In an effort to reach a settlement with investors who bought its shares between February 2007 and April 2008, Citigroup Inc. (C), has agreed to shell out $590 million. The settlement, one of the largest of its kind, has accused Citi of misleading its investors by withholding information regarding its toxic asset transactions during that period.
According to Citi, despite denying the allegations, it opted for the settlement to do away with the uncertainties and costs involved in the litigation. The settlement received preliminary approval and now awaits the next hearing on January 15, 2013.
The Allegation
The class action lawsuit was filed on behalf of the shareholders of Citi who purchased the company’s common stock between February 26, 2007 and April 18, 2008. As per the claims, between this period, Citi allegedly misled shareholders through untrue statements as well as omissions in its disclosures.
Particularly, the lawsuit accuses Citi of hiding its exposure to toxic assets and the heavy losses incurred on them. The toxic assets include collateralized debt obligations mostly backed by subprime mortgages. So when this became public and the company took billions in write-downs, its share value plunged and the shareholders suffered significant losses on their investments.
Our Take
We believe that though settling of such charges would fundamentally hurt Citi’s funds, it would simultaneously lessen the company’s litigation overhang to some extent. Though the company has adequate reserves to meet this settlement amount, we believe that it could have been steered towards the company’s growth initiatives, had it not been subject to such litigations. On the other hand, the investors can now breathe a sigh of relief as the settlement amount can be well utilized.
As a matter of fact, Citi, being hard hit by the impact of the financial crisis, had to seek refuge in government bailouts to stay afloat. Its market value suffered a significant fall since the crisis and the company is still battling the after effects of the crisis.
However, Citi is not the only one to settle such charges. A number of the Wall Street big shots have been chased over such issues and their conduct that led to the financial crisis. Companies such as Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) struck a similar cord with the suitors and agreed to pay millions for settling such litigations in the past.
Citi, otherwise, boasts of an impressive global footprint and attractive core business. The company has restructured its business and overhauled its risk management. It is reducing its risky exposures by trimming its problem assets, which in turn frees up its capital to be invested in its core business. Yet, a low interest rate environment, regulatory headwinds and litigation risks remain our concerns.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock.
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