Shareholders Sue ShitiGroup / 07

Citigroup Sued Over Mortgage Exposure
11/16/07
By PHYLLIS SKUPIEN, ESQ., Andrews Publications Staff Writer

Shareholders have sued Citigroup, its former CEO, and several top executives and directors, alleging they recklessly disregarded news of the mortgage meltdown and continued to invest in overvalued, high-risk subprime loans.

At least three types of lawsuits have been filed against Citigroup in the U.S. District Court for the Southern District of New York since it announced Nov. 4 that it would write down between $8 billion and $11 billion to reflect losses in the value of its holdings in its mortgage-backed securities.


"We believe the suits are without merit and will defend against them vigorously," a Citigroup spokesman said in response to the allegations.

The derivative lawsuit that seeks to recover damages for the company alleges that from January until now, Citigroup "recklessly spent billions of dollars purchasing subprime loans to be warehoused for future collateralized debt obligations."

CDOs are pools of assets or asset-backed securities that provide investors with returns based on the associated cash flows and the risk involved. With the increasing delinquency rates among subprime borrowers, who generally have low credit scores or high debt-to-income ratios, any investment in the future cash stream becomes precarious.

A suit solely alleging violations of the anti-fraud provisions of federal securities law has also been filed against the investment bank in the Manhattan federal court. Saltzman v. Citigroup Inc., No. 07-9901, complaint filed (S.D.N.Y. Nov. 8, 2007).

In addition, participants in Citigroup's retirement plans have sued the bank for allegedly mismanaging its 401(k) plan by investing in the corporation's common stock, causing substantial losses to employee investors. Gray v. Citigroup Inc., No. 07-9790, complaint filed (S.D.N.Y. Nov. 5, 2007).

According to the shareholders, the mortgage crisis began last January when several subprime lenders, including New Century Financial Corp., declared bankruptcy because their liquidity had dried up.

Other lenders, such as Accredited Home Lenders Holding Co., attempted to sell their subprime loans at "fire-sale" prices to raise cash so they could continue to issue mortgage loans.

The plaintiffs contend that the Citigroup defendants breached their fiduciary duty to shareholders by purchasing more than $2.7 billion in subprime loans from Accredited and by telling investors the bank was immune from any fallout from the downturn in the housing market.

According to the complaint, Citigroup CEO Charles Prince told the Financial Times July 10 that there was too much liquidity in the subprime mortgage market to "stop the music."

But on Oct. 1 Citigroup announced a $1.4 billion write-down on the value of its mortgage-related holdings. Two weeks later the company said its third-quarter earnings were 60 percent less than the prior year. But this was followed by even worse news.

In early November Citigroup revealed an additional $8 billion to $11 billion write-down of its subprime-related assets and that it was reducing its third-quarter earnings by another $166 million. Prince resigned shortly thereafter.

The shareholders maintain that Citigroup's stock price declined from $55 per share to less than $36 per share during the relevant period and that defendants sold more than $36 million in their personal stock holdings before the truth came out.

The lawsuits also say the defendants authorized the buyback of $663 million worth of Citigroup's own shares which should not have been approved while the stock price was inflated.

The derivative suit alleges breach of duty, waste of corporate assets, unjust enrichment and violation of Securities Exchange Act. The investors want the individual defendants to disgorge their insider-trading profits and pay damages to the company for their improper conduct.

The plaintiffs say it would have been futile to make a demand on the board to take up the charges, as normally required for derivative suits, because the directors named as defendants would not sue themselves.

The investors also want Citigroup to change its corporate governance policies to strengthen its internal controls.

The securities fraud suit filed against the investment bank seeks to represent investors who bought stock between April 17, 2006, and Nov. 2, 2007.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@Thomson.com.


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Harris v. Prince et al., No. 07-9841, complaint filed (S.D.N.Y. Nov. 7, 2007).
Securities Litigation & Regulation Reporter
Volume 13, Issue 15
11/16/2007


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