Citibank 2011 Annual Report Download - page 293

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Mortgage-Backed Securities and CDO Investor Actions and Repurchase
Claims: Beginning in July 2010, several investors, including Cambridge
Place Investment Management, The Charles Schwab Corporation, the Federal
Home Loan Bank of Chicago, the Federal Home Loan Bank of Boston,
Allstate Insurance Company and affiliated entities, Union Central Life
Insurance Co. and affiliated entities, the Federal Housing Finance Agency,
the Western & Southern Life Insurance Company and affiliated entities,
Moneygram Payment Systems, Inc., and Loreley Financing (Jersey) No. 3
Ltd. and affiliated entities, have filed lawsuits against Citigroup and Related
Parties alleging actionable misstatements or omissions in connection with
the issuance and underwriting of MBS and CDOs. These actions are in early
stages. As a general matter, plaintiffs in these actions are seeking rescission
of their investments or other damages. Additional information relating to
these actions is publicly available in court filings under the docket numbers
10-2741-BLS1 (Mass. Super. Ct.) (Lauriat, J.), 11-0555-BLS1 (Mass. Super.
Ct.) (Lauriat, J.), CGC-10-501610 (Cal. Super. Ct.) (Kramer, J.), 10 CH
45033 (Ill. Super. Ct.) (Allen, J.), LC091499 (Cal. Super. Ct.) (Mohr, J.),
11 Civ. 10952 (D. Mass.) (O’Toole, J.), 11 Civ. 1927 (S.D.N.Y.) (Sullivan,
J.), 11 Civ. 2890 (S.D.N.Y.) (Daniels, J.), 11 Civ. 6188 (S.D.N.Y.) (Cote, J.),
11 Civ. 6196 (S.D.N.Y.) (Cote, J.), 11 Civ. 6916 (S.D.N.Y.) (Cote, J.), 11 Civ.
7010 (S.D.N.Y.) (Cote, J.), A 1105042 (Ohio Ct. Common Pleas) (Myers, J.),
No. 27-CB-11-21348 (Minn. Dist. Ct.) (Howard, J.) and 650212/12 (N.Y. Sup.
Ct.). Other purchasers of MBS or CDOs sold or underwritten by Citigroup
affiliates have threatened to file lawsuits asserting similar claims, some
of which Citigroup has agreed to toll pending further discussions with
these investors.
In addition, various parties to MBS securitizations, among others,
have asserted that certain Citigroup affiliates breached representations
and warranties made in connection with mortgage loans placed into
securitization trusts. Citigroup also has experienced an increase in the level
of inquiries relating to these securitizations, particularly requests for loan
files from trustees of securitization trusts and others. In December 2011,
Citigroup received a letter from the law firm Gibbs & Bruns LLP, which
purports to represent a group of investment advisers and holders of MBS
issued or underwritten by Citigroup. The letter asserts that Gibbs & Bruns
LLP’s clients collectively hold 25% or more of the voting rights in 35 MBS
trusts issued and/or underwritten by Citigroup affiliates, and that these
trusts have an aggregate outstanding balance in excess of $9 billion. The
letter alleges that certain mortgages in these trusts were sold or deposited
into the trusts based on misrepresentations by the mortgage originators,
sellers and/or depositors and that Citigroup improperly serviced mortgage
loans in those trusts. The letter further threatens to instruct trustees of the
trusts to assert claims against Citigroup based on these allegations. Gibbs &
Bruns LLP subsequently informed Citigroup that its clients hold the requisite
interest in 70 trusts in total, with an alleged total unpaid principal balance
of $24 billion, for which Gibbs & Bruns LLP asserts that Citigroup affiliates
have repurchase obligations. Citigroup is also a trustee of securitization trusts
for MBS issued by unaffiliated issuers that have received similar letters from
Gibbs & Bruns, LLP.
Given the continued and increased focus on mortgage-related matters,
as well as the increasing level of litigation and regulatory activity relating to
mortgage loans and mortgage-backed securities, the level of inquiries and
assertions respecting securitizations may further increase. These inquiries
and assertions could lead to actual claims for breaches of representations and
warranties, or to litigation relating to such breaches or other matters.
Underwriting Matters: Certain Citigroup affiliates have been named
as defendants arising out of their activities as underwriters of securities
in actions brought by investors in securities of issuers adversely affected
by the credit crisis, including AIG, Fannie Mae, Freddie Mac, Ambac and
Lehman, among others. These matters are in various stages of litigation. As
a general matter, issuers indemnify underwriters in connection with such
claims. In certain of these matters, however, Citigroup affiliates are not being
indemnified or may in the future cease to be indemnified because of the
financial condition of the issuer.
On September 28, 2011, the United States District Court for the Southern
District of New York approved a stipulation of settlement with the underwriter
defendants in IN RE AMBAC FINANCIAL GROUP, INC. SECURITIES
LITIGATION and judgment was entered. A member of the settlement class has
appealed the judgment to the United States Court of Appeals for the Second
Circuit. On December 22, 2011, the underwriter defendants moved to dismiss
the appeal. Additional information relating to this action is publicly available
in court filings under the docket numbers 08 Civ. 0411 (S.D.N.Y.) (Buchwald,
J.) and 11-4643 (2d Cir.).
Counterparty and Investor Actions
Citigroup and Related Parties have been named as defendants in actions
brought in various state and federal courts, as well as in arbitrations, by
counterparties and investors that claim to have suffered losses as a result
of the credit crisis. These actions include an arbitration brought by Abu
Dhabi Investment Authority (ADIA) alleging statutory and common law
claims in connection with its $7.5 billion investment in Citigroup. ADIA
sought rescission of the investment agreement or, in the alternative, more
than $4 billion in damages. A hearing took place in May 2011. Following
post-hearing proceedings, on October 14, 2011, the arbitration panel issued
a final award and statement of reasons finding in favor of Citigroup on all
claims asserted by ADIA. On January 11, 2012, ADIA filed a petition to vacate
the award in New York state court. On January 13, 2012, Citigroup removed
the petition to the United States District Court for the Southern District of New
York. Additional information regarding this matter is publicly available in
court filings under the docket number 12 Civ. 283 (S.D.N.Y.) (Daniels, J.).
In August 2011, two Saudi nationals and related entities commenced a
FINRA arbitration against Citigroup Global Markets, Inc. (CGMI) alleging
$380 million in losses resulting from certain options trades referencing a
portfolio of hedge funds and certain credit facilities collateralized by a private
equity portfolio. CGMI did not serve as the counterparty or credit facility
provider in these transactions. In September 2011, CGMI commenced an
action in the United States District Court for the Southern District of New
York seeking to enjoin the arbitration. Simultaneously with that filing, the
Citigroup entities that served as the counterparty or credit facility provider
to the transactions commenced actions in London and Switzerland for
declaratory judgments of no liability.