Citigroup Global Markets, a unit of the similarly named holding company, and a second stock brokerage, UBS, are believed to be capable of paying a potential $95 million judgment. That's an estimate of the amount of money owed to 50 former clients of Southwest Exchange, which had virtually no assets when it closed in late January.

Southwest Exchange enabled real estate investors to postpone income tax on capital gains from the sale of properties.

Under a section of federal law, real estate investors may direct buyers of their properties to send the payment to accommodators like Southwest Exchange. When the seller finds a new property, he then uses the proceeds from the sale to pay for the new property.

As long as the investor does not touch the proceeds of the first sale, he may delay taxes on his gains on the property.

However, the investors' money was gone when Donald McGhan closed Southwest Exchange in January. Plaintiffs' attorneys contend that McGahn was operating a typical Ponzi scheme, in which early investors or clients are paid with money from later clients.

In the hearing, San Francisco attorney Gilbert Serota argued that Citigroup could not be held liable in the Southwest Exchange case based on state and case law. Southwest Exchange no longer had a brokerage account with Citigroup in 2006 when plaintiffs say Southwest Exchange stole money from them, Serota said.

Two years earlier, however, Citigroup did have a brokerage account for Southwest Exchange. Plaintiffs' attorneys said Southwest Exchange set up the brokerage account to hold clients' money.

In 2004, Southwest Exchange directed Citigroup broker John "P.J." DeMarigny to sell securities, including Treasury bills, and to transfer $47.3 million in the form of a loan to Blackstone Ltd., McGhan's private company.

Plaintiffs' attorney Stephen Peek argued that the Ponzi scheme started with Citigroup's transfer of the money to Blackstone. The plaintiffs' money was used to repay people like those whose assets were diverted in the $47 million transaction, he said.

The plaintiffs contend that DeMarigny knew the money belonged to clients of Southwest Exchange and that DeMarigny was part of a Ponzi scheme conspiracy.

Plaintiffs' attorneys "here are very creative and very willing to make a leap of faith in order to hold (Citigroup) in a case it doesn't belong in," Serota said.

Serota said Citigroup is not liable for any of the losses by Southwest Exchange clients, based on legal interpretations of state law and rulings in earlier cases.

Gonzalez suggested that the plaintiffs might want to amend their arguments, having heard Serota's comments Tuesday.

Peek said he would do so. The judge plans to hear another round of arguments on Sept. 11 on Citigroup's motion to dismiss it from Southwest Exchange lawsuits.