NEW YORK, March 24, 2008 – Our securities litigators scored a major victory for Legg Mason on March 17, 2008, when Judge Denny Chin of the United States District Court for the Southern District of New York dismissed, with prejudice, a securities class action complaint alleging violations of the 1933 and 1934 Acts against Legg Mason, Inc., its CEO and CFO, and Citigroup Global Markets Inc. See Garber v. Legg Mason, Inc., --- F. Supp. 2d ---, No. 06 Civ. 9436 (DC), 2008 WL 697638. The decision, which precludes plaintiffs from amending their complaint, was based solely on the pleadings, without any oral argument.
In Garber, Plaintiffs representing a class of Legg Mason shareholders alleged that Legg Mason violated Sections 11, 12(a)(2), and 15 of the 1933 Act and Sections 10(b) and 20(a) of the 1934 Act for failing to disclose four facts relating to a swap of Legg Mason’s brokerage business for Citigroup’s asset management division. Specifically, Plaintiffs alleged that Legg Mason failed to disclose in a secondary offering following the swap that (1) Peter Wilby, a successful asset manager, planned to leave Legg Mason to start his own company and would take more than $8 billion in assets with him; (2) Legg Mason was experiencing increasing customer withdrawals; (3) Legg Mason’s integration-related expenses were higher than anticipated; and (4) the company had failed to pay $12 million in fees in connection with the distribution of mutual funds acquired in the swap.
In granting our motion to dismiss, Judge Chin adopted nearly all of our arguments, and held that Plaintiffs failed to adequately plead materiality as a matter of law under both the 1933 Act and the 1934 Act. Acknowledging that materiality is typically a mixed question of law and fact and therefore carries a high bar for dismissal, Judge Chin found that none of the four alleged omissions were material. First, a reasonable investor could anticipate that key personnel like Wilby would leave the company, and in any case his departure was adequately disclosed both by Legg Mason and in public press reports. Second, Plaintiffs’ failure to plead the amount or magnitude of the customer withdrawals or integration expenses undermined any allegation of their materiality. Additionally, the company adequately disclosed these risks in its prospectuses. Finally, Judge Chin held that the $12 million distribution expense was too small to be material as a matter of law when considering Legg Mason’s revenues and expenses.
Judge Chin also provided three additional grounds for dismissal of Plaintiffs’ claims under the 1934 Act (all of which we advanced in our motion): (i) Plaintiffs failed to plead fraud with particularity as required by Rule 9(b) and the PSLRA; (ii) Plaintiffs could not show loss causation for the alleged omissions relating to Peter Wilby, the customer withdrawals, and the integration expenses; and (iii) Plaintiffs did not plead scienter. Judge Chin also dismissed Plaintiffs’ control person claims under Section 15 of the 1933 Act and Section 20(a) of the 1934 Act because Plaintiffs failed to plead a primary violation of the respective Acts.