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EXHIBIT A
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)
IN RE CITIGROUP INC. SHAREHOLDER )
DERIVATIVE LITIGATION ) MASTER FILE NO.:) 07 Civ. 9841 (SHS)
__________________________________________)
) FIRST AMENDED
) CONSOLIDATED
) DERIVATIVE ACTION
THIS DOCUMENT RELATES TO: All Actions ) COMPLAINT
)
__________________________________________)
Lead Plaintiffs, Walter E. Ryan, Jr. and Sam Cohen for their derivative action complaint,
based upon the investigation of their counsel, alleges as follows on information and belief:
INTRODUCTION
1. On August 25, 2009, this Court dismissed Plaintiffs Consolidated Derivative
Complaint, holding that Plaintiffs did not adequately allege demand futility primarily because
there were not sufficient allegations that the Board of Directors had been directly involved in the
material misstatements and omissions. Therefore, the Court concluded, the Board did not have a
disabling interest in prosecution of the claims on behalf of Citigroup Inc. (Citi or Citigroup
or Company). This First Amended Derivative Complaint adds allegations fromIn re Citigroup
Bond Litigation, 08-9522 (S.D.N.Y.), which directly implicates the Board Defendants named in
this litigation and shows their complicity in Citis misstatements and omissions. Because of their
knowledge of the misstatements, or bad faith failure to investigate the accuracy of public filings
that they signed, they are substantially likely to be liable for securities fraud and demand is futile.
Additionally, this Amended Complaint adds a claim for Corporate Waste based on the Boards
decision to waste corporate assets and gift a lavish retirement package to Defendant Prince.
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2. This shareholders derivative action is brought in the right of, and for the benefit ofnominal defendant Citigroup, Inc. against its former Chief Executive Officer and Chairman of the
Board of Directors, Charles Prince, its officers and former officers, Robert Druskin, William R.
Rhodes, Sallie L. Krawcheck, David C. Bushnell, Steven J. Freiberg, John C. Gerspach, Michael S.
Helfer, Michael Klein, Stephen R. Volk, Lewis B. Kaden, and Gary Crittenden, as well as members
and former members of the Board of Directors, C. Michael Armstrong, Alain J.P. Belda, Sir Win
Bischoff, George David, Kenneth T. Derr, John M. Deutch, Roberto Hernandez Ramirez, Andrew N.
Liveris, Anne Mulcahy, Richard D. Parsons, Judith Rodin, Robert E. Rubin, Robert L. Ryan, and
Franklin A. Thomas, (collectively referred to as the Defendants) all of whom authorized, or
through abdication of duty permitted, and failed to disclose, the Companys subjection of itself to
vast exposure in its subprime portfolio at expense of Citigroup and its shareholders
3. Citigroup, under Defendants direction, recklessly spent billions of dollars purchasingsubprime loans to be used for future collateralized debt obligations. Due to Defendants misfeasance
and malfeasance alleged herein, these subprime mortgages have caused substantial monetary losses
to Citi and other damages, such as to its reputation and goodwill. Moreover, Defendants ignored the
signs and news of the impending subprime loan failures and violated the Companys publicly
disclosed risk management procedures, resulting in massive losses for the Company and its
investors, both directly from eventually reporting the real state of Citigroups financials and the costs
of litigation and possible future liability to investors asserting claims for securities fraud.
4. Additionally, Citis Board, along with Defendants Prince, Krawcheck and Gerspach,disseminated false and misleading S-3 shelf registrations and subsequent bond offerings
disseminated pursuant to the S-3s that omitted material information regarding Citis massive
subprime exposure, including misrepresentations and omissions regarding:
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(a) Citis direct exposure to as much as $66 billion of CDOs containing subprimeRMBS;
(b) Citis exposure to $100 billion of securities held by its Special Interest Vehicles;(c) Citis approximately $213 billion portfolio of residential mortgage loans;(d) The value of Citis assets;(e) The Companys well-capitalized status;(f) Citis net income; and(g) Citis financial results during the period.
5. These registration statements incorporated Citis Form 10-Ks , its quarterly reports(10-Qs) filed after the Form 10-K and Citigroups Form 8-Ks filed after Citis Form 10-K.
