* Investors say Citigroup unit never passed on savings
* Smith Barney accused of pocketing "kickbacks"
* Citigroup, Smith Barney previously dismissed from case
By Jonathan Stempel
March 21 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
Sept. 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.