David Zalubowski/Associated PressForeclosure notices hit a record high in 2007, driven up by problems with subprime mortgages.Citigroup said on Wednesday that it had agreed to pay $590 million to settle a class-action lawsuit brought by shareholders who contended that they had been misled about the bank’s exposure to subprime mortgage debt on the eve of the financial crisis.
The shareholder lawsuit, originally filed in November 2007, contended that the bank and some of its former senior executives and directors had failed to disclose the bank’s huge holdings in securities known as collateralized debt obligations that were tied to mortgage securities until November 2007, when it took a multibillion-dollar write-down on them. Citigroup later wrote down the C.D.O.’s by tens of billions of dollars more.
The bank had previously tried to conceal the deteriorating value of its holdings by improper accounting practices, the shareholders contended in an amended complaint filed in December 2008. “Citigroup used inflated, unreliable and unsupportable marks to keep its C.D.O.-related quasi-Ponzi scheme alive and to give the appearance of a healthy asset base,” the complaint said.
Problems with its C.D.O. business have dogged Citi. Wednesday’s settlement is on top of the $360 million that the bank has agreed to pay to resolve civil mortgage securities cases brought by federal regulators. In a statement on Wednesday, Citigroup, which denied the allegations, said: “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.”
It added, “Citi is fundamentally a different company today than at the beginning of the financial crisis.”
The plaintiffs included pension funds in Colorado, Ohio and Illinois and were led by former employees and directors of Automated Trading Desk who received Citigroup shares when they sold the electronic trading firm to the bank in July 2007. The proposed settlement, which was given preliminary approval by Judge Sidney H. Stein of the Federal District Court in Manhattan, covers investors who bought Citi shares from Feb. 26, 2007, through April 18, 2008. Shares of Citigroup traded as high as $55 in the summer of 2007. By spring of 2008, its stock price had tumbled by half.
A hearing on the settlement was set for Jan. 15.
The nation’s third-largest bank by assets, Citi teetered on the brink of collapse in 2008 and was bailed out by the United States government. The bank has repaid the $45 billion in federal assistance that it received.
The shareholders’ accusations centered on its collateralized debt obligations. The plaintiffs claimed Citi assured them that it had sold billions of dollars in C.D.O.’s, thus averting risk to investors. But the plaintiffs argue the bank didn’t inform shareholders that it had guaranteed the securities against any losses, according to court documents. To further disguise the risks to investors, the plaintiffs said, Citigroup moved the guarantees to separate entities.
In a court filing on Wednesday, lawyers for the shareholders from the law firm Kirby McInerney acknowledged the difficulty of proving that the bank knowingly perpetrated fraud on its clients: “Rarely is there concrete direct evidence of fraudulent intent.”
For Citigroup, as well as other Wall Street firms, the business of slicing apart and packaging mortgages and other loans into complex securities had been a lucrative and fast-growing business before the financial crisis. The bank underwrote some $70 billion in collateralized debt obligations from 2004 to 2008.
The bank paid $75 million in 2010 to settle a Securities and Exchange Commission complaint that the bank made misleading public statements about the extent of its subprime exposure. In a statement at the time, the agency said that “between July and mid-October 2007, Citigroup represented that subprime exposure in its investment banking unit was $13 billion or less, when in fact it was more than $50 billion.”
In a separate, more recent case involving C.D.O.’s, the bank had agreed with the Securities and Exchange Commission to pay $285 million over allegations that it had misled investors by not disclosing that it was helping select the mortgage securities that underpinned the C.D.O. and that it was betting against it. That settlement was initially rejected by a federal judge, but an appeals court found that the judge may have overstepped his authority.
On Monday, the bank agreed to pay $25 million to another group of investors, who claimed that the bank misinformed them about the quality of securities backed by mortgages, which took big losses after the housing market collapsed during the crisis.