Court Limits Shareholder Suits Against Vendors, Banks

 (Bloomberg) -- The U.S. Supreme Court put new limits on shareholders suits against a company's banks and business partners in a ruling that may hinder efforts to recoup billions of dollars lost in frauds at Enron Corp. and HealthSouth Corp.

The justices, voting 5-3, threw out a lawsuit by Charter Communications Inc. investors against two of its suppliers, Motorola Inc. and Scientific-Atlanta Inc. The court said the shareholders didn't show they relied on the alleged deception by the suppliers in making investment decisions.

Allowing additional shareholder lawsuits ``may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets,'' Justice Anthony Kennedy wrote for the court.

Business groups called the case their highest priority in the court's 2007-08 term. Trade groups representing banks, accounting firms and law firms took an especially keen interest, saying their members might present tempting targets for shareholder lawyers. The ruling will bolster efforts by Merrill Lynch & Co. to block a lawsuit by Enron investors and by UBS AG to defeat claims by HealthSouth shareholders.

The case split the court along ideological lines, with Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joining Kennedy's opinion.

Seeking a Remedy

Justices John Paul Stevens, Ruth Bader Ginsburg and David Souter dissented. Stevens wrote that Congress enacted the federal securities laws ``with the understanding that the federal courts respected the principle that every wrong would have a remedy.''

Justice Stephen Breyer didn't participate in the case. He owns stock in Cisco Systems Inc., which is now Scientific- Atlanta's parent company.

The Supreme Court in 1994 ruled 5-4 that federal securities law bars suits for ``aiding and abetting'' another company's wrongdoing. Congress changed the law in 1995 to permit aiding- and-abetting suits by the Securities and Exchange Commission, but not by private shareholders.

Investors said the 1994 ruling left room for accusations that outsiders took part in a scheme to deceive shareholders, while business groups said those types of claims were barred. The Bush administration largely supported the companies, though using different reasoning.

 

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State Street's Earnings Fall 28% on Legal Fund Costs

(Bloomberg) -- State Street Corp., the world's largest money manager for institutions, said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages.

Net income declined to $223 million, or 57 cents a share, from $309 million, or 91 cents, a year earlier, the Boston-based company said today in a statement. State Street dropped 5.5 percent in New York composite trading after the company said 2008 growth will be at the lower end of its target ranges.

State Street faces at least three class-action lawsuits from investors claiming its funds made inappropriate bets on subprime-backed securities. It disclosed the legal reserve Jan. 3 and replaced William Hunt, its chief investment officer for the past three years. State Street's 2008 forecast follows a year in which the company exceeded analysts' estimates.

``People are trying to figure out just how much of the strength State Street showed in 2007 is truly sustainable,'' Thomas McCrohan, an analyst at Janney Montgomery Scott LLC in Philadelphia, said in an interview today.

State Street fell $4.03 to $80.83 at 9:38 a.m. in New York Stock Exchange composite trading after declining to as low as $80.20. Before today, the stock had risen 19 percent in the past year, compared with the 4.9 percent gain by the Standard & Poor's Supercomposite Asset Management and Custody Banks Index.

Excluding the legal reserve of $279 million after tax, or 71 cents a share, profit was $1.38 a share, beating the $1.35 average estimate of 15 analysts surveyed by Bloomberg. State Street's earnings for 2007 were $4.57 a share, outpacing the $4.55 estimate of the 15 analysts.

 

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Citigroup Posts Record Loss on $18 Billion Writedown

(Bloomberg) -- Citigroup Inc. posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the largest U.S. bank said today in a statement. New York-based Citigroup also reduced its dividend by 41 percent, cut 4,200 jobs and obtained $14.5 billion from outside investors to shore up depleted capital.

The results are ``unacceptable,'' Chief Executive Officer Vikram Pandit, who was installed in December after Charles ``Chuck'' Prince stepped down amid mounting subprime losses, said on a conference call with analysts and investors. ``We need to do better, and we will.''

Citigroup fell as much as 3.7 percent in New York trading as the writedown for subprime home loans and related securities was almost double what the company forecast in November and the loss exceeded analysts' estimates. The bank also set aside $5.2 billion to cover lending losses, including credit-card and auto loans where delinquencies increased.

The markdown on subprime securities is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank. Former CEO Sanford I. Weill and Saudi Prince Alwaleed bin Talal, who is already Citigroup's largest individual shareholder, were among the investors contributing new capital to the bank.

`Deep, Desperate Hole'

``They've got themselves in a deep, desperate hole and it's going to take them all of 2008 to work their way out of it,'' Jon Fisher, who helps manage $22 billion at Minneapolis-based Fifth Third Asset Management, said in an interview on Bloomberg TV. Fifth Third owns shares of Citigroup. ``There are probably issues on their balance sheet that the management team, who's only really been running the company for about a month, doesn't even know about.''

The net loss exceeded analysts' estimates of 97 cents a share, according to a survey by Bloomberg. Citigroup has slumped 47 percent in New York Stock Exchange composite trading during the past year. The shares fell 92 cents, or 3.2 percent, to $28.14 in composite trading at 9:52 a.m.

Standard & Poor's lowered its long-term rating on Citigroup to AA- from AA after the earnings announcement, reflecting the ``severe losses'' and the likelihood that the bank's 2008 performance ``could be rocky.''

Dividend Reduced

Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion annually. The company said as recently as November that it had no plans to lower the payout to shareholders.

Citigroup also had to turn to outside investors for fresh capital for the second time in two months, bringing to $22 billion the total amount raised. The bank said it generated $6.88 billion by selling convertible preferred shares to an investment fund controlled by the government of Singapore. Similar shares were sold to Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Prince Alwaleed and Weill.

In November, the bank got a $7.5 billion injection from the ruling family of the Middle Eastern emirate Abu Dhabi. Alwaleed, the 52-year-old billionaire, already owns 4 percent of the company. He has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of funds.

 

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