Citigroup to Settle Subprime Lawsuit Led by Pensions

Final Score: Citigroup 0, Pensions and Investors $25 million.

(August 28, 2012) – Citigroup has agreed to pay $25 million to settle a lawsuit brought by investors, including two public pension funds, who accused the firm of lying about the quality of subprime mortgage-backed securities. 

The Ann Arbor Employees’ Retirement System and Greater Kansas City Laborers Pension Fund led the class action suit, which was filed in 2008. Both pensions purchased millions of dollars worth of the securities in 2007, based on information they say “misrepresented and, more specifically, under-represented, the risk profile of the investment,” according to court documents. 

Compared to some other financial crisis-related lawsuits against big banks, Citigroup’s settlement is fairly modest. In July, BNY Mellon settled a securities lending lawsuit headed up by a union and a hospital pension for $280 million. Likewise, JP Morgan agreed to pay $150 million to a group of pension funds that filed a lawsuit alleging securities lending improprieties. They accused JP Morgan of predicting Sigma Finance Corp.’s collapse and engaging in “predatory repo with substantial haircuts to ‘cherry-pick’ the best assets in Sigma’s portfolio.” JP Morgan denied the charges. 

With the Citigroup case, the complaint itself reads like a primer on the sub-prime mortgage crisis. The investors claimed that Citigroup Mortgage managers “pressured underwriters charged with evaluating the pools of mortgages to accept all loans. These managers allegedly “set the underwriting guidelines so low that any mortgage would pass, even if it was clear that the borrower was unable to repay the loan.” Citigroup did argue successfully that “the high risk profile of the investment offered was disclosed” in their prospectuses. A judge presiding over the case at a district court in Eastern New York concluded, after “extensive review of the disclosure documents,” that “the strong nature of the cautionary language contained in the disclosure materials brings this case very close to the dismissal line.” But, given the extent of the plaintiffs’ other grievances, the case remained open. 

The case only named the one defendant, Citigroup, but the complaint outlines a subprime securities system fraught with deception and negligence. On the ratings agencies, for instance, the complaint argued: “In addition to using flawed models to generate ratings, Moody’s and S&P repeatedly eased their ratings standards in order to capture more market share of the ratings business. This easing of ratings standards was due in large part to the fact that rating agencies like Moody’s and S&P were compensated by the very entities that they provided ratings to, and the fact that those entities were free to shop around for the rating agency that would provide them with the highest ratings.”