g., Compl. ¶¶ 14‐40.)
17
The exceptions are a few remarks allegedly made directly to Odom in
Florida—which themselves appear to have been based on information or
directives received from Citigroup’s New York headquarters. (See id. at ¶¶
41‐46.)
For these reasons, “[a]ll parties could reasonably expect New York law
to govern the conduct within its borders that forms the basis of both
claims,” whereas the defendants would not have reasonably expected
Florida law to apply—at least no more so than the law of any jurisdiction
in which a Citigroup investor resided. See AHW, 2013 WL 5827643, at *10.
And subjecting defendants to liability in any jurisdiction in which a
Citigroup investor lived at the time of a misrepresentation “would
paralyze actors in the securities market,” rather than engendering
predictability, uniformity, and certainty. See id. The Section 6 factors thus
tip decisively in favor of the application of New York law.
The contacts with New York and Florida are more evenly matched.
That defendants are based in New York and the alleged
misrepresentations were primarily made in New York must be weighed
against the contacts with Florida: that Odom is a Florida resident, received
the alleged misrepresentations in Florida, and allegedly decided to
continue holding his Citigroup stock while he was resident in Florida.
These contacts do not clearly favor either forum, and thus have little
bearing on the Court’s analysis.
Balancing these factors, the Court concludes that New York law
applies. The Court reaffirms its previous finding that the New York Court
of Appeals would not recognize holder claims and that no special
relationship exists between an issuer of securities to the general public and
a purchaser of such securities. See AHW, 2013 WL 5827643, at *7, *11‐12.
Thus, even if Odom’s fraud and negligent misrepresentation claims were
not preempted by SLUSA, dismissal for failure to state a claim would be
the appropriate outcome.
E.
Odom’s Florida Whistleblower’s Act Claim Should Be
Remanded to the Northern District of Florida.
Odom’s final cause of action is an alleged violation of the Florida
Whistleblower’s Act, which creates a private cause of action for employees
18
who are the object of retaliatory personnel actions because they “[o]bjected
to, or refused to participate in, any activity, policy or practice of the
employer which is in violation of a law, rule or regulation.” Fla. Stat. §§
448.102, 448.103. Odom alleges that he believed “Smith Barney was
engaging in unlawful activity by prohibiting its financial advisors from
advising clients to sell their Citi preferred securities, encouraging clients to
establish ‘Gold’ accounts because Citi was in need of cash, and prohibiting
advisors from advising clients regarding the financial impact of the
Citi/Smith Barney joint venture and their ability to opt out” and that he
objected to and refused to comply with these instructions, resulting in
Smith Barney demanding his resignation. (Compl. ¶¶ 74‐75.) Citigroup
argues that Odom has failed to state a claim because he has not properly
identified any law, rule, or regulation that Smith Barney’s alleged behavior
violates.
The Court declines to opine on the merits of Citigroup’s argument.
Instead, it observes that the allegations against Smith Barney cited in
support of this claim are wholly distinct from the allegations involving
Citigroup’s misrepresentations regarding its RBMS and CDO holdings,
which are the facts that unify and undergird the lawsuits in the MDL
proceedings. The MDL has nothing to do with Citigroup’s marketing of
preferred securities to its clients or with “Gold” accounts; furthermore,
Smith Barney’s allegedly illegal activities took place exclusively in 2009,
after the period during which Citigroup’s alleged misrepresentations took
place. (See Compl. ¶¶ 51‐53.)
In its Order of Transfer, the JPML noted that this Court would have
the opportunity to “determine the level of overlap between [the Florida
Whistleblower’s Act] claim and the claims pending in the MDL and
whether the whistle‐blower issues should be separately remanded to the
transferor court.” Having reviewed the claim in question, the Court
determines there is essentially no overlap between the Florida
Whistleblower’s Act claim and the claims in the MDL. It therefore
recommends the remand of the Whistleblower’s Act claim to the Northern
District of Florida, pursuant to JPML Rule 10.1(b).
19
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