6. Defendants also wasted millions in Citigroups assets by agreeing to a wasteful andlavish retirement package for Defendant Prince.
7. Defendants have breached their fiduciary duties of care, good faith and loyalty, andsubstantially damaged the Company. Among other things the Defendants:
(a) Failed to ensure that the Company implemented adequate internal controls toprevent a variety of improper business practices, including controls over the Companys
subprime lending practices;
(b) Caused the Company to repurchase over $1.6 billion of its own common stockat artificially inflated prices;
(c) Failed to cause the Company to implement adequate internal controls toprevent fraud related to the reporting of the Companys financial condition;
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(d) Caused the Company to issue materially false and misleading financialstatements;
(e) Caused the Company to disseminated false information regarding its bondofferings; and
(f) Failed to cause the Company to implement adequate internal controls toprevent insider trading by the Companys senior management.
8. Furthermore, Defendants failed to disclose material information relating to Citissubprime exposure in turn allowing Defendants to entrench themselves in the Company and enrich
themselves through insider sales at inflated prices, some to the Company itself. Further, while
insiders were unloading their common stock in Citi, the Board was authorizing $1.645 billion in
share repurchases. These actions are inconsistent with Defendants affirmative duties of care, loyalty,
good faith, and candor.
9. And, the Board Defendants themselves disseminated materially misleading statementsin Citis shelf registrations and bond offering materials all while causing Citi to buyback shares at
artificially inflated prices.
10. Indeed, Defendants exposed Citigroup to numerous liabilities, including:(a) Substantial civil liability because of misstatements;(b) Damage to the Companys reputation within the market;(c) A loss of financial goodwill;(d) A loss of good will of the Companys name and brand for the purposes of its
banking activities;
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(e) Damages to the Companys reputation in the financial community, exposingitself, to, inter alia, loss of corporate client base;
(f) Substantial expenses resulting from costly investigations and defense costs;(g) Damages and legal defense costs for securities fraud class action litigation and
ERISA class action litigation; and
(h) Substantial additional future costs to remediate its failed corporate governanceprocesses and institutional operations.
JURISDICTION AND VENUE
11. Jurisdiction/Subject Matter: Claims are asserted under Sections 10(b) of theSecurities Exchange Act of 1934 [15 U.S.C. 78j(b)] (the Exchange Act) and Rule 10b-5
promulgated thereunder by the SEC [17 C.F.R. 240.10b-5]. Accordingly, this Court has subject
matter jurisdiction pursuant to 28 U.S.C. 1331 and 1337, and Section 27 of the Exchange Act [15
U.S.C. 78aa]. Further, this Court has jurisdiction over all claims asserted herein under 28 U.S.C.
1332, as complete diversity exists between Plaintiffs and each defendant and the amount in
controversy exceeds the jurisdictional minimum of this Court. This Court also has supplemental
jurisdiction pursuant to 28 U.S.C. 1367(a) over all other claims that are related to claims in the
action within such original jurisdiction that they form part of the same case or controversy under
Article III of the United States Constitution. This action is not a collusive action designed to confer
jurisdiction on a court of the United States that it would not otherwise have.
12. Jurisdiction over Defendants: This Court has jurisdiction over each defendant namedherein because each defendant is either a corporation that conducts business in and maintains
operations in this District, or is an individual who has sufficient minimum contacts with this District
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so as to render the exercise of jurisdiction by the District courts permissible under traditional notions
of fair play and substantial justice.
13. Venue: Venue is proper in this District pursuant to Section 27 of the Exchange Act,and 28 U.S.C. 1391(b) and (e). Many of the acts charged herein, including the preparation and
dissemination of materially false and misleading information to the investing public, occurred in
substantial part in this District. And, venue is proper in this Court pursuant to 28 U.S.C. 1391(a)
because: (a) Citigroup maintains its principal place of business in the District; (b) one or more of the
defendants either resides in or maintains executive offices in this District; (c) a substantial portion of
the transactions and wrongs complained of herein, including the defendants' primary participation in
the wrongful acts detailed herein occurred in this District; and (d) defendants have received
substantial compensation in this District by doing business here and engaging in numerous activities
that had an effect in this District. Citigroups principal place of business is located at 399 Park
Avenue, New York, NY 10043.
