Corporate Governance

The Citi That Almost Slept

By Carolyn Moskowitz

As Susan Weiswasser reports in the current issue of The Pomerantz Monitor, a New York District Court has preliminarily approved a $590,000,000 securities class action settlement between Citigroup, the country?s third largest bank, and its shareholders, who lost millions when the value of Collateralized Debt Obligations (CDOs) held by Citi plunged. A final fairness hearing on the settlement is set for January 15, 2013. Citi allegedly failed to disclose its potential exposure to catastrophic losses if the housing market tanked, which, as we all know, it did.

To fool investors, Citi fed them false information designed to make them believe it had sold off, or hedged, the risk of many of these subprime mortgages; it also manipulated its books to create the perception of good financial health. These deceptions caused Citi?s stock price to be inflated. Once the truth came out, the price of Citi?s shares plummeted and investors lost billions.

Citi, which received a huge amount of federal bailout money to prop it back up, still faces a multitude of litigation by investors, as well as the Securities and Exchange Commission, for alleged misrepresentations and omissions regarding the value and safety of a variety of securities it was trading. The course of some of the cases has been tortuous. As Tamar Weinrib reported in February?s issue of The Pomerantz Monitor, one of the SEC?s cases against Citi was settled last year for $285 million, but the federal judge overseeing the case refused to approve the settlement because he did not believe it to be fair and adequate for shareholders. The Second Circuit Court of Appeals stayed that ruling, pending its review of the court?s action,which should occur early next year.

Judges around the country are considering, some with trepidation, other settlements involving the behavior of major financial institutions that led to the financial crisis. Another New York federal judge recently approved a settlement entered into by the SEC with two former Bear Stearns hedge fund managers. However, he did so grudgingly, stating that he was ?constrained to accept the settlement,? and expressing disappointment that the SEC had such limited power to bring financial relief to plaintiffs. Only by disgorgement can the SEC possibly recover any money for injured investors; the power to return the money is discretionary. When the money isn?t there, investors have no chance of recovery in an action brought by the SEC. The court encouraged Congress to consider expanding the SEC?s powers ?to recover amounts more reflective of investor losses.? For the foreseeable future, investors must rely on private litigation if they have any hopes of recovering any of their losses.

Full post as published by PomTalk on October 17, 2012 (boomark / email).