Citigroup Inc. (C) paid $680 million in cash and stock to David Whitcomb and other shareholders of Automated Trading Desk LLC when it bought the firm in 2007. Five years later, the bank will have to pay them again.
ATD founder Whitcomb, 69, and other former investors led a class-action lawsuit against Citigroup, claiming executives concealed toxic assets from shareholders and caused the stock to plunge in value. The bank, the third-biggest in the U.S., agreed to pay $590 million to end the claims, which would be among the biggest settlements by a Wall Street firm in the aftermath of the financial crisis.
“We’re getting a small fraction of the total loss that a reasonable person would ascribe to Citigroup’s actions,” said Whitcomb, a former professor of finance at Rutgers University who received more than $100 million in cash and stock from the ATD deal. “But we’re getting something and that’s pleasing.”
Citigroup Chief Executive Officer Vikram Pandit is still dealing with the fallout from the bank’s practices before the financial crisis, when it almost collapsed amid losses tied to subprime home loans. In addition to the shareholder lawsuit, regulators accused the New York-based firm of misleading investors in $1 billion in securities linked to risky mortgages, and the lender paid $75 million in 2010 to settle claims it failed to disclose some subprime investments.
“For Citigroup not to challenge it in court meant that they knew they didn’t have a chance to win,” said Gerald Hanweck, a former Federal Reserve economist who’s now a finance professor at George Mason University in Fairfax, Virginia. “It would be tough to find a shareholder settlement in excess of this.”
The class-action, or group, suit was brought on behalf of Whitcomb, another former ATD executive, Jonathan Butler, and other investors who acquired Citigroup shares during the period Feb. 26, 2007, through April 18, 2008. U.S. District Judge Sidney Stein in Manhattan, who is presiding over the case, yesterday granted preliminary approval to the unopposed agreement and set a hearing for Jan. 15.
The deal would be the third-biggest shareholder class- action settlement to arise from the credit crisis, based on data from Nera Economic Consulting, which provides advice in lawsuits. Legal representatives for the plaintiffs, including Kirby McInerney LLP, are entitled to 17 percent, or more than $100 million, of the settlement, according to legal filings. Citigroup didn’t admit wrongdoing in the settlement.
Whitcomb, who has a doctorate in economics from Columbia University, became a professor at New Brunswick, New Jersey- based Rutgers in 1980 and founded ATD in 1988. He and his wife owned about 20 percent of the firm, which was described as a “pioneer” of electronic trading technology in a 2002 press release. Employees owned about 60 percent, he said.
“These shareholders were people who believed in my company and deserved a reasonable outcome,” Whitcomb said in a phone interview. He wasn’t sure of how much money he and his wife are going to get from the settlement.
In 2007, amid falling property prices, then-CEO Charles O. “Chuck” Prince was seeking to expand Citigroup’s ability to process trades electronically. He bought ATD for $680 million, including $102.6 million in cash and about 11.17 million Citigroup shares. On Oct. 3, the day the deal closed, the bank’s stock closed at the equivalent of $478.90.
The deal pushed Citigroup into the ranks of the five largest brokers on the New York Stock Exchange and Nasdaq Stock Market, according to data on the exchanges’ websites. ATD handled more than 200 million shares a day, including orders from retail brokers, the bank said then.
About the same time, Citigroup was using a “quasi-Ponzi scheme” to give the appearance that its assets were healthy, the lawsuit plaintiffs said in court documents. The firm and some of its former senior officers and directors “materially misrepresented” the exposure to so-called collateralized debt obligations, or CDOs, financial instruments that were often tied to subprime mortgages.
Citigroup told investors it had sold billions of dollars of CDOs and no longer faced a risk, the plaintiffs alleged. The bank didn’t reveal that it had guaranteed the securities if they suffered losses, according to the complaint. Citigroup transferred the guarantees to entities it set up to hide the risks, the investors alleged.
“This complaint arises because Citigroup responded to the widely known financial crisis by concealing both the extent of its ownership of toxic assets -- most prominently CDOs backed by nonprime mortgages -- and the risks associated with them,” the plaintiffs alleged in December 2008. “Defendants omitted to disclose the existence or acknowledge the market value of our risks associated with tens of billions of dollars of financial instruments.”
When CDO indexes showed steep declines in the value of the securities, Citigroup didn’t adjust its valuations, relying instead on higher evaluations from ratings firms or sales to itself, according to the amended complaint.
Citigroup shares fell 52 percent during the class period as losses mounted, according to data compiled by Bloomberg. The bank’s board ousted Prince as CEO and replaced him with Pandit, 55, in December 2007.
Shares tumbled 77 percent overall in 2008 as the bank lost $27.7 billion and took a $45 billion bailout from U.S. taxpayers, which was later repaid. Some of the shares that ATD directors and employees received were restricted, making them harder to sell as the price fell, Whitcomb said.
“Most of us ended up losing a lot of money when Citigroup stock went south,” he said. “We’re very happy that it’s finally been resolved and that there will be a settlement not just for ATD shareholders, who were grievously mistreated, but perhaps up to a million other Citigroup shareholders during that period.”
Other plaintiffs included the Public Employees’ Retirement Association of Colorado and Pensionskassernes Administration A/S, a Danish pension fund manager with 20.6 billion euros ($25.8 billion) under management at the end of 2011, according to its website.
Citigroup denied the allegations and said it agreed to the settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation. The amount to be paid under the proposed settlement is covered by Citigroup’s existing litigation reserves, the bank said.
The bank’s stock rose 1.9 percent to $29.91 after yesterday’s announcement. It has advanced 12 percent so far this year.
“Citi is fundamentally a different company today than at the beginning of the financial crisis,” the bank said in the statement. “Citi has overhauled risk management, reduced risk exposures and through our core businesses in Citicorp, we are focused on the basics of banking, leveraging our unique presence throughout the emerging and developed markets to serve our clients and the real economy.”
Whitcomb left ATD after the deal closed and is now chief financial officer at Revolutionary Tennis Innovations LLC, a New York-based company that is testing a new type of tennis racket. Whitcomb said the new racket has more power than conventional ones and predicted it would replace current models in five years.
Other executives joined the ranks of Citigroup’s equities- trading division, including Daniel Keegan, who rose to become head of the bank’s electronic-trading and cash equities businesses. The bank’s shares are down 94 percent since the ATD deal closed Oct. 3, 2007.
“Now that it’s over, I can say that it was interesting,” said Whitcomb about leading the class-action suit. “I won’t say it was fun, but we did feel we were doing one last thing for our shareholders that we thought was right to do.”
The case is In re Citigroup Inc. Securities Litigation, 07- cv-9901, U.S. District Court, Southern District of New York (Manhattan).