PARTIES
Plaintiffs
14. Plaintiff Walter E. Ryan Jr. brings this action derivatively in the right and for the
benefit of Citigroup to redress injuries suffered by Citigroup as a direct result of the Individual
Defendants breaches of fiduciary duty alleged herein. Plaintiff will adequately and fairly represent
the interests of Citigroup in enforcing and prosecuting its rights. Plaintiff is and was a continuous
owner of stock of Citigroup throughout all relevant times. Specifically, Mr. Ryan has been a
shareholder since 2003 and currently owns at least 51,900 shares of Citigroup common stock.
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15. Plaintiff Sam Cohen brings this action derivatively in the right and for the benefit of
Citigroup to redress injuries suffered by Citigroup as a direct result of the Individual Defendants
breaches of fiduciary duty alleged herein. Plaintiff will adequately and fairly represent the interest of
Citigroup in enforcing and prosecuting its rights. Plaintiff is and was a continuous owner of stock of
Citigroup throughout all relevant times. Specifically, Mr. Cohen has been a shareholder since the
1980s and currently owns at least 4,000 shares of Citigroup common stock.
Defendants
16. Nominal Defendant Citigroup is named herein solely as a nominal defendants. This
action is brought on behalf of and for the benefit of Citigroup.
17. Defendant Charles O. Prince is the former CEO and Chairman of Citigroup Inc.
Defendant Prince resigned and/or was terminated from his position in November 2007. In July
2008, he joined the board of directors of Xerox Corporation, joining fellow Citigroup director
defendant Anne Mulcahy, who is the Chairman and Chief Executive of Xerox. Defendant Prince
was a director of Citigroup since 2003.
Director Defendants (collectively, the Board or Board of Directors)
18. Defendant C. Michael Armstrong is a member of the Board of Directors of Citigroup
and a member of the Audit committee. Defendant Armstrong has been a member of the Citigroup
board since 1989. Defendant Armstrong is also a director of IHS Inc., which Citigroup represented
in IHSs Initial Public offering in 2005. Defendant Armstrong also signed S-3 shelf registration
statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Armstrong is liable
for these misstatements and all other misstatements for all offerings made pursuant to the shelf
registrations.
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19. Defendant Alain J.P. Belda is a member of the Board of Directors and member of the
Compensation committee. Defendant Belda has been a member of the Citigroup board since 1997.
Defendant Belda is also a director of Alcoa Inc., along with Board Member Defendant Frankin
Thomas. In 2005, Alcoa sold Southern Graphic Systems Inc. to Citigroup Venture Capital Equity
Partners. Defendant Belda also signed S-3 shelf registration statements dated March 2, 2006, March
10, 2006, and June 20, 2006. Defendant Belda is liable for these misstatements and all other
misstatements for all offerings made pursuant to the shelf registrations.
20. Defendant George David is a member of the Board of Directors and member of the
Audit committee. Defendant David has been on the Citigroup Board since 2002. Defendant David
also signed S-3 shelf registration statements dated March 2, 2006, March 10, 2006, and June 20,
2006. Defendant David is liable for these misstatements and all other misstatements for all offerings
made pursuant to the shelf registrations.
21. Defendant Kenneth T. Derr is a member of the Board of Directors and a member of
the Compensation committee. Defendant Derr has been a director of Citigroup since 1987.
Defendant Derr is also a director of the Halliburton Company, which Citigroup has funded through
equity linked securities, under the trading symbol ECK. Defendant Derr also signed S-3 shelf
registration statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Derr is
liable for these misstatements and all other misstatements for all offerings made pursuant to the shelf
registrations.
22. Defendant Roberto Hernandez Ramirez is a member of the Board of Directors and
member of the Public Affairs committee. Defendant Ramirez has been on the Citigroup Board since
2001. Defendant Ramirez also signed S-3 shelf registration statements dated March 2, 2006, March
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10, 2006, and June 20, 2006. Defendant Ramirez is liable for these misstatements and all other
misstatements for all offerings made pursuant to the shelf registrations.
