Citigroup Bondholder Suit Can Go Forward, Judge Rules

By Bob Van Voris and Patricia Hurtado
(c) 2010 Bloomberg News
Monday, July 12, 2010; 12:00 AM

(Adds excerpt from judge's opinion in third paragraph.)

July 12 (Bloomberg) -- A lawsuit claiming that Citigroup Inc. misled investors who bought 48 issues of its corporate bonds offered from May 2006 to August 2008 can go forward, a federal judge in New York ruled.

U.S. District Judge Sidney Stein today denied part of a motion by Citigroup to dismiss the suit, which claims Citigroup misrepresented its liabilities from "toxic" mortgage-backed securities. Stein threw out claims that involved alleged lack of disclosure about auction rate securities and part of the plaintiffs' case related to structured investment vehicles.

The bank's disclosures of its financial performance and condition "contained untrue statements of material facts and omitted material facts," the plaintiffs said in a complaint originally filed in New York state court in 2008. These statements failed to disclose "the true extent of the Company's massive exposure to risky mortgage-related assets -- including mortgage backed securities and collateralized debt obligations."

Once these liabilities became public, the company's bonds plummeted in value, the complaint claims. The underwriters failed to ensure the truthfulness and accuracy of the various statements in Citigroup's offerings, the plaintiffs claimed. According to Stein, the plaintiffs dismissed 61 of the underwriters from the suit in February 2009.

Citigroup and the other defendants argued the investors lacked legal standing to press the claims.

The suit names as defendants Citigroup, its wholly owned Citigroup Funding Inc. subsidiary, eight Citigroup trusts, 28 current and former Citigroup officers and directors and almost 80 banks that underwrote the bonds, according to Stein's opinion.

"We are pleased that some claims were dismissed, and will vigorously defend the remaining claims on the merits," Danielle Romero, a spokeswoman for Citigroup, said in an e-mail.

Stein said the plaintiffs have standing to raise claims that Citigroup violated sections 11 and 15 of the federal Securities Act. Section 11 permits investors to sue for misstatements in a registration statement. Section 15 makes "controlling persons" liable for violations, Stein said.

The ruling says the investors can continue to pursue claims that Citigroup's registration statements failed to disclose possible liability for $66 billion in collateralized debt obligations backed by subprime mortgages and for $100 billion in subprime mortgage-backed structured investment vehicles after December 2007.

The defendants can also pursue their Section 11 and 15 claims that Citigroup understated the amount necessary to cover residential loan losses, falsely claimed it was "well capitalized" and falsely claimed that its financial statements complied with Generally Accepted Accounting Principles, GAAP.

Stein dismissed claims that Citigroup failed to disclose $11 billion in auction rate securities it held and its liability for the structured investment vehicles before December 2007.

Stein held that the plaintiffs lack standing to bring any claims under Section 12 of the act, which covers misstatements in public offering materials, because the investors didn't claim they bought the bonds directly from Citigroup, rather than on the secondary market.

The plaintiffs in the case include the Louisiana Sheriffs' Pension and Relief Fund, Minneapolis Firefighters' Relief Association and the City of Philadelphia Board of Pensions and Retirement. They seek to represent all holders of the Citigroup bonds.

The case is: In Re Citigroup Bond Litigation, No. 08-CV- 9522, U.S. District Court, Southern District of New York (Manhattan).

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