We wrote on collateralized debt obligations (CDOs) in another section of this issue and attempted to explain how these instruments played a major role in almost destroying our economy. In a lawsuit arising out of this complicated debacle, Loreley Financing has sued Citigroup Inc. for fraud involving nearly $1 billion worth of CDOs purchased in 2006 and 2007. Citigroup is accused of defrauding Loreley into purchasing “fraudulent investments that are now worthless.” It’s alleged in the suit, filed in New York State Supreme Court in Manhattan, that Citi used the CDOs to offload the risks of toxic mortgage-backed securities on its books and to help preferred clients “short” the housing market.
Loreley Financing is a group of special-purpose entities formed to invest in CDOs. The entities are organized under the laws of Jersey in the Channel Islands. The entities, whose claims include fraud and unjust enrichment, are seeking to recover at least $965 million paid for the notes and buybacks. This lawsuit may be the first of many more to come arising out of the sale of CDOs and related matters.
Source: Insurance Journal
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