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Enron linked securities sparked citibank lawsuit Original Source Link: (May no longer be active)
http://www.reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=6078501http://www.reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=6078501
Enron-Linked Securities Sparks Lawsuit
Thu Aug 26, 2004 09:11 AM ET
By Jonathan Stempel
NEW YORK (Reuters) - Citigroup Inc. (C.N: Quote, Profile, Research) faces a lawsuit from angry investors who allege they were defrauded in a "massive scheme of deception" when they bought securities tied to the credit-worthiness of Enron Corp. (ENRNQ.PK: Quote, Profile, Research) .
The suit might cost the world's No. 1 financial services company up to $2.5 billion, the Wall Street Journal said, citing "a person familiar with the matter."
Bank of New York Co. (BK.N: Quote, Profile, Research) acted as trustee in filing the lawsuit on Monday in New York State Supreme Court on behalf of the investors, which include well-known "distressed" debt specialists Angelo Gordon & Co. and Appaloosa Investment LP.
In their 77-page complaint, the investors said Citigroup concocted a fraudulent scheme to raise billions of dollars from the sale of notes called "Yosemite" securities.
Citigroup, the investors said, then used the funds to make "disguised" loans to Enron "to reduce its own Enron credit risk, prop up Enron, cover up Enron's failing financial condition and generate significant fees in the process."
The complaint alleges fraud, breach of contract and fiduciary duty, and negligence in the Yosemite transactions, which it said took place between 1999 and 2001. Enron sought Chapter 11 bankruptcy protection on Dec. 2, 2001.
A spokeswoman for New York-based Citigroup said, "The purchasers of these notes are among the largest and most sophisticated financial institutions in the world, and we complied fully with all our obligations in dealing with them."
Bank of New York spokesman Jeep Bryant said the bank filed the lawsuit because "as trustee, we have a responsibility to act at the direction of the investors." He said the bank has no financial interest in the Yosemite securities and the lawsuit will not affect its financial results.
A successful lawsuit might complicate Citigroup's plan to keep its already high legal costs from rising further.
The company in May roughly quadrupled, to $6.7 billion, its reserves for legal bills, including those for Enron, as it agreed to pay $2.65 billion to settle a lawsuit by WorldCom Inc. investors accusing it of participating in financial fraud.
Citigroup Chief Executive Charles Prince said at the time, "We feel very comfortable in saying that, with our advisers helping us, we have established a reserve that will cover all of our meaningful exposures."
REDUCING EXPOSURE
In their complaint, the Yosemite investors said Citigroup knew Enron's debts were several billion dollars greater than the company publicly disclosed between 1999 and 2001.
They also said the bank wanted to cut its own, rising exposure to Enron. Though Enron was an investment-grade company until just four days before it filed for Chapter 11 bankruptcy, the complaint said Citigroup, because of undisclosed information it possessed about Enron, knew that defaults were "likely."
"Citibank thus found itself in a bind: It knew Enron was not loan-worthy, yet if it failed to find Enron new sources of financing, it ran the significant risk that Enron would collapse before Citibank could recover the billions of dollars Enron owed it," the complaint said. "The Yosemite transactions were Citibank's solution to its problem."
The Yosemite investors also said they should have been relatively well protected in an Enron bankruptcy because their claims were supposed to rank relatively high in the pecking order among creditors seeking repayment.
The Wall Street Journal said the dispute arose because Enron, in its bankruptcy proceedings, said the investors' claims should rank lower than other claims because Citigroup was involved in the deception that triggered Enron's collapse.
The newspaper said the lawsuit is also important to the hot market for credit insurance, which gives investors their money back when a company defaults or seeks bankruptcy protection.
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