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Citigroup beats $900M lawsuit
By Susan Harrigan
NEWSDAY
December 9, 2005

Continuing a trend that has gone in favor of Wall Street, Citigroup has defeated an investor's attempt to recover $900 million in damages associated with allegedly fraudulent research. Such cases mushroomed after 10 large firms agreed to pay $1.4 billion in 2003 to settle regulators' charges that their analysts hyped ratings of current or potential investment banking clients.

The ruling for Citigroup occurred in a closely watched arbitration case filed by a wealthy Colorado investor who said that he received dishonest investment advice from former Citi star analyst Jack Grubman. The allegedly tainted advice pertained to the investor's nearly 21 million shares in WorldCom, a telecommunications company that went bankrupt in July 2002 after an estimated $11-billion accounting scandal.

Arbitration rulings don't set precedent, and Citigroup's win doesn't necessarily bode ill for other plaintiffs, said Jacob Zamansky, a Manhattan-based securities arbitration lawyer. It shows, however, that "it's become difficult for wealthy, sophisticated investors to win arbitration cases as opposed to more unsophisticated investors," Zamansky said.

The arbitration case was filed in October 2003 by Donald Sturm, a Denver-based investor who has been on the Forbes list of the 400 wealthiest Americans. According to a summary of the case by an arbitration panel of the NASD, a self-regulatory organization, Sturm said he'd "relied exclusively on Jack Grubman's advice relating to WorldCom," but the analyst and Citigroup failed to "honestly advise" him.

Grubman, a strong supporter of WorldCom, was fined $15 million by regulators as part of the 2003 settlement and barred from the securities industry. Neither he nor Citigroup admitted wrongdoing.

According to the Wall Street Journal, which first reported the panel's findings, Citigroup argued in a written response to Sturm's charges that he was a sophisticated investor who had a number of personal financial advisers. Zamansky said that having the advisers probably hurt Sturm's chances of convincing arbitrators that he had "absolutely relied" on Grubman's research, a key element that must be proved in such cases.

As is customary in arbitrations, the arbitration panel didn't give the reasons for its decision, which was issued late last month.

Sturm, 73, was ranked the 280th richest person in the U.S. in Forbes' 400 survey in 2001, with a net worth of $900 million. The year before that, he was No. 87 with a worth of $2.8 billion.

Sturm couldn't be reached. J. Boyd Page, a lawyer who handled the case, said that Sturm's team "believed we proved a compelling case that there was a direct reliance on Mr. Grubman" in acquiring and holding the WorldCom stake and is "disappointed that the panel ultimately didn't share our view."

A Citigroup spokeswoman said the firm is "very pleased with the panel's decision as well as what has been quite a favorable success rate for these claims in general."

According to Richard Ryder, publisher of Securities Arbitration Commentator, a New Jersey-based research organization, Sturm's claim was the second-largest ever filed against a Wall Street firm. Ryder said that, in general, arbitrations filed over allegedly fraudulent analyst research "have not done very well." But he said that's probably because many are small claims decided without a hearing, a category that has a lower investor-win rate than other types of cases

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