Close Close

Practice Management > Compensation and Fees

Citigroup, Smith Barney Emerge Unscathed From Mutual Fund Suit

Your article was successfully shared with the contacts you provided.

Citigroup and its former Smith Barney brokerage unit, together with two executives, saw nearly all claims thrown out in a lawsuit that accused them of shortchanging mutual fund investors out of more than $100 million in fee discounts.

Reuters reported Wednesday that U.S. District Judge William Pauley dismissed all claims against Citigroup and the former Smith Barney Fund Management, as well as those against Thomas Jones, formerly CEO of Citigroup Asset Management. Pauley also dismissed some of the claims against Lewis Daidone, a former Smith Barney senior vice president.

At issue were fees charged by Citicorp Trust Bank, an in-house transfer agent created by Citigroup, which was supposed to be able to charge lower mutual fund fees than First Data Corp. The latter’s contract was expiring, and shareholders sued, saying that Citicorp Trust Bank, instead of lowering fees, continued to charge more in what they said was a “kickback scheme” that funneled to the bank more than $100 million in profits that should instead have been passed on to fund shareholders.

Citing the passage of time as one factor in his decision, Pauley wrote, “In the Eclogues, Virgil observed that ‘time bears away all things, even our minds.’ Virgil’s maxim applies to legal theories as well.” Last September Pauley delayed the case, saying there were “epic failures” on both sides, by removing the lead plaintiff after he learned that it never owned shares that were part of the case.

He also said that recent Supreme Court decisions undercut fund shareholders’ argument that they had bought their shares in reliance on an assumption that Citigroup would honor its fiduciary duties. The case he cited, Janus Capital Group, Inc. v. First Derivative Traders, held that “[o]ne who prepares or publishes a statement on behalf of another is not its maker.” That, plus the time factor, contributed to the defendants’ arguments against the case.

In his decision Wednesday, Pauley was quoted saying, “This theory of reliance—if accepted—would amount to a novel presumption of reliance in the mutual fund context.”

The judge did allow some charges against Daidone to stand, however, concerning misstatements in documents that the latter signed.

The lawsuit predated the current majority ownership of Smith Barney by Morgan Stanley in a joint venture with Citigroup. An SEC case against the two former executives was dismissed in 2007.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.