Citigroup Inc was sued by Loreley Financing regarding nearly $1 billion worth of residential collateralized debt obligations (CDOs) purchased in 2006 and 2007.  Citi stands accused of defrauding Loreley into purchasing "fraudulent investments that are now worthless." Loreley stated that Citigroup lied about the riskiness of the residential mortgage-backed securities (RMBSs) underlying the investments.  Citi used the CDOs to offload the risks of toxic MBSs on its books and to help preferred clients "short" the housing market, the lawsuit claims.  Loreley a group of 9 investment companies, organized under the laws of Jersey in the Channel Islands, to invest in CDOs, filed its complaint in Manhattan state court on Tuesday. The Complaint. From September 2006 to July 2007, Loreley bought from Citigroup $965 million of notes in 11 CDOs that benefited only the bank, which earned transaction fees and successfully unloaded loans that were likely to lose money.

“Citigroup devised and implemented several fraudulent schemes through which it was able to mitigate its exposure to the impending collapse of the subprime market even as it continued to earn lucrative fees securitizing subprime RMBS and arranging and marketing CDOs stocked with these increasingly toxic assets to unsuspecting investors such as plaintiff."

Loreley seeks an order rescinding its purchase of the notes and the return of its $965 million investment. Citigroup says the suit is without merit. The case: Loreley Financing (Jersey) No. 3 Ltd. v. Citigroup Global Markets Inc., 650202/2012, New York State Supreme Court (New York County). For further details, go to:   [Bloomberg, 1/24/12] and [Reuters, 1/24/12].