The shareholders’ suit was originally dismissed by a federal judge, who found it should have been brought derivatively on behalf of Citigroup and all its shareholders, according to a report by Thompson Reuters’ Legal Solutions Blog. But an appeals court ruled that the issue was one of Delaware state law.
In November, the Second Circuit Court of Appeals certified the question to the Delaware Supreme Court, Legal Solutions reported. The court ruled that investors who held onto previously purchased stock based on reliance on misleading statements from the company could sue directly.
The lawsuit was originally filed by Arthur Williams, founder of insurance company A.L. Williams & Associates. Williams received 17.6 million shares of stock in a 1998 merger. He transferred the stock to AHW Investment Partnership, MFS Inc., and several trusts, according to Legal Solutions Blog. Williams decided to liquidate his Citigroup holdings in 2007, but changed his mind after a review of the company’s financial statements, which led him to believe Citigroup was in good financial shape.
But the stock price had plummeted 95% by 2009, as the company disclosed its investments in securities backed by toxic subprime mortgages. In 2010, Williams and other shareholders filed suit against Citigroup, along with then-CEO Vikram Pandit, former CEO Charles Prince and former CFO Gary Crittenden. The shareholders said they wouldn’t have held onto their stock had the defendants not misrepresented the company’s financial health, Legal Solutions Blog reported.
The case will now go back to the Second Circuit, which will decide whether to uphold the dismissal of the suit using the Delaware decision as guidance.
Officers of big banks that engage in shady practices may find themselves responsible to shareholders in more ways than one if the Delaware Supreme Court has its say. The court has ruled that shareholders accusing Citigroup of tricking them into holding onto risky stock by misrepresenting its exposure to soured mortgage bonds can sue the company’s officers directly.