23. Defendant John M. Deutch is a member of the Board of Directors and a member of
the Audit committee. Defendant Deutch has served two terms on the Citigroup Board (1987-1993)
and (1993-present). Defendant Deutch is also a director for Cheniere Energy Inc., which Citigroup
represented in its initial public offering in 2007. Furthermore, Defendant Deutch is also a director of
Cummins Inc. along with Defendant Thomas. Defendant Deutch also signed S-3 shelf registration
statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Deutch is liable for
these misstatements and all other misstatements for all offerings made pursuant to the shelf
registrations.
24. Defendant Andrew N. Liveris is a member of the Board of Directors and a member of
the Audit committee. Defendant Liveris has been a member of the Citigroup board since 2005.
Defendant Liveris is also a director of Dow Chemical Corporation, which uses Citigroup as an
investment banker and has awarded Citigroup a trade mandate for the preparation and processing of
the documents relating to Dow Companies trade transactions in Asia. Defendant Liveris also signed
S-3 shelf registration statements dated March 2, 2006, March 10, 2006, and June 20, 2006.
Defendant Liveris is liable for these misstatements and all other misstatements for all offerings made
pursuant to the shelf registrations.
25. Defendant Anne Mulcahy is a member of the Board of Directors and member of the
Audit committee. Defendant Mulcahy has been a board member of Citigroup since 2004. Defendant
Mulcahy is also the Chairman and CEO of Xerox. Defendant Prince, after he resigned and/or was
terminated from Citigroup, joined Xeroxs board. Defendant Mulcahy also signed S-3 shelf
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registration statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant
Mulcahy is liable for these misstatements and all other misstatements for all offerings made pursuant
to the shelf registrations.
26. Defendant Richard D. Parsons is a member of the Board of Directors and a member of
the Compensation committee. Defendant Parsons has been a member of the Citigroup Board since
1996. Defendant Parsons is also a director of the Estee Lauder Companies, which in 2003 and 2007
issued hundreds of millions in unsecured, 30-year notes in a public offering led by Citigroup.
Furthermore, Parsons is a director of Time Warner, which appointed Citigroup to decide the future of
AOL Europe. Defendant Parsons also signed S-3 shelf registration statements dated March 2, 2006,
March 10, 2006, and June 20, 2006. Defendant Parsons is liable for these misstatements and all
other misstatements for all offerings made pursuant to the shelf registrations.
27. Defendant Judith Rodin is a member of the Board of Directors and a member of the
Audit committee. Defendant Rodin has been a board member of Citigroup since 2004. Defendant
Rodin also is a director of Comcast Corporation, which Citigroup represented in Comcasts initial
public offering. Additionally, Defendant Rodin is a director of AMR Corporation, the parent
company of American Airlines, which has a lucrative credit-card partnership. AMR is also an
investment banking client of Citigroup and Citigroup owns more that 1% of beneficial common
equity securities in AMR. Further, Defendant Rodin is the dean of the Wharton School of Business.
In 2006, Citigroup agreed to donate a substantial, three-year donation. Defendant Rodin also signed
S-3 shelf registration statements dated March 2, 2006, March 10, 2006, and June 20, 2006.
Defendant Rodin is liable for these misstatements and all other misstatements for all offerings made
pursuant to the shelf registrations.
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28. Defendant Robert E. Rubin is the Chairman of the Board of Directors and a member
of the Executive committee. Defendant Rubin has been a member of the Citigroup board since
1999. Defendant Rubin is Board Chairman of Local Initiatives Support Corporation, which received
$200 million commitment from Citigroup. Defendant Rubin also signed S-3 shelf registration
statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Rubin is liable for
these misstatements and all other misstatements for all offerings made pursuant to the shelf
registrations.
