Judicial 'Intifada' - Participation is Growing.

[ by Howard Haykin ]

Last Monday a federal court room in lower Manhattan was the scene of yet another hearing involving asset backed securities assembled and sold by Citigroup to investors during the height of the financial credit crisis.  Toxic mortgage assets that backed the securities had lost a significant percentage of their value, rendering the securities virtually worthless.

However, the opposing parties arrived at an agreed upon settlement - an all cash deal that would provide $590 million for investors who held these seriously devalued investments.  Approval by the courts was critical, because this class action settlement with Citigroup would resolve claims by shareholders covering a 15-month period - from February 2007 to April 2008 - when the bank misrepresented its exposure to CDOs and MBSs that were tied to mortgage.  The settlement was announced last August. 

Federal District Court Judge Sidney Stein Presiding.   In an order dated 4/1/13, Judge Sidney Stein posed the question as to whether the absence of any payments from individuals named in the lawsuit - e.g., former Chief Executive Charles Prince and other bank officials - makes the settlement "unfair."  And Judge Stein grilled the lawyers on the fact that Citigroup's current shareholders would ultimately be the ones who would pay for the settlement under the proposed terms of the agreement. 

He reiterated his concerns about the impact on future bank conduct, citing the lack of any planned payments by individual defendants including former CEO Charles Prince. "Should the plaintiffs not also be concerned with deterrence as an issue in the settlement?" Judge Stein asked.

Over the course of the 3-hour hearing in U.S. District Court in lower Manhattan, lawyers for both sides responded:

• Ira Press, a lawyer for the plaintiffs at law firm Kirby McInerney, said his job was to get the most money possible for shareholders.
• Mr. Press added that Citi would wind up paying for any settlements against individual defendants anyhow, because bank officers were shielded  by indemnification agreements.
• Richard Rosen, representing Citigroup, said that the SEC, rather than plaintiffs' lawyers, properly has the role of bringing enforcement actions against individuals to deter future misconduct.
• Mr. Rosen added that current Citi shareholders also have an interest in reaching a settlement to avoid a trial where damages could climb to "tens of billions of dollars."

The Judge also asked questions related to the settlement's allocation plan and whether he should award plaintiffs' lawyers around $100 million in fees and expenses. That fee request would amount to about 16.5% of the total settlement. 

Judge Stein Holds Off on Ruling on the Settlement or Fee Request.   The hearing marked the latest instance of a judge questioning the fairness of litigation settlements with large financial companies. 

• Citigroup is separately waiting for an appeals court to decide whether U.S. District Judge Jed Rakoff properly rejected a $285 million settlement with the SEC. 
• In March, U.S. District Judge Victor Marrero in Manhattan cited the SEC's pending Citigroup appeal in holding off on approving the SEC's $602 million insider trading settlement with a unit of Steven Cohen's hedge fund SAC Capital Advisors.  On Tuesday, 4/16, the judge conditionally approved the settlement - which is still subject to the outcome of the Rakoff case.

[Compliance Insights Note:  For what it's worth, we support the concerted efforts of judges, like Judge Stein, who choose to question "traditional solutions" applied to new and ongoing matters.  In another post, we consider the lax attitudes that shape the way financial industry leaders continues to address matters of a very serious nature.  It continues to drive a stake between our industry and the rest of America. 

The solution may be at hand, but financial executives seem not to know which hand to reach out to.]

This case: Citigroup Inc. Securities Litigation, U.S. District Court, Southern District of New York, No. 07-09901.

For further details, go to [Reuters, 4/8/13].

To contact the writer:  Howard@compliance-insights.com.