NEW YORK— Citigroup has agreed to pay US$590 million to settle legal claims by shareholders that its executives lied about the bank’s growing problems before the financial crisis. The bank denied the allegations yesterday, but said it agreed to the deal to eliminate the cost and uncertainty of litigating the class-action suit. Plaintiffs say Citigroup executives kept mum between February 2007 and April 2008 about huge losses the bank faced on complex mortgage investments. When the problem was disclosed, they say, Citigroup’s share price plunged. They blame the bank for their losses. The case, filed in late 2007, was one of the first major lawsuits related to the toxic investments that fueled the financial crisis in 2008. It’s also among the biggest proposed settlements of any crisis-related case. In a statement, the bank said it is “pleased to put this matter behind us.” It called the proposed settlement “a significant step” toward resolving the reams of litigation it faces as a result of the financial crisis. Citigroup was one of the banks hit hardest by the crisis. As it faltered in the fall of 2008, the government made stronger banks take multibillion dollar bailouts in part to mask Citi’s weakness. Citi took direct bailouts totaling US$45 billion and relied heavily on other emergency programmes from the Federal Reserve. It has repaid the money with interest.
The bank said in its statement that it is “a fundamentally different company today than at the beginning of the financial crisis,” having overhauled its risk management, reduced its risky investments and sold off non-core businesses. Citigroup denied wrongdoing in agreeing to settle. It called the accord “a significant step toward resolving our exposure to claims arising from the period of the financial crisis,” and said the US$590 million is covered by existing reserves. US District Judge Sidney Stein in Manhattan yesterday granted preliminary approval of the settlement, and scheduled a January 15, 2013 hearing 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. Wednesday’s accord followed mediation before retired federal judge Layn Phillips, and the gathering of nearly 40 million pages of documents, according to court papers. “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,” Ira Press, a partner at Kirby McInerney representing the shareholders, said in a phone interview.
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. It was not clear whether any of these executives or their insurers are responsible to pay any of the settlement. A Citigroup spokeswoman, Shannon Bell, declined to comment. In their 547-page lawsuit, Citigroup shareholders said 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 US$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 US$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. 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 US$680 million. About 85 per cent of that price was paid in Citigroup stock, and the plaintiffs received Citigroup shares as part of the transaction, according to court papers and a regulatory filing. The shares have since fallen 94 per cent. Citigroup said it already has set aside enough money to cover the cost of the settlement. (AP)