By Jonathan Stempel
NEW YORK (Reuters) - It took six years for anyone to realize the lead plaintiff in a fraud lawsuit against Citigroup was not entitled to sue in the first place.
The judge was not happy.
Citing "epic failures" on both sides of the case, a Manhattan federal judge on Thursday removed an Illinois union pension fund as lead plaintiff from a 2005 fraud lawsuit against the bank's Smith Barney brokerage.
U.S. District Judge William Pauley made the ruling after learning the fund, the Operating Engineers Local 649 Annuity Trust Fund of Peoria, Illinois, never owned securities that were part of the litigation.
The failure of the fund's law firm, Bernstein Liebhard, to confirm "the most basic fact" that its client owned the securities at issue resulted in a "considerable waste of time and resources."
But Pauley did not let the defense off the hook. He said that "had Smith Barney simply checked its records, it would have avoided six years of sparring with a phantom opponent," while its lawyers "astonishingly" failed to ask their client whether Local 649 invested in the relevant Smith Barney funds.
The case stemmed from Citigroup Inc's May 2005 agreement to pay $208 million to settle U.S. Securities and Exchange Commission civil charges that Smith Barney failed to pass fee discounts on to mutual fund investors.
Pauley's ruling came after the law firm for Local 649 revealed in an August 31 letter that the fund, which it had certified owned more than 75,000 shares of the Smith Barney Capital Preservation mutual fund, in fact had bought shares in the Smith Barney Capital Preservation Collective Trust, which was not part of the case.
"The epic failures described in this memorandum and order offer a cautionary lesson for securities litigators" and "highlight the need for diligence at all stages of litigation," Pauley wrote.
"In retrospect, it was something so obvious that every lawyer in the case should have recognized the problem and reacted immediately. But no one did."
Seth Ottensoser, who wrote the August 31 letter, did not immediately respond to a request for comment. Charles Platt, a partner at WilmerHale, which represents Smith Barney, declined to comment, saying the firm does not discuss pending lawsuits.
Morgan Stanley now owns a majority stake in Smith Barney, under a joint venture with Citigroup. The lawsuit predated the creation of that venture.
Morgan Stanley referred a reporter to Citigroup, which did not immediately respond to a request for comment.
Pauley plans to set up a schedule to appoint a new lead plaintiff and lead counsel.
The case is In re: Smith Barney Transfer Agent Litigation, U.S. District Court, Southern District of New York, No. 05-07583.
(Reporting by Jonathan Stempel in New York; editing by Andre Grenon)