Citigroup, Execs Targeted In $9B Euro Note Class Action
by Daniel Wilson
4 September 2012
Citigroup Inc. and four of its current and former top executives were hit with a proposed class action, which accuses the financial services giant of lying about its exposure to subprime mortgage assets and causing more than $9 billion in losses for holders of its medium-term Euro notes, by a pension fund in New York federal court Thursday.
According to Rentokil-Initial Pension Scheme's complaint, Citigroup and former CEOs Sanford Weill and Charles Prince, former Chairman Robert Rubin and current CEO Vikram Pandit falsely and misleadingly failed to disclose its exposure to the subprime mortgage crisis, which required billions of dollars in writedowns in 2008 and drove the company to the brink of bankruptcy, causing buyers to pay too much for its Euro notes.
Citigroup had portrayed its collateralized debt obligation involvement as "benign and somehow distinct" from its "toxic" subprime and Alt-A mortgage investments, leading to a $9 billion drop in value for the 26 Euro notes -- worth about $30 billion in face value -- after the truth emerged during the subprime crisis, according to the complaint.
"By misrepresenting Citigroup's true financial condition, including its balance sheet exposure to CDOs and other toxic subprime assets, and therefore its true capitalization and ability to generate future cash flows ... Citigroup was able to tap the European capital markets far more cheaply than it would have been able to" otherwise, the complaint says.
Citigroup was the largest CDO issuer in the world at the time -- with nearly $50 billion in CDOs underwritten by the company in 2007 alone and had kept significant tranches of its subprime-backed CDOs, according to the complaint.
The company had understated its loan loss reserves for the $213 billion in "poor quality" mortgage loans backing the CDOs, basing its reserves only on loans that had already defaulted and not probable defaults, the complaint says.
Also, it misrepresented itself as "well capitalized" despite secretly borrowing nearly $100 billion from the Federal Reserve in 2008 and 2009, and also getting $326 billion in emergency federal support in November 2008 to stave off bankruptcy, according to the complaint.
These falsehoods were exposed in early 2009, meaning the purportedly investment-grade Euro notes were closer to "junk bonds" and should have been marketed as such, the complaint says.
Citigroup's position was further exposed when the company agreed to pay $75 million in July 2010 to settle with the U.S. Securities and Exchange Commission over its undisclosed CDO subprime exposure, which the company was aware of at least as early as 2006, according to the complaint.
RIPS, the pension fund for the 68,000-employee British business services firm Rentokil-Initial PLC, brought its claims under the U.K.'s Financial Services and Markets Act, saying it has standing because the offering documents for the CDOs were prepared and approved in New York and filed with the SEC.
The pension fund seeks compensatory damages, pre- and post-judgment interest, costs and fees for a class of purchasers of the Euro notes between October 2005 and February 2009.
A representative for Citigroup declined to comment on the case Tuesday.
RIPS is represented by Samuel H. Rudman, Joseph Russello, Darren J. Robbins, Mark Solomon and Theodore J. Pintar of Robbins Geller Rudman & Dowd LLP and David A. Straite of Stewarts Law US LLP.
Counsel information for Citigroup was not available Tuesday.
The case is Rentokil-Initial Pension Scheme v. Citigroup Inc. et al, case number 1:12-cv-06653, in the U.S. District Court for the Southern District of New York.