Oct. 6 (Bloomberg) -- Citigroup Inc. sued Wells Fargo & Co. and its takeover target Wachovia Corp. for $60 billion, claiming their agreement violates its rights to buy a portion of the Charlotte, North Carolina-based lender under a previous deal.

Citigroup's suit came as Federal Deposit Insurance Corp. Chairman Sheila Bair said today the parties were working toward resolving the competing takeover bids. Bair said a settlement needed to be reached today to serve the public interest. Wachovia said the banks have agreed in consultation with the Federal Reserve to a ``litigation standstill'' until noon on Oct. 8.

Citigroup seeks more than $20 billion in compensatory damages and $40 billion in punitive damages, claiming Wells Fargo and Wachovia interfered with its bid, according to a complaint filed today in New York State Supreme Court in Manhattan.

The ``transaction would have been signed and announced on Friday, October 3rd if it had not been subverted by the unlawful conduct of Wachovia, Wells Fargo, and their officers and directors and outside advisers,'' Citigroup said in a statement.

Citigroup seeks to complete its purchase as part of a rebuilding effort following $61 billion in losses tied to the mortgage-market collapse. The bank wants to buy parts of Wachovia for about $2.16 billion. San Francisco-based Wells Fargo's $15 billion bid is for the whole company. Wachovia said the Wells Fargo offer is a better deal for investors, employees and taxpayers because, unlike Citigroup, it doesn't rely on U.S. government assistance.

Wells Fargo spokeswoman Melissa Murray declined to comment, saying the bank hadn't seen the complaint.

Government Assistance

Wachovia's ``agreement with Wells Fargo, which involves no government assistance, is proper and valid,'' that bank said in a statement.

The New York state suit alleges breach of contract and tortious interference, where a third party interferes with an agreement between two others. Citigroup also seeks an order barring Wachovia and Wells Fargo from continuing their merger talks and an order forcing Wachovia to negotiate with it ``in good faith.''

A separate lawsuit is pending between Citigroup and Wachovia across the street in Manhattan federal court. Wells Fargo and Wachovia today filed papers seeking to move the state lawsuit to the U.S. district court.

$700 Billion

In the federal litigation, Wachovia argues the $700 billion federal bailout law for the banking industry signed into law last week includes language that permitted Wells Fargo to top Citigroup's offer, a contention disputed by Citigroup's lawyers. That case was assigned today to U.S. District Judge Lewis Kaplan.

The state suit was randomly assigned today to New York Justice Charles Ramos, who on Oct. 4 granted Citigroup's request at an emergency hearing in his Cornwall, Connecticut home to extend its period of ``exclusivity'' in completing its purchase.

The accord between Citigroup and Wachovia was set to expire today. Ramos extended it until Oct. 10, when a hearing in the case was scheduled.

Citigroup lawyers said yesterday the bank wanted to file a lawsuit last week and didn't after concerns were raised that the litigation would negatively affect the financial markets.

``On Friday we were ready to file and we were told by federal regulators that we should not,'' Gregory Joseph, an attorney for Citigroup, said. By Oct. 4, Citigroup decided to file suit and went searching for an available state court judge who handles business cases. They eventually located Ramos at his weekend home, lawyers said.

Second Ruling

Wachovia and Wells Fargo appealed Ramos's decision to New York State Supreme Court Justice James McGuire of the state appeals court in Manhattan. McGuire last night threw out Ramos's ruling and said Wachovia may continue merger talks with Wells Fargo.

Ramos then last night issued a second order, agreed to by both Citigroup and Wachovia, which preserves Citigroup's ability to secure full and complete relief if a state court judge finds Wachovia breached the exclusivity agreement.

The state case comes after McGuire questioned both sides about whether he was legally able to prevent Wachovia from accepting a bidder offering the best possible deal. One legal expert said Citigroup needed to file today's complaint to preserve its rights.

Promised to File

``This is the complaint that Citigroup promised to file when they sought an injunction Saturday night,'' said Antony Page, an associate professor at Indiana University School of Law in Indianapolis. ``You don't want to hang your judge out to dry.''

Eric Seiler, a lawyer for Wells Fargo, declined comment. George Frampton, a lawyer for Wachovia, wasn't immediately available for comment.

According to Citigroup's state court complaint, Wells Fargo's proposed transaction triggers severance payments that may enable Wachovia Chief Executive Officer Robert Steel and other senior executives to receive a combined $225 million.

The consummation of Citigroup's offer wouldn't prompt similar agreements because the New York-based bank was buying Wachovia's banking operations and not the entire company, according to Citigroup.

Last night, lawyers for Wachovia and Citigroup disagreed about the impact of having cases on parallel tracks in both state and federal courts. Paul Bschorr and P.J. Mode, lawyers for Citigroup, said they would appeal McGuire's ruling.

`Dead' in Court

Frampton, Wachovia's lawyer, disagreed, saying, ``They're dead in state court, this case belongs in federal court. The provisions in that exclusivity agreement are un-enforceable.''

Wachovia today said a court in its home state of North Carolina issued a temporary restraining order that ``precludes Citigroup from acting further to enforce the exclusivity provision'' in New York. The suit, Wachovia said, ``appears to be in violation of the North Carolina court order.''

The North Carolina ruling couldn't be immediately confirmed.

Citigroup dropped 94 cents to $17.41 at 4:02 p.m. in New York Stock Exchange composite trading. Wachovia fell 43 cents to $5.78 and Wells Fargo fell 92 cents to $33.64.

The case is Citigroup Inc. v. Wachovia Corp., 08-602872, New York State Supreme Court for New York County (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York State Supreme Court in Manhattan at pathurtado@bloomberg.net and; David Glovin in U.S. District Court in New York at dglovin@bloomberg.net.

Last Updated: October 6, 2008 16:19 EDT