Otto Candies, LLC, et al v. Citigroup Inc.

Summarized by Amir Shachmurove , Brown Rudnick LLP
9 months 2 weeks ago

Case Type:

Business

Case Status:

Reversed and Remanded

Citation:

23-13152 (11th Circuit, May 08,2025) Published

Tag(s):

Ruling:

In this second appeal arising out of a long-running case based on allegations of a transnational fraudulent scheme-a conspiracy by and among Citigroup, Inc. (Citi); its agents, Citibank (CB) and Banco Nacional de México (Banamex); and Oceanografía S.A. de C.V. (OSA)-in over $1 billion of losses to thirty plaintiffs (PLs), the U.S. Court of Appeals for the Eleventh Circuit (Circuit) reversed the dismissal by the U.S. District Court for the Southern District of Florida (DC) of the PLs' third amended complaint (Complaint), a 541-paragraph behemoth, for failure to state a claim.

Procedural context:

In 2016, a group consisting of thirty plus U.S. and non-U.S. shipping and leasing companies, investment funds, and one bank, each a vendor, creditor, or bondholder of OSA, sued Citi. Taking the factual allegations in their latest pleading as true, as required bfor purposes of ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), PLs alleged that Citi and its agents (Citibank and Banamex) conspired with OSA to orchestrate and execute a vast and fraudulent scheme designed to boost the appearance of OSA’s profits and increase Citi's earnings from interest payments. These plaintiffs first complaint was dismissed for forum non conveniens in 2018; the Circuit Court reversed and remanded, holding that the DC had failed to give proper deference to the domestic plaintiffs’ choice of forum. Subsequently, the DC dismissed the same plaintiffs' second amended complaint. In 2022, the PLs, a "slimmed-down" subgroup, filed the Complaint. This pleading set forth seven claims and included four appendices in an "attempt[] to satisfy the ... [DC's] request for more specificity." Nonetheless, the DC dismissed all seven counts under rule 12(b)(6) of the Federal Rules of Civil Procedure (Rules, and each a Rule), reasoning thusly. It tossed the PLs' substantive RICO and common-law fraud claims because it found the allegations failed to provide details about which specific misrepresentations the PLs had relied on and to claim that their reliance was "justifiable," thus violating Rule 9(b)'s heightened requirement for pleading fraud. It dismissed the RICO conspiracy claims for failure to plead “an agreement to the overall objective of the alleged conspiracy or an agreement to commit two predicate acts.” The common-law conspiracy claim ran aground on the shoals of Rule 9(b). The PLs' common law aiding-and-abetting fraud claim fell due to their failure to allege facts giving rise to “a strong inference of actual knowledge” on Citi's part about the fraud. That-and their failure to plead with particularity that Citigroup had substantially assisted the fraud. And, lastly, to the heap went the PLs' vicarious liability claims. Here, too, the Complaint's lack of specificity was faulted, "[t]hough Citi[] did not dispute the existence of an agency relationship between itself, ... [CB], and Banamex." The PLs appealed this dismissal order.

Facts:

The roster. of defendants. Citi is a banking and financial institution incorporated in Delaware and headquartered in New York. Citibank is Citi's "primary U.S. lending and banking entity." OSA is now-defunct Mexican oil and gas services company. At one time, OSA provided offshore drilling services to Petróleos Mexicanos S.A. de C.V. (Pemex), Mexico’s state-owned oil and gas company. Banamex is a wholly owned Mexican subsidiary of Citigroup that furnished on-the-ground banking services for Citi. PLs "thoroughly" painted a damning picture of what these actors did that no observer could disavow at this stage of the proceeding. This was-is-what their verbal brushstrokes product. Under its arrangement with OSA, Citigroup advanced OSA funds, subject to steep interest rates, in exchange for the right to collect repayment directly from Pemex. Because Pemex often did not pay its contractors immediately, the cash advances provided OSA with liquidity to perform its underlying contracts. For this privilege, Citi upped the amount of its advances nine times to sums that far exceeded the value of the underlying contracts, while OSA was saddled with increasing debt, "up to nearly half of its revenue." Throughout the relevant time period, Citi was a knowing actor. Though well aware of OSA's precarious financial condition, it ignored OSA's overleveraged state in boosting advances by almost 600% between 2009 and 2012. Citi's internal control procedures required copies of a Pemex work estimate and a work estimate authorization form, signed by Pemex and the relevant contractor (here, OSA) and reflecting the amount owed to the contractor by Pemex for services provided; Citi simply ignored these procedures. Specifically, it granted OSA's requests even though (1) their value dwarfed the value of the Pemex contracts, and (2) Citi knew that OSA had forged Pemex signatures on the authorization forms it submitted to Citi. To make matters worse, in 2012, Citi outsourced to OSA, "the player that stood to gain the most from inflating the value of the Pemex contracts," the job of authenticating the documents it submitted in support of its own cash-advance requests per a "secret contract." In this, Citi too sidestepped its own internal control procedures. Per this scheme, as OSA requested larger and larger cash advances from Citi - from 2008 to 2014, the advances alone totaled over $3.3 billion - OSA collected millions in “increased illicit income,” and Citigroup amassed millions in “increased illicit interest.” Citi, however, profited, and misbehaved, in other ways. Citi (or its agents and subsidiaries) would serve as trustee of OSA’s 2008 bond issuance and as fiduciaries of the trust that facilitated OSA’s 2013 bond issuance, help restructure OSA’s debt, draft investor presentations, advise OSA on acquisitions, and act as OSA’s banker. It was during the bond issuances that Citi's behavior morphed from the predatory to the fraudulent, as Citi proceeded to misrepresent and omit key information about OSA’s financial condition and “the stability and reliability of the cash advance facility" to investors. Citi, it would seem, even "played an integral role in drafting the fraudulent materials distributed to investors between 2008 and 2014, and in vouching for OSA’s fraudulent financial statements." In 2014, the scheme was revealed. In that year, during an investigation of OSA’s insurance policies, Mexican authorities determined that the company had violated Mexican law. In the course of this investigation, Mexican regulators uncovered the cash-advance scheme and determined that ten Citi employees were criminally liable under Mexican law. Banamex was fined $2.3 million, and arrest warrants for three Citi employees were issued. As for OSA itself, the Mexican government seized OSA and placed it into restructuring proceedings. In the US, after "discover[ing] that it had issued nearly $430 million in fraudulent cash advances," the SEC fined Citi $4.75 million for failing to maintain a system of internal controls related to Banamex. Meanwhile, according to its then CEO, Citi terminated at least one employee purportedly "'directly involved in the fraud,'" followed by the dismissal of at least eleven others.

Judge(s):

Jill A. Pryor; Elizabeth L. Branch; and Britt C. Grant

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