On March 22, 2018, Chief Judge Colleen McMahon of the United States District Court for the Southern District of New York granted in part and denied in part class certification in a putative class action alleging breach of contract claims against Citibank, N.A. Merryman et al. v. Citigroup Inc. et al., 15 Civ. 9185 (CM) (S.D.N.Y. Mar. 22, 2018). Plaintiffs, former holders of American Depositary Receipts (“ADRs”) in three separate companies, brought this putative class action on behalf of a proposed class who currently or previously held any of 35 separate ADRs for which defendant served as depositary bank. Plaintiffs alleged that defendant breached the contracts governing these ADRs by converting cash distributions received from foreign issuers at one foreign exchange rate and then supposedly using a less favorable rate when remitting the proceeds to ADR holders and retaining the difference (the “spread”). The Court granted class certification with respect to the securities previously owned by plaintiffs, but held that plaintiffs lacked class standing to bring claims on behalf of holders of other securities.

The Court noted that the standing issue turned on whether the case was more similar to NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012) (“NECA”), than to Ret. Bd. of the Policemen’s Annuity & Ben. Fund of the City of Chicago v. Bank of N.Y. Mellon, 775 F.3d 154 (2d Cir. 2014) (“Retirement Board”). In NECA, the Second Circuit held the named plaintiff must demonstrate that (1) he “personally has suffered some actual . . . injury as a result of the putatively illegal conduct of the defendant,” and (2) “such conduct implicates ‘the same set of concerns’ as the conduct alleged to have caused injury to other members of the putative class by the same defendants.” NECA, 693 F.3d at 162. In Retirement Board, the Second Circuit determined that, applying NECA, the named plaintiff lacked class standing to pursue breach-of-duty claims against a trustee for hundreds of residential mortgage-backed securities trusts in which the named plaintiff did not invest, which the Second Circuit held would have required proof on a loan-by-loan and trust-by-trust basis.

The Court concluded that plaintiffs could satisfy the first part of the NECA test for class standing, based on plaintiffs’ allegations that they had suffered actual injury as a result of defendant’s alleged retention of the “spread.” Slip op. at 16. As to the second NECA factor, the Court noted that this case was “somewhere on the spectrum between” NECA and Retirement Board. For instance, it was more similar to NECA in that the agreements for 34 of the ADRs (excluding one with materially different language) provided ADR holders with “largely identical rights” respecting cash distributions. The Court contrasted this situation with the hundreds of trusts with different terms in Retirement Board. Id. at 17-18. The Court also noted that plaintiffs met NECA’s second prong in that they alleged that the class members had been injured in exactly the same way, to the extent that, were they to succeed in a trial limited to just the three ADRs they held, the doctrine of offensive collateral estoppel would likely apply in favor of investors in the other 31 ADRs. Id. at 18.

However, the Court found that the case differed from NECA in key ways. As in Retirement Board, the claims were based on contracts, and plaintiffs “cannot point to a single document containing a single set of misrepresentations applicable to all thirty-four ADRs.” Id. at 18-19. While the burden was likely less than that involved in trying to prove the terms of hundreds of thousands of mortgage loans in Retirement Board, the Court nevertheless noted that this was an additional burden that the named plaintiffs would not have to undertake to prove claims based on their own holdings. More critically, the Court highlighted that plaintiffs alleged that defendant had a spread retention “policy” applicable to all ADRs, requiring plaintiffs to prove that defendant had such a policy and adhered to it on a case-by-case basis—including by offering evidence of the actual exchange rate used in converting a cash distribution to dollars and the actual exchange rate used in remitting the proceeds to plaintiffs—which the named plaintiffs had less of an incentive to do for ADRs on which they had no prospect of personal recovery. Id. at 19. While “closer than it appears at first blush,” the Court held that this case was closer to Retirement Board than to NECA and that the named plaintiffs’ claims failed to implicate the “same set of concerns” as those of class members who owned different ADRs. Id. at 20.

This case serves as a reminder that, in addition to the requirements for class certification contained in Rule 23, named plaintiffs seeking class certification may face additional Constitutional obstacles to establishing standing to pursue claims involving securities they did not own.

Merryman et al. v. Citigroup Inc. et al.