Citigroup Inc., Former CEO Sued Over Subprime Mortgage Losses

By Chad Bray | November 9, 2007

Citigroup Inc., former CEO Charles Prince and other executives were sued in federal court this week over losses related to the bank’s subprime mortgage-backed securities portfolio.

The shareholder derivative lawsuit, filed in federal court in Manhattan, alleges Citigroup executives recklessly purchased subprime loans to be used for future collateralized debt obligations and then made improper statements regarding the financial services company’s exposure to the subprime market meltdown.

The suit also alleges some executives sold their own shares in the company while in possession of “material nonpublic information” about its exposure, securing more than $36 million (euro24.5 million) in proceeds.

“Citigroup, under defendants’ direction, recklessly spent billions of dollars purchasing subprime loans to be warehoused for future collateralized debt obligations,” the lawsuit said. “These actions were reckless due to the impending subprime mortgage crisis and increasing delinquency rates among subprime borrowers.”

The derivative suit follows a separate lawsuit filed earlier this week in New York on behalf of participants or beneficiaries of Citigroup’s retirement plans, which alleged the company’s stock was an “imprudent investment” for the plans because of mismanagement and improper business practices at the company.

The derivative lawsuit, which was filed by Citigroup shareholder Jeffrey Harris, is seeking a judgment against the individual defendants for the amount of damages sustained by the company as a result of their alleged breaches of fiduciary duties. The suit also seeks directive that Citigroup improve its corporate governance and internal procedures.

Prince resigned as the company’s CEO on Sunday. Citigroup has named Sir Win Bischoff, head of its European operations, as interim CEO and former Treasury Secretary Robert Rubin as chairman. Bischoff and Rubin are both named as defendants in the lawsuit.

The company has said it will write off between $8 billion (euro5.43 billion) and $11 billion (euro7.47 billion) to reflect declines in the value of its subprime-mortgage-related securities since Sept. 30.

“We believe the suit is without merit and will defend it vigorously,” said Shannon Bell, a Citigroup spokeswoman.

Citigroup shares fell $1.47, or 4.2 percent, to $33.61 in late trading Wednesday. The financial-services company is based in New York.

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Chad Bray is a correspondent of Dow Jones Newswires.

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