Shareholders of Citibank NA have filed suit against the bank in a new derivative class action of misrepresenting the health of mortgage-backed securities (MBS) in some $17.4 billion worth of pools of loans that the bank trusteed. Plaintiffs Transamerica Life Insurance Co., units of Prudential Financial Inc., Kore Advisors LP, Pimco, Sealink Funding Ltd., and TIAA-CREF Bond Fund — and many of their affiliates — contend that the bank knowingly “ignored pervasive and systemic deficiencies” in the loans, which were packaged into 27 trusts, selling them with the aid of misleading representations and warranties. It was alleged in the complaint:
Citibank knew that the pools of loans backing the trusts were filled with defective mortgage loans. Citibank must at all times act in the best interests of the trusts. As alleged herein, Citibank failed to discharge its duties and obligations to protect the trusts. Instead, to protect its own business interests, Citibank ignored pervasive and systemic deficiencies in the underlying loan pools and the servicing of those loans.
Citibank sold $69 billion in loans total over the course of its MBS business dealings, the suit says. The loans at issue here were securitized and collateralized from 2004 to 2007, it says. The Plaintiffs, who are seeking “billions of dollars” in damages, alleged:
The fundamental role of a trustee in an RMBS securitization is to ensure that there is at least one independent party, free from any conflicting self-interest, to protect the trust corpus.
The Plaintiffs contend that Citibank broke that trust. They said, among many other things in the complaint, that Citibank failed to issue “event of default” notices within 90 days, which the agreements allegedly required. The causes of action in the complaint include breach of contract, violation of the Trust Indenture Act, negligence, breach of fiduciary duty, and breach of the post-default duty of independence. The Plaintiffs say that the bank needs to implement governance reforms.
Citibank is defending other suits over its RMBS activities. In August, a New York state judge declined to dismiss a $157 million put-back action against Citigroup Global Markets Realty Corp. arising from its alleged failure to live up to contractual promises surrounding the sale of more than $900 million in mortgage loans to a securitization trust.
And in April, Citigroup Inc. argued that a lawsuit brought by Deutsche Zentral-Genossenschaftsbank AG over alleged fraud in its sale of $362 million in residential mortgage-backed securities should be dismissed, saying the German lender waited too long to bring the suit.
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