30.08.2012

By Simon Miller

US bank Citigroup has agreed to pay $590m to settle a lawsuit over allegations that it mislead investors over the amount of mortgage debt it owned before the financial crisis.

Investors alleged that Citi employed a "CDO-related quasi-Ponzi scheme" to hide the growing risk to its balance sheet from mortgage-backed debt and CDOs.

The class suit, which was brought in 2009, said the bank had told investors that it had sold the CDOs when, in fact, it was still liable for any losses the products suffered.

Citi denies the allegations but said it had offered settlement to avoid a protracted lawsuit.

In a statement, the bank said: "Citigroup denies the allegations and is entering into this settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation. The amount to be paid under the proposed settlement is covered by Citi’s existing litigation reserves."

It added that it was pleased to put the matter behind it and that the settlement was a "significant step toward resolving our exposure to claims arising from the period of the financial crisis".

The statement continued: "Citi is fundamentally a different company today than at the beginning of the financial crisis. Citi has overhauled risk management, reduced risk exposures and through our core businesses in Citicorp, we are focused on the basics of banking, leveraging our unique presence throughout the emerging and developed markets to serve our clients and the real economy."

The proposed settlement will be reviewed by the Hon. Sidney Stein in the United States District Court for the Southern District of New York, where the class action is pending.