The parties to the Citigroup subprime-related securities class action lawsuit – one of the highest profile of the remaining subprime cases – have agreed to settle the suit for $590 million, in what is the third largest settlement so far out of the subprime and credit crisis litigation wave. Southern District of New York Judge Sidney Stein preliminarily approved the settlement on August 29, 2012, and scheduled a hearing for final approval on January 13, 2013.
The Citigroup case was among the most prominent of the subprime cases because of Citigroup’s role in the mortgage-backed securities industry that contributed so significantly to the subprime meltdown, as well as because of the high-profile individuals involved in the case, including former Citigroup CEO Charles Prince and former Treasury secretary and Citigroup board member Robert Rubin. In addition, Citigroup’s attempt to settle the subprime-related SEC enforcement action for a payment of $285 was famously rejected by Southern District of New York Judge Jed Rakoff, a decision that is now on appeal before the Second Circuit.
As discussed in detail here, in a November 9, 2010 Judge Sidney Stein narrowed the shareholders’ action against Citigroup and dismissed a number of the individual defendants. But what Judge Stein called the plaintiffs’ “principal” allegations survived the dismissal motion and remained in the case, as did seven of the individual defendants, including Prince and Rubin. The surviving allegation was the plaintiffs’ claim that Citigroup “did not disclose that it held billions of dollars of super-senior tranche CDOs.”
The basic thrust of the plaintiffs’ CDO-related allegations is that though the company disclosed that it was deeply involved in underwriting CDOs, the company did not disclose that billions of dollars of the CDOs had not been purchased at all but instead had been retained by Citigroup. In November 2007, the company disclosed that it was exposed to super-senior CDO tranches in the amount of $43 billion and that it estimated a write down of $8 to $11 billion of those assets. The plaintiff alleged that this disclosure omitted an additional $10.5 billion worth of holdings that the company had hedged in swap transactions.
Judge Stein found that the plaintiffs had adequately alleged that Citigroup’s CDO valuations were false between February 2007 and October 2007. In concluding that these statements were made with scienter, Judge Stein noted that the plaintiffs’ claims "concern a series of statements denying or diminishing Citigroup’s CDO exposure and the risks associated with it." These statements, Judge Stein found were "inconsistent with the actions Citigroup was allegedly undertaking between February 2007 and October 2007."
Among the subprime and credit crisis cases that have settled so far, the $590 Citigroup settlement has been exceeded only by the $627 million Wachovia bondholders’ settlement and the $624 million Countrywide settlement. As Jan Wolfe points out in his August 29, 2012 Am Law Litigation Daily article about the Citigroup settlement (here), the $590 settlement in the Citigroup case may represent the largest settlement by a single financial institution.
Among the remaining subprime and credit crisis cases, there are several that at least potentially present the possibility of similarly large settlements, including the BofA/Merrill Lynch merger case, the AIG case and the Citigroup bondholders’ case. It remains to be seen how the Citigroup settlement will stack up when all of these cases have settled. But as I had to remind several people in telephone conversations yesterday about the Citigroup settlement, at well over half a billion dollars, the Citigroup settlement is unquestionably represents a big number. Others will have to wrestle with the question whether it is “big enough.”
I have in any event added the Citigroup settlement to my running tally of subprime and credit-crisis case resolutions, which can be accessed here.
FDIC Releases Quarterly Banking Profile: If you have not yet seen it, on August 28, 2012, the FDIC released the Quarterly Banking Profile for the quarter ending June 30, 2012. In general, the report reflects a generally improving banking industry. Among other things, the report shows that the industry had collective net income of $34.5 billion, a figure that would have been even larger were it not for the J.P. Morgan “London Whale” trading losses. This net income figure represents the 12th consecutive quarter over quarter increase in industry net income.
Consistent with this overall picture of improving industry health, the number of problem banking institutions decreased during the quarter, from 772 to 732. However, because the number of reporting institutions overall also decreased, the number of troubled institutions at quarter’s end still represents a significant percentage (10.1%) of all banks. The number of troubled banks at the end of the first quarter represented 10.5% of all reporting institutions. The second quarter number does represent a significant decline in the number of problem institutions compared to the end of the second quarter of 2011, when there were 865. The FDIC notes that the second quarter 2012 decline in the number of problem institutions represents the fifth consecutive quarterly decline.
One interesting additional note in the FDIC’s report is that there were no new bank charters granted in the second quarter of 2012, which represents the fourth consecutive quarter in which there were no new charters. Through closure and merger, and the lack of additions of any new banks, the number of banking institutions is shrinking significantly