Citigroup Sued by South Korea’s Woori Bank Over CDO Losses

Citigroup Inc. (C) was sued by Woori Bank to recover losses from the Seoul-based lender’s $95 million investment in collateralized debt obligations it claims were fraudulently sold.

Woori claims Citigroup led it to invest during 2006 and 2007 in fraudulent CDOs and related products. Citigroup used misleading credit ratings to mask the fact that many of the mortgages underlying its CDOs and residential mortgage-backed securities, or RMBS, were likely to default, Woori said in its complaint filed May 15 in federal court in New York.

Citigroup “never disclosed to plaintiff -- and indeed affirmatively misrepresented and/or concealed -- the fact that the ratings on the CDOs purchased by plaintiff falsely portrayed the riskiness of the investments,” Woori said in the complaint.

Woori said in its complaint that it bought interests in five CDOs from Citigroup and had to sell them later at a loss. Citigroup used the CDOs “to move toxic mortgages off their balance sheet and onto those of plaintiff,” Woori claimed.

Woori claimed that, beginning in 2006, Citigroup knew that CDOs were very risky.

‘Violated Standards’

“Defendants knew that the RMBS that they and other major banks were packaging into CDOs included a significant percentage of mortgages that violated basic underwriting standards and were likely to default,” Woori alleged in the complaint. “Rather than disclose these material facts to investors in the deals it arranged, defendants concealed them so that Citigroup could off- load some of the massive exposure to subprime RMBS that it carried on its own balance sheet to unsuspecting investors.”

“Citigroup believes the allegations made in the suit are entirely without merit,” James Griffiths, a Hong Kong-based spokesman for New York-based Citigroup, said by phone. “We will defend the claim vigorously.”

In its complaint, Woori claimed Citigroup is liable for fraud, negligent misrepresentation and unjust enrichment. The Korean bank seeks damages of at least $95 million plus unspecified punitive damages.

Woori Bank is a unit of Woori Finance Holdings Co., South Korea’s largest financial company by assets.

The case is Woori Bank v Citigroup Inc., 12-CV-3868, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Seonjin Cha in Seoul at scha2@bloomberg.net; Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net