Preliminary Settlement Approved for Investor CDO Suit Against Citigroup

This week a court has given preliminary approval for the settlement of a class action against Citigroup Inc. The settlement proposal was unopposed, so unless something substantial happens between now and January 15, when a final hearing will be held, the settlement will become final. The terms of the agreement provide that Citigroup will pay $590 Million to the affected shareholders, without admitting or denying that it did anything wrong.

The class action was brought on behalf of investors who bought shares of Citigroup common stock between February 26, 2007 and April 18, 2008. During this period of time, Citigroup shares fell in price by roughly 55%. The complaint claims that Citigroup intentionally misrepresented and failed to disclose the amount of CDOs (Collateralized Debt Obligations) that Citigroup owned. This misled investors about the amount of risk shares of the company carried, which, in turn, artificially inflated the price of the shares.

According to the complaint, Citigroup began what investors dubbed a “quasi-Ponzi scheme” related to the CDOs in 2006 in order to give the investing public the impression that it had healthy and safe investments and financials. The investors further claim that many of Citigroup’s former senior officials and directors made material misrepresentations about the level of exposure that the company held because of CDOs. The investors believe that the company and its executives knew that CDOs were going to drop precipitously well before the public, and chose to not disclose it.

Also, the complaint states that Citigroup told investors that it had sold huge portions of its CDO holdings, billions of dollars’ worth, and therefore no longer carried significant risks as a result. However, Citigroup had guaranteed the CDOs against losses to the companies it had sold them to, and did not disclose those guarantees. As a result, the company faced the exact same amount of risk as if it still held all of those securities itself. Further, investors claimed that Citigroup had created a variety of companies into whom it transferred the CDOs purely for the purpose of concealing the risks from investors.

The shareholders who have been leading this case are former employees of Automated Trading Desk. The company, which is an electronic trading firm, was bought by Citigroup in 2007 for $680 Million. Roughly 80% of that purchase price was paid with Citigroup stock. As a result, the original owners of ATD fell to around $170 Million that they received for the sale of the company as a result of the huge fall in the Citigroup share price. They stand to recover some of those losses from this settlement, although the exact amount has not been determined yet. All told, there could be up to 1 million shareholders who will receive some compensation from this settlement.

Citigroup continues to deny the allegations in the complaint, saying that it has agreed to this settlement solely to eliminate the uncertainties and expense of litigation. The company will pay the settlement, if approved, out of Citigroup’s litigation reserve funds. According to a statement made by the bank, “Citi will be pleased to put this matter behind us. This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis.”

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