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Bank’s failings prove costly

The $590 million sum that Citigroup Inc. recently agreed to pay to settle fraud claims by investors could be “too little and too late” for those shareholders who have seen Citi’s market value plunge by $173 billion since 2007, according to a Pace University business professor.

While agreeing to the settlement, Citigroup executives denied a federal court complaint charging the company misled investors by hiding the amount of bad debt it held in the form of collateralized debt obligations, or CDOs, during the subprime mortgage crisis. The bank’s write-downs on its housing market debt totaled $31 billion, according to the lawsuit brought by investors. Citigroup was estimated to have underwritten more than $70 billion of those securities and, unknown to investors, had kept about $57 billion on its books, according to the federal complaint.

The settlement will be divided among investors who bought Citigroup common stock during a roughly 14-month period from late February 2007 to mid-April 2008. The payback reportedly is expected to amount to 19 cents a share, to be covered by the company’s existing legal reserves.

Citigroup officials said the bank agreed to the settlement “solely to eliminate the uncertainties, burden and expense of further protracted litigation.”

Citigroup CEO Vikram Pandit said the institution he has led since 2007 sought to “put the pain from the financial crisis behind it.”

John Alan James, an international management consultant and executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business, called the settlement “another chapter in a long and sad story of mismanagement and ineffective governance by major financial institutions during the toxic subprime debt era of 2007 to 2009.”

James in prepared comments compared Citigroup’s out-of-court agreement with Goldman, Sachs & Co.’s decision in 2010 “to settle for a fine instead of long legal battles” with the U.S. Securities and Exchange Commission.

The company agreed to pay $550 million and to reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product as the U.S. housing market had begun to collapse. Goldman’s was the largest penalty ever paid to the SEC by a Wall Street firm.

“Citi had earlier settled a suit brought by the Securities and Exchange Commission for similar lapses in transparency and accurate reporting,” said James, referring to Citigroup’s $285 million settlement with the SEC in 2011. “This earlier action and settlement with a major federal regulatory agency probably played a role in encouraging the suing investors and the decision by Citi” to avoid further litigation.

Reserves set aside for the settlement will be another cost to shareholders if reflected in earnings and share prices, James said.

“It has become evident by these massive legal actions by regulators and investor groups that the integrity of corporate governance and its effective implementation was sorely lacking,” James said.

“Failures to develop sound policies at the board level, to insure that their implementation is effective and constantly monitored and tested – compliance management – cost shareholders billions of dollars and vast disequilibrium in the national and global financial markets. The failure in effective governance, risk management and compliance has brought about the huge, complex and costly Dodd-Frank legislation and its hundreds of new regulations.”

“Sadly, many institutions more effectively managed will have paid the price of the failures of a few,” James said.

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About The Author

John Golden
Westchester Bureau Chief

The Business Journal’s senior writer, John Golden directs news coverage of the county and Hudson Valley region as Westchester bureau chief. He was an award-winning upstate columnist and feature writer before joining the Business Journal in 2007. He is the author of “Northern Drift: Sketches on the New York Frontier,” a collection of his regional journalism.

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