Citigroup Inc. (NYSE:C) and its former brokerage agent, Smith Barney – now run as a joint venture with Citigroup and Morgan Stanley (NYSE:MS) – were cleared of nearly all charges in a lawsuit filed by mutual-fund investors that charged the two entities of keeping about $100 million in fee discounts that the investors believed they should have received.
U.S. District Judge William Pauley in Manhattan threw out all claims against Citigroup Inc. (NYSE:C), Smith Barney Fund Management LLC and former Citigroup Asset Management chief executive Thomas Jones.
The suit brought against Citigroup Inc. (NYSE:C) and Morgan Stanley (NYSE:MS) by the investors revolved around the fees the investors paid when they bought shares in mutual funds. Citigroup had established an in-house transfer agent, Citicorp Trust Bank, which could charge lower fees than First Data Corporation, the previous transfer agent whose contract expired. The investors filed claims that the new transfer agent continued to charge similar fees as the old agent, meaning Morgan Stanley (NYSE:MS) – and by extension, Citigroup (NYSE:C) – was keeping $100 million in profits for itself in a “kickback scheme.” The claimants charged that they made their investments on a reasonable reliance that Citigroup and Morgan Stanley would honor their “fiduciary duties” by charging the lower fees.
Judge Pauley wrote, “This theory of reliance – if accepted – would amount to a novel presumption of reliance in the mutual fund context.”
Citigroup (NYSE:C) had agreed on a $208 million settlement of fines and restitution for a related civil fraud case brought by the Securities and Exchange Commission. This latest court victory will likely help the bottom line at Citigroup, which may be taken very well by investors in Citigroup stock, like Bill Ackman’s Pershing Square hedge fund.