Published March 21, 2013
A federal judge on Thursday granted class certification to mutual fund shareholders in a lawsuit accusing a former executive of brokerage Smith Barney of defrauding them out of fee discounts.
The 7-1/2-year-old case stems from an alleged practice by Smith Barney, the former brokerage unit of Citigroup Inc, of pocketing "kickbacks" in providing a variety of back-office services to the funds.
Citigroup had agreed in May 2005 to pay $208 million in fines and restitution to settle a related U.S. Securities and Exchange Commission civil fraud case.
Fund investors brought their own civil lawsuit three months later. The SEC distributed more than $100 million to fund investors in 2010, but the investor lawsuit continued.
Last August, U.S. District Judge William Pauley in Manhattan threw out all claims against Citigroup, Smith Barney and former Citigroup Asset Management Chief Executive Thomas Jones.
But Pauley allowed some claims against another defendant, former Smith Barney senior vice president Lewis Daidone.
Pauley's decision on Thursday lets investors who between September 11, 2000, and June 24, 2004, bought or sold shares in 17 Smith Barney funds whose prospectuses Daidone had signed, and which contained alleged misstatements, sue him as a group.
Peter White, a partner at Schulte, Roth & Zabel who represents Daidone, declined to comment.
The case arose after Citigroup created an in-house transfer agent, Citicorp Trust Bank, to replace First Data Corp, whose contract was expiring.
Fund shareholders complained that Citicorp Trust Bank then subcontracted much of the work to First Data for significantly lower fees than First Data had been charging, but kept the savings for itself rather than passing it on to the funds.
Pauley on Thursday wrote that while some plaintiffs never read the disclosure materials, others claimed that knowledge of the scheme would have affected their investment decisions.
"In view of this testimony, Daidone fails to carry his heavy burden of proving by a preponderance of the evidence that disclosure of the scheme would not have altered the (plaintiffs') investment decision," Pauley wrote.
The lawsuit was delayed for several months after Pauley in September 2011, citing "epic failures" on both sides of the case, removed an Illinois pension fund as lead plaintiff upon learning that it never owned shares that were part of the case.
Morgan Stanley now owns 65 percent of the former Smith Barney through a joint venture with Citigroup and plans to buy the remainder. The lawsuit predated that venture.
The class representatives are the DVL 401(k) Plan, Steven Hall, Renee Miller, Richard Rees, Bharat Shah, Jeffrey Weber and David Zagunis. Law firms for the class representatives are Stull, Stull & Brody and WeissLaw.
The case is In re: Smith Barney Transfer Agent Litigation, U.S. District Court, Southern District of New York, No. 05-07583.
(Reporting by Jonathan Stempel; Editing by Leslie Adler)