Oct. 9 (Bloomberg) -- Citigroup Inc. and Wells Fargo & Co. won a two-day extension of an agreement suspending federal litigation over the fate of Wachovia Corp. after a lawyer said a ``grand solution'' between bidders was being negotiated.

The two suitors urged U.S. District Judge Lewis Kaplan in Manhattan yesterday to extend the delay during a teleconference five minutes after the original agreement expired, according to a court transcript. Kaplan agreed, canceling a scheduled hearing in Wachovia's lawsuit against Citigroup.

``There are negotiations between Wells Fargo and Citigroup about a possible grand solution that would preserve the shareholder value for Wachovia as represented by the Wells Fargo deal,'' said Wachovia lawyer David Boies, according to the transcript. Such a deal ``would involve not a single choice between Citigroup and Wells Fargo,'' he added, without elaborating. Wells Fargo fell 11 percent in New York trading.

Wells Fargo and Citigroup are competing for control of Charlotte, North Carolina-based Wachovia's $448 billion of deposits in 21 states. Citigroup offered $2.16 billion last week for the banking operations. Wells Fargo's later bid, originally valued at $15 billion, was for the whole company, an offer Wachovia wants to consummate with its lawsuit. The Charlotte, North Carolina-based bank seeks an order that the deal is valid.

The takeover of Wachovia also has been held up as Citigroup and Wells Fargo officials are concerned about potential losses from acquiring low-quality assets from Wachovia, the Wall Street Journal reported, citing unidentified people familiar with the matter.

Continuing Talks

New York-based Citigroup and San Francisco-based Wells Fargo are continuing their talks with the Federal Reserve to resolve the dispute, the banks said yesterday in statements. The ``litigation standstill'' was extended until 8 a.m. New York time on Oct. 10. It began Oct. 6 and had expired at noon yesterday.

``This is a standstill that the Fed has insisted on because of concern as to what's going on in the market,'' Citigroup lawyer Gregory Joseph told Kaplan, according to the transcript, adding, ``the hearing could affect market activity.'' Boies, of Armonk, New York-based Boies Schiller & Flexner, agreed, saying ``the Fed has actively pushed for the standstill.''

The teleconference this afternoon included Kaplan, Boies, Joseph and Wachovia General Counsel Jane Sherburne, according to the transcript.

During the call, Joseph said a hearing in a parallel lawsuit filed by Citigroup in New York State Supreme Court in Manhattan before Justice Charles Ramos is scheduled for Oct. 14. A hearing in a third lawsuit over the proposed buyouts is set for Oct. 13 in North Carolina state court in Charlotte, he said.

Extended Standstill

``Those parties and the Fed believe that it's important that the standstill be extended,'' Boies said of Wells Fargo and Citigroup. Fed spokesman Andrew Williams in New York didn't return a call seeking comment.

Kaplan ordered court papers in the case filed under seal. Wells Fargo spokesman Larry Haeg declined to comment. Citigroup spokeswoman Shannon Bell didn't immediately return a call. Dawn Schneider, a spokeswoman for Boies, declined to immediately comment.

Wells Fargo may buy Wachovia and sell parts to Citigroup, said a person briefed on the negotiations who declined to be identified because the talks are private. Citigroup would get branches in the Northeast and about a quarter of Wachovia's deposits. Wells Fargo would take the branches in the South and Mid-Atlantic states, the person said.

Wachovia, which was on the verge of being seized last week by the Federal Deposit Insurance Corp., has a limited role in the talks, Sherburne said.

`In The Middle'

Wachovia is ``unfortunately somewhat caught in the middle of this negotiation between Wells and Citigroup,'' she told Kaplan, adding that her bank ``will facilitate in whatever way we can a negotiated settlement of this matter.''

Christy Phillips Brown, a spokeswoman for Wachovia, declined to comment.

Wachovia slumped 20 percent, or 99 cents to $4.07 at 10:53 a.m. in New York Stock Exchange composite trading. Citigroup fell 37 cents to $14.03. Wells Fargo slipped $3.51 to $28.39.

The North Carolina case was filed in Superior Court in Charlotte by two Wachovia shareholders, including former Chief Executive Officer Leslie Baker. In that suit, a temporary restraining order was granted blocking Citigroup's acquisition, according to their lawyer, Mark Merritt.

During yesterday's teleconference, Sherburne warned the judge that a settlement of the dispute must be reached soon.

``The farther this litigation proceeds,'' she said, ``the more difficult it becomes to sustain a negotiated settlement posture between the other two parties.''

The case is Wachovia v. Citigroup, 08-cv-08503, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in U.S. District Court in New York at dglovin@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: October 9, 2008 10:58 EDT