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In the latest round of litigation involving Enron and WorldCom, Southern District of New York Judge Laura Swain has dismissed a class action suit against Citigroup alleging that the financial giant failed to adhere to its risk management policies. It is welcome news for Citigroup, which paid $2.65 billion earlier this year to settle charges arising from claims that its brokerage arm, Salomon Smith Barney, had recommended WorldCom’s stock although it knew of the company’s financial troubles. In re Citigroup, Inc. Securities Litigation, No. 02 Civ. 5779, one of several cases over Citigroup’s financial relationship with Enron and WorldCom, was brought by Milberg Weiss Bershad & Schulman on behalf of Citigroup’s investors. The lead plaintiff was the Pompano Beach Police & Firefighters’ Retirement System. Its central allegation rested on Citigroup’s risk management policies disclosed in its public findings. The plaintiffs said Citigroup failed to live up to the policies to an extent constituting fraud. Judge Swain, however, saw nothing more than potential mismanagement in the accusations. An allegation of fraud, she held, required references to specific misconduct. Because plaintiffs failed to deliver ample specifics, she dismissed the action. The suit charged that Citigroup assisted Enron in hiding liabilities and inflating its reported earnings, among other things. In each instance, Citigroup should have known of Enron’s true financial state, and the suspect transactions constituted violations of its own risk management policies, the plaintiffs argued. Other accusations of fraud included recommendations of Enron’s and WorldCom’s stock arising from Citigroup’s purported desire to lure business to its investment banking unit in return for boosting its analyst ratings. NO DECEPTION SHOWN Judge Swain, however, referring to a 1977 U.S. Supreme Court opinion, said that for a fraud suit to succeed, “The fraudulent conduct must involve an element of manipulation or deception.” If Citigroup did enter into transactions inconsistent with its internal policies, she held Tuesday, it amounted to “nothing more than a charge that Citigroup’s business was mismanaged.” The ruling, based on federal securities law, was consistent with Delaware’s business judgment rule, which forbids judges to second-guess management decisions that simply go sour. Unprofitable decisions are not necessarily illegal ones, according to established legal doctrine. “Such allegations of mismanagement, even where a plaintiff claims that it would not have invested in an entity had it known of the mismanagement issues, are insufficient to support a securities fraud claim,” the judge wrote. The plaintiffs’ allegations relied not on “specific factual or opinion disclosures alleged to have been false or misleading, or on omissions of specific facts,” said Swain. Instead, they claimed that Citigroup would have avoided the suspect transactions had it adhered to its publicized risk management policies. “While such allegations may demonstrate that Citigroup engaged in risky transactions, they do not rise to the level of depicting manipulative or deceptive conduct,” she ruled. The Private Securities Litigation Reform Act of 1995 requires plaintiffs to meet higher pleading standards when accusing companies of fraud. INTENT OF CONGRESS In passing the law, Congress intended to reduce securities class actions by making it more difficult for plaintiffs to survive a motion to dismiss. Plaintiffs are required to plead allegations of fraud with specificity rather than make the broad statements that often characterized complaints in the past. Despite these restrictions, the number of securities class action settlements has risen in recent years. They climbed from 65 in 1999 to 96 in 2003, according to a study released earlier this year by Cornerstone Research. At the same time, the aggregate value of settlements of such cases rose in commensurate fashion. RISK MANAGEMENT The Citigroup plaintiffs quoted extensively from the financial institution’s descriptions of its risk management policies listed on its financial statements. But they failed to specify “which of these descriptions constitutes a false or misleading statement or how … each risk management policy quoted in the Complaint was violated,” Judge Swain wrote. Plaintiffs’ allegations did not reveal that these descriptions “were false or misleading at the time they were included in the public statements,” she held. “Such generalized allegations are insufficient to satisfy the requirements that allegedly fraudulent statements and omissions, and the reasons why they are alleged to be fraudulent, be identified with particularity.” Plaintiffs’ lawyers may file an amended complaint by Aug. 31. They could not be reached for comment. Richard Rosen, Brad Karp, and others at Paul, Weiss, Rifkind, Wharton & Garrison represented Citigroup.

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