Citigroup recently agreed to pay $590 million to settle a shareholder securities fraud class action lawsuit that accused the bank of hiding tens of billions of dollars of toxic mortgage assets. The mortgage assets on Citigroup‘s books ultimately lost approximately $28 billion in value in 2008. Losses such as those caused Citigroup to lose approximately $250 billion in market value between February 2007 and March 2009. Citigroup’s shares still trade at barely one-tenth of their value at which they traded in April 2008.
The lawsuit involved a claim that Citigroup shareholders suffered massive losses after the bank failed to take timely writedowns on collateralized debt obligations, many backed by subprime mortgages, and engaged in self-dealing transactions that hid the risks. The lawsuit alleged, among other things, that Citigroup shareholders collectively lost billions of dollars as the market began to recognize the “ticking time bombs that eventually exploded back onto Citigroup’s balance sheet.”
While this is one of the largest settlements stemming from the global financial crisis, the settlement represents only about two-tenths of one percent (.2%) of the quarter trillion in Citigroup’s market capitalization that was wiped out.
Some may view the settlement as reflective of lawyers selling out investors in order to pocket a quick attorneys’ fee. We disagree with any such opinion, as it can be incredibly difficult to clear all of the legal and technical hurdles related to proving and winning a securities fraud class action. This appears to have been a hard-fought litigation that resulted in a fair settlement. The lawsuit went on for four years and involved the production of approximately 40 million documents. The enormous risks of losing such a lawsuit can justify a settlement in order to ensure a recovery for investors.
Other banks also were hit with similar lawsuits over conduct leading up to and during the 2008 financial crisis. For example, in 2010, Bank of America paid $601.5 million to settle claims related to its Countrywide mortgage unit. Last year, Wells Fargo reached a $590 million settlement over loans and securities. Again, these settlements are large in gross dollars, but they pale in comparison to the billions of dollars in damage that many believe the banks caused.
Citigroup separately is trying to persuade the federal appeals court in New York to approve its $285 million settlement with the U.S. Securities and Exchange Commission of charges that it fraudulently misled investors in a sale of a $1 billion CDO. U.S. District Judge Jed Rakoff, a colleague of Stein’s, rejected that settlement last November, and Citigroup and the SEC have jointly appealed.