NEW YORK (Reuters)—Citigroup Inc. is not liable to thousands of workers who said it should not have offered bank stock in its retirement plans because it knew its subprime mortgage exposure made that stock a bad investment, a federal appeals court said.

A divided 2nd U.S. Circuit Court of Appeals in New York on Wednedsay rejected compensation for workers who said they suffered big losses in their 401(k) plans as Citigroup's share price fell 52% from Jan. 1, 2007, to Jan. 15, 2008, when it reported an $18.1 billion subprime-related loss.

The 2nd Circuit separately upheld the dismissal of a similar case against McGraw-Hill Cos., the financial services and education publisher and owner of credit rating agency Standard & Poor's Corp.

Both cases were brought under the federal Employee Retirement Income Security Act of 1974.

The Citigroup case was brought on behalf of roughly 153,000 workers in the United States and Puerto Rico with 401(k) plans, tens of thousands of whom collectively held about $2.14 billion of Citigroup stock in those plans at the start of 2007.

They accused Citigroup of consistently downplaying its exposure to subprime mortgages and other toxic debt, causing hundreds of millions of dollars of losses for the tens of thousands of workers who owned bank stock in their 401(k)s.

More than three dozen individuals were also sued, including former CEO Charles Prince and former senior adviser Robert Rubin.

But writing for a 2-1 majority, Circuit Judge John Walker said the workers did not show that the defendants "either knew or should have known that Citigroup was in the sort of dire situation that required them to override plan terms in order to limit participants' investments in Citigroup stock."

He said Citigroup did not abuse its discretion in offering the stock and had no duty to disclose nonpublic information about how it expected the stock to perform.

The Citigroup decision upheld a 2009 ruling by U.S. District Judge Sidney Stein in Manhattan, and prompted a strong dissent from Circuit Judge Chester Straub.

Judge Straub called the decision an "alarming dilution" of federal law governing retirement plans and said it left no legal remedy for workers who lost years of savings by investing in Citigroup's 401(k) plans at the bank's "cajoling."

"We're very disappointed with the decision," said Marc Machiz, a lawyer for the plaintiffs. "The majority opinion will make it almost impossible to address abuses in companies' management of company stock options in 401(k) plans. Judge Straub's strong and forceful dissent should be the law."

He expects to ask the full 2nd Circuit to rehear the case.

Citigroup spokeswoman Anu Ahluwalia said the bank was pleased with the decision.

The McGraw-Hill decision upheld a 2010 ruling by U.S. District Judge Richard Sullivan in Manhattan.

Edwin Mills, a lawyer for the plaintiffs in that case, did not immediately return a call seeking comment.

The Citigroup lawsuit is part of a variety of shareholder and bondholder litigations against the third-largest U.S. bank, whose losses led to $45 billion of federal bailouts. Judge Stein oversees much of that litigation.

Citigroup stock now trades at close to 95% below its level at the start of 2007, reflecting a reverse stock split.

The cases are In re: Citigroup ERISA Litigation, 2d U.S. Circuit Court of Appeals, No. 09-3804; and Gearren et al. vs. McGraw-Hill Cos. et al. in the same court, Nos. 10-792 and 10-934.