Citi Wins Over Abu Dhabi in Arbitration Case on $7.5B Investment

(November 5, 2011) — Citigroup, the third-biggest bank in the United States, has won its case against the Abu Dhabi Investment Authority (ADIA). 

In a regulatory filing released yesterday, Citigroup revealed that an arbitration panel awarded in its favor on all claims made by ADIA in connection with its $7.5 billion investment in the bank, which the sovereign wealth fund had aimed to discard. 

“On October 14, 2011, an arbitration panel issued a final award and statement of reasons finding in favor of Citigroup on all claims asserted by the Abu Dhabi Investment Authority (ADIA) in connection with its $7.5 billion investment in Citigroup,” the regulatory filing stated. 

The sovereign wealth fund claimed in late 2009 that its November 2007 investment of $7.5 billion into Citigroup was based on fraudulent statements by the New York City-based bank. At the time, Citigroup battled record losses tied to subprime mortgages. If the investment was unable to be canceled, the Abu Dhabi fund had sought $4 billion in damages. Meanwhile, the bank had asserted that the suit lacked merit, promising to “vigorously” defend itself. 

Citigroup is not the only bank to have encountered scrutiny and disapproval in the aftermath of the financial crisis — largely in connection with mortgage-backed securities. In June, the Securities and Exchange Commission announced that JP Morgan would pay $153 million to settle charges of allegedly selling $1.1 billion in mortgage-backed securities that were designed to fail. Following the financial crisis and housing collapse, countless other cases of alleged fraud and acts of misleading investors among the nation’s largest banks have been brought to light. Similar to suits against Goldman Sachs, Citigroup, and other US financial institutions, the case against JP Morgan encompassed an accusation that a hedge fund was seminally involved in the selection of the underlying collateral in the portfolio while simultaneously betting against it with a short position.

The US regulator asserted that as the housing market crumbled in March and April 2007, JP Morgan executives urged the marketing of Squared CDO 2007-1, a synthetic collateralized debt obligation (CDO) linked to a collection of residential mortgages, without informing investors that a hedge fund — Magnetar Capital — helped select the assets in the CDO portfolio and had a short position in more than half of those assets. Consequently, the hedge fund was positioned to benefit if the CDO assets it was selecting for the portfolio defaulted.

In the case of Citigroup, its recent regulatory filing concludes: “…with respect to assertions that certain Citigroup affiliates in its Consumer mortgage…business breached representations and warranties made in connection with mortgage loans placed into securitization trusts, Citigroup has experienced, and may continue to experience in the future, an increase in the level of inquiries relating to these securitizations, particularly requests for loan files, among other matters, from trustees of securitization trusts and others. These inquiries may or may not lead to actual demands for repurchase of the affected mortgage loans; however, given the continued 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, not just for Citigroup but for the industry as a whole, these inquiries and/or repurchase demands may result in litigation.”