Citigroup, Morgan Stanley Sued Over Overseas Shipholding

Citigroup Inc. (C), Morgan Stanley and HSBC Securities (USA) Inc. (HSBA) were among underwriters sued by an investor in a $300 million debt offering by Overseas Shipholding Group Inc. (OSGIQ), which filed for bankruptcy Nov. 14.

The underwriters and Overseas directors and officers signed off on misleading financial documents for the March 24, 2010, offering, according to the lawsuit filed Nov. 21 in New York state court in Manhattan.

Overseas, the largest U.S. tanker operator, sought bankruptcy protection after saying Oct. 22 that its financial statements from 2009 through the first two quarters of 2012 contained inaccuracies. Before the announcement, the New York- based company posted 13 straight quarters of net losses as shipping rates fell.

Documents provided to investors in the $300 million offering contained inaccuracies from previous financial filings, according to the complaint, filed by Paul Otto Koether IRA Rollover on behalf of all investors in the debt. The investor said it is seeking to recoup losses after prices for the notes fell about 58 percent.

“Unaware of the material misstatements in the offering materials, investors purchased the notes in or traceable to the offering,” David Wales, a lawyer for the plaintiff, said in the complaint.

Senior Notes

Securities at issue in the suit are 8 1/8 percent senior notes due in 2018.

Spokeswomen Danielle Romero-Apsilos of Citigroup, Mary Claire Delaney of Morgan Stanley and Juanita Gutierrez of HSBC Securities (USA) declined to comment on the complaint. The three firms are based in New York.

The company’s inaccurate financial filings failed to account for tax liabilities, resulting in the overstatement of income, understatement of losses and mistakes in balance sheet information, according to the complaint. When the company told investors that it would be withdrawing the statements because of inaccuracies, the announcement “stunned the market,” leading to immediate downgrades of the company’s credit ratings, Wales said in the complaint.

“The company was foreclosed from accessing the commercial paper, capital and credit markets and thus, the company was unable to obtain the financing it needed to run its business,” Wales said.

The suit alleges the underwriters are liable for damages as much as the amount of the securities each handled in the offering. Citigroup, Morgan Stanley (MS) and HSBC, which acted as book runners, together handled $225 million of the notes, receiving total fees of about $4 million, according to the complaint.

The case is Paul Otto Koether IRA Rollover v. Arntzen, 654037/2012, New York Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Christie Smythe in New York at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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