Citigroup agreed to pay $590 million in cash to settle a lawsuit by investors alleging the bank hid risks tied to toxic assets, the plaintiffs said.
U.S. District Judge Sidney Stein in Manhattan, who is presiding over the suit, today granted preliminary approval to the unopposed accord, and ordered a hearing for Jan. 15.
Citigroup, the third-biggest U.S. bank by assets, was accused by investors of repackaging unmarketable collateralized debt obligations and reselling them to itself to hide its exposure to the securities.
"Citi will be pleased to put this matter behind us," the bank said in a statement. "This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis."
Citigroup began using the "CDO-related quasi-Ponzi scheme" in 2006 to give the appearance that it had a healthy asset base, investors alleged in court documents. The plaintiffs alleged Citigroup, including some of its former senior officers and directors, "materially misrepresented" its exposure to CDOs and were both aware of the size of Citigroup's holdings and their impairment before they were disclosed to the public.
The class-action suit was brought on behalf of investors who purchased Citigroup common stock during the period Feb. 26, 2007, through April 18, 2008.
Citigroup shares fell 55 percent during the period, according to Bloomberg data. The New York-based lender almost collapsed later in 2008 and took a $45 billion bailout from U.S. taxpayers, which was later repaid.
The plaintiffs alleged in an amended complaint that Citigroup told investors it had sold billions of dollars worth of CDOs and no longer faced a risk. The bank didn't reveal that it had guaranteed the securities if they suffered losses, according to the complaint. Citigroup transferred the guarantees to entities it set up to hide the risks, the investors alleged.
When CDO indexes showed steep declines in the value of the securities, Citigroup didn't adjust its valuations, relying instead on better rating company evaluations or sales to itself, according to the complaint.
Citigroup denies the allegations and said it is entering into this settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation. The amount to be paid under the proposed settlement is covered by Citigroup's existing litigation reserves.
"Citi is fundamentally a different company today than at the beginning of the financial crisis," the bank said in the statement. "Citi has overhauled risk management, reduced risk exposures and through our core businesses in Citicorp, we are focused on the basics of banking, leveraging our unique presence throughout the emerging and developed markets to serve our clients and the real economy."
The case is In re Citigroup Inc. Securities Litigation, 07- cv-9901, U.S. District Court, Southern District of New York (Manhattan).