Citigroup Must Face Fraud Claim Over $1 Billion in CDOs

Citigroup Inc. failed to persuade an appeals court to throw out a lawsuit that claims it lied about the riskiness of securities valued at almost $1 billion, as the world’s biggest banks continue to defend against allegations they misled investors in the run-up to the financial crisis.

Loreley Financing was allowed by a New York appeals court to sue Citigroup for fraud. The appeals panel, partly upholding a lower-court’s decision denying the bank’s request to throw out the case, ruled today that Loreley can’t sue for unjust enrichment.

Loreley, a group of nine investment companies based in the Channel Islands, was formed to invest in collateralized-debt obligations. It sued Citigroup Global Markets Inc. in New York State Supreme Court in Manhattan in January 2012 claiming the bank secretly chose the riskiest mortgages for sale in CDOs while buying credit default swaps to bet against them. Citigroup used a similar scheme to help clients offload the risks of toxic mortgage-backed securities, Loreley said.

Citigroup, based in New York, is among banks still defending themselves against allegations they misled investors before the 2008 financial crisis. The U.S. Securities and Exchange Commission had alleged in a 2010 lawsuit against Goldman Sachs Group Inc. that fraud tied to CDOs contributed to the worst financial crisis since the Great Depression.

$1.13 Billion

Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment on today’s ruling in an e-mail. The third-largest U.S. bank last month agreed to pay $1.13 billion to settle claims from mortgage-bond investors.

Loreley, which made similar claims in separate suits against other banks, said Citigroup sold it $965 million of notes and profited by charging fees and unloading loans that were likely to lose money. Loreley sought an order rescinding the purchases and the return of its investment.

Citigroup had argued the fraud claim should be dismissed because Loreley hasn’t shown that it relied on bank documents to buy the securities.

The appeals court said that while disclaimers made in “carefully drafted documents executed by sophisticated commercial parties” are usually enough to protect sellers from liability, Citigroup’s disclosures didn’t address the misrepresentations and omissions alleged by Loreley.

The same court in January ruled that Goldman Sachs’s disclosures didn’t protect that bank from fraud claims in a $1 billion suit filed by Basis Capital Funds Management Ltd., an Australian hedge fund, over the sale of CDOs known as Timberwolf and Point Pleasant. The court allowed the lawsuit to proceed.

Timberwolf became a symbol of the financial crisis when an e-mail by former Goldman Sachs executive Thomas Montag describing it as “one shi--y deal” was released by U.S. senators in April 2010.

The case is Loreley Financing (Jersey) No. 3 Ltd. v. Citigroup Global Markets Inc., 650202/2012, New York State Supreme Court (New York County).

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