Bondholders Sue Citigroup for Misrepresntations Regarding CDOs and Other Toxic Securities


A United States District Court judge has ruled that a class action may proceed against Citigroup and others for making an array of material misrepresentations and omissions in public offering materials associated with bonds purchased by the plaintiffs (Reuters, “Judge Rules Bondholders Can Pursue Citigroup Suit,” July 12, 2010).

The plaintiffs are a group of pension plans and an insurance company that purchased the bonds issued by Citigroup between May 2006 to August 2008. Citigroup had moved to dismiss the action in its entirety. The court held that the plaintiffs have standing to bring claims based on Section 11 (misrepresentations made in a registration statement) and Section 15 (controlling persons liable for Section 11 violations) of the Securities Act of 1933.

The action centers on a series of 48 bond offerings between May 2006 and August 2008 from which Citigroup raised over $71 billion dollars. According to the complaint, Citigroup did so while failing to truthfully and fully disclose critical information about its financial condition to investors, notably information pertaining to its “toxic mortgage-linked exposures.” When that information was belatedly disclosed, Citigroup’s bond securities plummeted in value, and the plaintiffs suffered damage.

Specifically, the complaint alleges:

(1) Citigroup failed to disclose its exposure to $66 billion worth of collateralized debt obligations (“CDO’s”) backed by subprime mortgage assets, and instead, indicated through offering materials that it had no direct exposure to subprime mortgage-backed CDOs, when, in fact, it held nearly $30 billion in subprime backed CDOs and had guaranteed another $25 billion and had a total of nearly $66 billion in direct CDO exposure.

(2) Citigroup failed to properly disclose its exposure to $100 billion in structured investment vehicles (“SIVs”) that were similarly backed primarily by subprime mortgage assets, and instead maintained that it had only “limited continuing involvement” with the SIVs it offered, when, in fact, Citigroup was “implicitly required” to absorb any losses from its SIVs.

(3) Citigroup “materially understated reserves” held for losses that might stem from its Residential Mortgage Loan Portfolio, thereby misleading investors about the state of the company’s financial health.

(4) Citigroup only belatedly disclosed its holdings of $11 billion in illiquid auction-rate securities (“ARS”), which “shocked the market.”

(5) Citigroup misrepresented that it was “well capitalized”?i.e., it had a Tier 1 capital ratio above 6%, when, in fact, that statement was false because it failed to account for the $66 billion in CDO exposure, $100 billion in SIV exposure, and $11 in ARS exposure, which rendered Citigroup insolvent, and in need of a Government bailout.

(6) Citigroup’s SEC filings misrepresented that the its financial statements complied with Generally Accepted Accounting Principles (“GAAP”), when, in fact, its accounting of its CDO, SIVs, and other “subprime exposures” all violated GAAP.

“The core of plaintiffs’ allegations,” Judge Sidney H. Stein wrote in a 50-page opinion, “turn not on Citigroup’s management of its assets and liability, but instead on the manner in which they disclosed those assets and liabilities.”

The federal bailout in late 2008 left taxpayers owning one-third of Citigroup, which lost tens of billions of dollars of in risky assets that became illiquid as credit markets froze.

According to the article the plaintiffs include pension funds in Florida, Louisiana, Minnesota and Pennsylvania, including the Southeastern Pennsylvania Transportation Authority rail system, as well as the New Jersey-based American European Insurance Company.

The action is styled as In re Citigroup Inc. Bond Litigation, United States District Court for the Southern District of New York, Case No. 08 Civ. 9522 (SHS).

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors in cases against Citigroup and its affiliates. For further information, please contact us.