Citigroup Settles Investors’ CDO Suit for $590 Million

Citigroup, Investors Reach $590 Million Accord in CDO Suit
Citigroup Inc. was accused by investors of repackaging unmarketable collateralized debt obligations and reselling them to itself to hide its exposure to the securities. Photograph: Victor J. Blue/Bloomberg

Citigroup Inc. agreed to pay $590 million in cash to settle a lawsuit by shareholders alleging the third-biggest U.S. bank hid risks tied to toxic assets, the plaintiffs said.

U.S. District Judge Sidney Stein in Manhattan, who is presiding over the suit, today granted preliminary approval to the unopposed accord, and ordered a hearing for Jan. 15.

Citigroup is among Wall Street firms still dealing with the fallout from the financial crisis, when the bank almost collapsed amid losses tied to subprime mortgages and took a $45 billion bailout. Investors accused the New York-based bank of repackaging unmarketable financial instruments and reselling them to itself to hide its exposure to the securities.

“Citi will be pleased to put this matter behind us,” the bank said in a statement. “This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis.”

Citigroup began using the “CDO-related quasi-Ponzi scheme” in 2006 to give the appearance that it had a healthy asset base, investors alleged in court documents. The plaintiffs alleged Citigroup, including some of its former senior officers and directors, “materially misrepresented” its exposure to CDOs and were both aware of the size of Citigroup’s holdings and their impairment before they were disclosed to the public.

Common Stock

The class-action, or group, suit was brought on behalf of investors who purchased Citigroup common stock during the period Feb. 26, 2007, through April 18, 2008. Citigroup shares fell 55 percent during the period, according to Bloomberg data.

The original claims by the plaintiffs spanned an array of Citigroup businesses, from the mortgages the bank sold to consumers to the mortgage-backed securities it sold to institutional investors such as CDOs, Structured Investment Vehicles, Residential Mortgage-Backed Securities and Auction Rate Securities.

Citigroup told investors it had sold billions of dollars worth 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.

Amended Complaint

“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 an amended complaint filed in December 2008.

“Defendants omitted to disclose the existence of 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 better rating company evaluations or sales to itself, according to the amended complaint.

Stein, in a November 2010 ruling, allowed claims for alleged misstatements and omissions related to Citigroup’s CDO exposure to proceed and he also narrowed the case by granting Citigroup’s motion to dismiss the remainder of plaintiffs’ claims involving other securities.

‘Adequate Settlement’

“We think this is a very good result for the class and it’s a fair, reasonable and adequate settlement given the allegations of the complaint.” Ira Press, a lawyer for the plaintiffs, said today in a telephone interview. “We think it compares favorably with prior securities fraud class-action settlements,” he said.

“The settlement is imminently fair considering the substantial recovery to the settlement class and the risks and costs attendant to further, protracted litigation,” Press said in memo today to Stein.

The plaintiffs had gathered almost 40 million pages of documents from Citigroup and third parties, Press said. Layn Phillips, a retired federal judge who was acting as a mediator in the case, proposed a $590 million settlement on April 25, Press said in his memo to Stein. An accord was reached “shortly thereafter,” he wrote the judge.

Denies Allegations

“Although plaintiffs believe that the defendants knowingly or recklessly misrepresented Citigroup’s CDO exposure and valuation, defendants have raised a host of factual and legal challenges increasing the uncertainty of a favorable outcome absent settlement,” Press said in his memo to the court.

Citigroup denies the allegations and said it is entering into this 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.

“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.”

The lead plaintiffs in the case were former employees and directors of Automated Trading Desk, an electronic trading firm that the bank bought for about $680 million on Oct. 3, 2007. About 80 percent of the purchase price was in Citigroup shares, ATD founder and former Chairman David Whitcomb said in a phone interview. The stock has plunged 94 percent since then.

‘Grievously Mistreated’

“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,” Whitcomb said. “Most of us ended up losing a lot of money when Citigroup stock went south.”

Whitcomb, a former finance professor at Rutgers University, said he and his wife owned about 20 percent of ATD and received more than $100 million in cash and Citigroup shares from the deal. Some of the shares were restricted, which made it difficult to sell as the price declined, he said. Whitcomb said he wasn’t sure of how much money he and his wife are going to get from the settlement.

“We’re getting a small fraction of the total loss that a reasonable person would ascribe to Citigroup’s actions,” Whitcomb said. “But we’re getting something and that’s pleasing.”

The case is In re Citigroup Inc. Securities Litigation, 07-cv-9901, U.S. District Court, Southern District of New York (Manhattan).

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