Citigroup Global Market, Inc. has filed a motion to dismiss an action against it by KV Pharmaceuticals Co. arising out of sales of auction rate securities, according to an August 25 article in Law360 by Christine Caufield entitled “Citigroup Argues KV Pharma Knew ARS Risks.” The case is pending in the United States District Court for the Eastern District of Missouri. Citigroup appears to following the playbook of other Wall Street firms, arguing that KV was a “sophisticated investor” that knew the risks of ARS, that KV failed to identify any material misrepresentations by Citigroup, failed to allege it relied on any Citigroup statements in deciding to invest, failed to establish any actual loss, and failed to file suit before the statute of limitations ran out.
The selling firms are making these arguments despite abundant evidence that they marketed and sold auction rate securities as safe and liquid when they clearly were not. Despite the fact that Citigroup represented the auction rate securities to be liquid, and they cannot be liquidated, Citigroup explained its “no actual loss” argument this way: “A temporary inability to sell certain ARS holdings at par does not constitute an economic loss, and KV continues to receive interest payments on these holdings,” according to the article. This is an interesting argument given that Citigroup reported as early as April, 2008 that the auction rate securities market would cease to exist.
Citigroup is being represented by Paul Weiss Rifkind Wharton & Garrison LLP, based in New York. Paul Weiss defended Citigroup and Jack Grubman in a multitude of cases arising out of the analyst fraud scandals. In those cases, Citigroup’s lawyers had to contend with numerous “smoking-gun” emails and findings by regulators that Citigroup and Grubman acted improperly in publishing “buy” ratings on telecom companies that they privately considered to have serious problems in order to keep the profitable underwriting business of such companies. Citigroup’s lawyers face similar evidence of wrongdoing in the ARS cases. It will be interesting to see how the district court decides Citigroup’s motion to dismiss.
Twenty-three underwriter banks have agreed with regulators to repurchase more than $61 billion of auction rate securities. The regulators are now pursuing brokerage firms that sold, but did not underwrite, auction rate securities. Recently, New York Attorney General Cuomo filed suit against Charles Schwab & Co., Inc., whose founder, Charles Schwab lashed out in protest. For more information, see our August 26 blog entitled “Despite Assurances to Investors, Schwab Doesn’t Want to Play by the Rules.” Brokers who sold auction rate securities as safe and liquid may even face criminal charges. See our August 18 blog entitled “Bad News for Brokerage Firms that Sold Auction Rate Securities.
Page Perry is handling a number of auction rate securities cases for investors who lost liquidity due to the collapse of the auction market. Based in Atlanta, Page Perry has a national practice through strategic alliances with other securities law firms.