Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court

The U.S. District Court for the Southern District of New York has given preliminary approval to the putative class action settlement reached between Citigroup Inc. (C) and its shareholders. Citigroup has agreed to pay $590 million over allegations that it misled the plaintiffs about its exposure to tens of billions of dollars collateralized debt obligations that were backed by residential mortgaged-backed securities and instead hid its toxic assets on its books. The plaintiffs contend that they sustained huge losses as a result. A settlement hearing for final approval is scheduled in January 2013.

The preliminary deal reached between the parties is the third largest shareholder class action settlement to be reached related to the 2008 financial crisis. Automated Trading Desk LLC shareholders, led by founder David Whitcomb and ex-ATD executive Jonathan Butler, are spearheading this securities case. (Citigroup had paid $680 million to buy ATD in 2008.) Other plaintiffs include pension funds in Ohio, Colorado, and Illinois.

Per the plaintiff shareholders, who purchased Citigroup shares between February 26, 2007 and April 18, 2008, it was around this time that Citigroup was involved in a “quasi-Ponzi scam” to make it seem as if its assets were doing well. The financial firm allegedly made material misrepresentations about CDO exposure-instead, claiming that it had sold CDOs worth billions of dollars and was no longer contending with their related risks-and failed to let investors know that it had guaranteed the securities (even transferring the guarantees it had established so the risks would be hidden).

The plaintiffs are also accusing Citibank of failing to do write-downs of the instruments in a timely manner during the class period ,even though it was aware that the subprime crash would cause great harm to its CDO holdings, and repackaging securities that no one wanted to buy into new CDOs so its exposure to the securities would be concealed. Also, per the amended complaint, Citigroup allegedly failed to modify its valuations when the CDO indexes revealed a huge drop in the securities values. Instead, the financial firm depended on higher valuations provide by sales it made to itself or from ratings firms.

Although Citibank is settling, it continues to deny the shareholder plaintiffs’ allegations. It claims it reached the agreement to get rid of the “burden and expense” of allowing this litigation to proceed. It also is saying that it is a different company now than what it was at the start of the economic crisis. Meantime, the interim lead plaintiffs have said they agreed to settle because it would be a “significant benefit” especially in light of the risk that the Settlement Class might not get anything if they had lost the CDO securities lawsuit.

Citigroup agrees to $590 million subprime settlement
, The Washington Post, August 29, 2012

Citigroup Pays ATD Executives Again in $590 Million Deal, Bloomberg, August 30, 2012

In re Citigroup Inc. Sec. Litig., S.D.N.Y., No. 07 Civ. 9901 (SHS), 8/29/12 (PDF)

More Blog Posts:
Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012
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