The case against a Citigroup fund unit failed to move forward, sparing the firm from judgement on whether it improperly failed to tell shareholders about its brokers' pay.

Salomon Smith Barney has won a court ruling that should send a sigh of relief through the ranks of the fund industry. Last week a federal judge for the Southern District of New York tossed a suit against the Citigroup unit after hearing both side's oral arguments. The case was brought by shareholders who claimed that Smith Barney had failed to disclose compensation to reps who sold its funds.

Judge Paul A. Crotty listened to more than three hours of arguments before telling the plaintiffs that they would not be able to continue with their case against the fund advisor. He did allow them to replead on part of the case based on alleged violations of the 1940 Act and only for the funds the plaintiffs actually owned shares of, but dismissed the remainder of the case.

The plaintiffs had claimed that Smith Barney violated secion 10(b) and 20(a) of the 1933 Act, Rules 10b-5 and 10b-10 of the 1934 Act and provisions of the 1940 Act as well as New York state law.

Crotty pointed to the failure of the plaintiffs to demonstrate losses in the funds as a key reason for his decision.

"Plaintiffs have not only not alleged why they lost money on their purchase of mutual fund stock, they have not alleged even that they in fact lost money on their purchase of the mutual fund stock," Crotty said. "Because plaintiffs failed to please loss causation, the federal securities claims ... must be dismissed."

James J. Sabella, a partner at Grant & Eisenhofer who represents the plaintiffs told the New York Law Journal that they intend to replead the case following the judge's instructions. Milbank, Tweed, Hadley & McCloy represented Smith Barney.

The case is Salomon Smith Barney Mutual Fund Fees Litigation (04-civ-4055). 

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