Citigroup Inc. has agreed to pay $590 million to settle a shareholder lawsuit accusing the company of hiding tens of billions of dollars of toxic mortgage assets. This is one of the largest settlements stemming from the global financial crisis. The agreement resolves claims that shareholders ended up with massive losses after the bank failed to take timely writedowns on collateralized debt obligations, many backed by subprime mortgages, and engaged in self-dealing transactions that hid the risks. Citigroup called the settlement “a significant step toward resolving our exposure to claims arising from the period of the financial crisis,” and said the $590 million is covered by existing reserves. It appears they consider this amount to be just part of doing business.
U.S. District Judge Sidney Stein in Manhattan has given preliminary approval to the settlement. A January 15, 2013 hearing has been scheduled to consider final approval. Investors have sued an array of banks over their conduct leading up to and during the 2007-2008 financial crisis. In 2010, Bank of America Corp. agreed to a $601.5 million settlement related to its Countrywide mortgage unit. Last year, Wells Fargo & Co reached a $590 million accord over loans and securities from the former Wachovia Corp.
The Citigroup case began in 2008 and it took four years to get to this point. The settlement followed mediation between the parties. Nearly 40 million pages of documents were gathered by way of discovery prior to the mediation. Fourteen current and former Citigroup executives had also been sued, including Chief Executive Vikram Pandit, his predecessor Charles Prince, and former senior adviser Robert Rubin.
Citigroup shareholders said in their lawsuit that they ended up with huge losses as the market began to recognize the “ticking time bombs that eventually exploded back onto Citigroup’s balance sheet.” Citigroup ultimately lost $27.68 billion in 2008. The settlement covers shareholders from Feb. 26, 2007, to April 18, 2008. By March 2009, Citigroup’s market value had sunk roughly $250 billion from the start of the class period, as the bank accepted a series of federal bailouts that for a while left taxpayers owning a one-third stake in the company.
While Citigroup has repaid the bailout money, its shares still trade at barely one-tenth their level at the end of the class period, after adjusting for a reverse stock split. Lead plaintiffs in the shareholder lawsuit included several former employees and directors of Automated Trading Desk Inc., an electronic market making and proprietary trading company that Citigroup bought in October 2007 for about $680 million. About 85 percent of that price was paid in Citigroup stock. The Plaintiffs received Citigroup shares as part of the transaction, which have fallen 94 percent since that time.
There is still ongoing bondholder and other litigation pending against Citigroup that is tied to the financial crisis. Judge Stein is overseeing that litigation. Separately, Citigroup is trying to persuade the federal appeals court in New York to approve its $285 million settlement with the U.S. Securities and Exchange Commission of charges that it fraudulently misled investors in a sale of a $1 billion CDO. U.S. District Judge Jed Rakoff, a colleague of Judge Stein’s, rejected that settlement last November, and Citigroup and the SEC have jointly appealed. Ira Press, a partner in the law firm of Kirby McInerney, located in New York, who represents the shareholders, had this to say:
Based on the allegations and the risks we faced in establishing liability and damages, and in comparison with other securities fraud class-actions, the settlement is a very good result for the class.
Separately, Citigroup is trying to persuade the federal appeals court in New York to approve its $285 million settlement with the U.S. Securities and Exchange Commission of charges that it fraudulently misled investors in a sale of a $1 billion CDO. However, a U.S. district judge rejected that settlement last November; thus, Citigroup and the SEC have jointly appealed. The case is In re: Citigroup Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 07-09901. If you have any questions about predatory lending or mortgage servicing fraud, contact Bill Robertson, a lawyer in the firm’s Fraud Section. Bill is currently handling cases involving predatory lending practices. He is also handling cases involving mortgage servicing fraud agreement by several different companies.
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