In an opinion today, Judge Stein dismissed a case accusing Citibank of fraud and negligent misrepresentation for understating its exposure to mortgage-backed securities. He dismissed the case because the plaintiffs were “holders” of the stock during the relevant time period (i.e., they did not buy at inflated prices and sell at a loss), and relied principally on a First Department decision in 2010, Starr v. AIG, which held that “holders” could not bring claims. Judge Stein rejected the argument that Starr would not be adopted by the Court of Appeals:
As noted above, the decision in Starr was rendered by an intermediate appellate court. A federal court will only decline to follow such an intermediate appellate court decision if it “find[s] persuasive evidence that the New York Court of Appeals, which has not ruled on this issue, would reach a different conclusion.” 10 Ellicott Square Court Corp. v. Mountain Valley Indem. Co., 634 F.3d 112, 120 (2d Cir. 2011) (quoting Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc., 344 F.3d 211, 221 (2d Cir. 2003)). The degree to which this Court is bound to follow Starr depends on whether New York’s intermediate appellate courts are in conflict as to the viability of holder claims regarding publicly traded corporations, and if not, whether “persuasive evidence” suggests that the Court of Appeals would reject Starr. On the first question, plaintiffs point to another First Department decision: Continental Insurance Co. v. Mercadante, 222 A.D. 181 (1st Dep’t 1927). But Starr succinctly distinguished Mercadante and even cast doubt on that 83‐year‐old decision’s “continuing vitality.” See 76 A.D.3d at 33. On the second question, plaintiffs point to the decisions of courts in other states that permit certain holder claims as evidence that the New York Court of Appeals would reject Starr. But the fact that some courts in other states may not follow Starr is no reason to disregard a recent First Department decision quite squarely addressing the viability of claims by holders of publicly traded securities. In sum, New York’s appellate courts are the best predictors of how the New York Court of Appeals would decide such a contentious issue. Accordingly, the Court adopts Starr as the law governing holder claims in New York.