29. Defendant Robert L. Ryan is a member of the Board of Directors and a member of the
Audit committee. Defendant Ryan has been a Citigroup director since 2007. Defendant Ryan is also
on the Board of UnitedHealth Group, which used Citigroup as a joint lead manager for a $3 billion
sale. Defendant Ryan is also a member of the General Mills Board. Citigroup has General Mills as
an investment banking client, non-investment banking business relationship, securities-related
relationship, and non-securities related relationship. Defendant Rubin also signed S-3 shelf
registration statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Rubin
is liable for these misstatements and all other misstatements for all offerings made pursuant to the
shelf registrations.
30. Defendant Franklin A. Thomas is a member of the Board of Directors and a member
of the Public Affairs committee. Defendant Thomas has been a member of the Citigroup board since
1970. Defendant Thomas is also a director of Alcoa Inc., along with Board Member Defendant
Belda. In 2005, Alcoa sold Southern Graphic Systems Inc. to Citigroup Venture Capital Equity
Partners. Further, Defendant Thomas is President of Bedford-Stuyvesant Restoration Corporation,
which received $100,000 donation from Citigroup in 2001. Defendant Thomas is also a director of
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Cummins Inc. along with Defendant Deutch. Defendant Thomas also signed S-3 shelf registration
statements dated March 2, 2006, March 10, 2006, and June 20, 2006. Defendant Thomas is liable
for these misstatements and all other misstatements for all offerings made pursuant to the shelf
registrations.
31. Defendant Win Bischoff is the Chairman of the Board of Directors and member of the
Executive committee. Defendant Bischoff is also a director of the McGraw-Hill Company and
Prudential PLC. Prudential appointed Citigroup to provide securities and accounting services for its
Asian business and sold its Internet Bank to Citigroup for $1.13 billion.
32. Each Board Defendant signed the S-3 registration statements that incorporated the
SEC filings containing material misstatements and/or omissions.
Officer Defendants
33. Defendant Robert Druskin is President and Chief Operating Officer of Citigroup.
34. Defendant Gary Crittenden is Citigroups former CFO from February 2007-July 2009.
35. Defendant John C. Gerspach is the former Controller and Chief Accounting Officer
of Citigroup, and is now Citigroups CFO.
36. Defendant Michael S. Helfer is and has been Citigroups General Counsel since 2003.
37. Defendant Sallie L. Krawcheck is former CFO and current CEO of Citis Global
Wealth Management Division.
38. Defendant Lewis B. Kaden is Vice Chairman and Chief Administrative Officer of
Citigroup.
39. Defendants William Rhodes acts as the Senior International Officer for Citigroup. He
also is Citibank N.A.s Chairman, President and CEO.
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40. Defendant David C. Bushnell acts as the Chief Administrative Officer and Senior
Risk Officer of Citigroup.
41. Defendant Michael Klein is Chairman of Citigroup, Co-CEO of CitiMarkets &
Banking, and is also Citigroups Vice Chairman of Citibank International.
42. Defendant Stephen R. Volk acts as Vice Chairman of the Board of Citigroup.
43. The Officer Defendants and Director Defendants are collectively referred to as
Defendants or Individual Defendants.
DEFENDANTSFIDUCIARY DUTIES
44. Defendants are officers and directors of Citigroup and therefore control the business
and corporate affairs of Citigroup. Defendants owe Citigroup and its shareholders fiduciary
obligations of trust, loyalty, good faith and due care, and are required to use their utmost ability to
control and manage Citigroup in a fair, just, honest and equitable manner. Defendants, at all times,
were required to act in the best interest of Citigroup and its shareholders, without regard to their own
self-interest.
45. By virtue of their positions as directors of Citigroup, the Citigroup Defendants had at
all relevant times, the power to and did control, influence and cause Citigroup to engage in any
wrongful acts and omit material information alleged herein.
46. Each Citigroup Defendant is sued individually as a conspirator in his capacity as an
officer and/or director of Citigroup, and the liability of each arises from the fact that each engaged in
actions that breached their fiduciary duties complained of herein.
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47. Each Citigroup Defendant herein had an affirmative fiduciary obligation to act in
good faith, truthfully, and in the best interests of Citigroup and its shareholders. To diligently
comply with these duties, the directors were obligated to refrain or prevent any action that:
(a) advanced or protected the interest of themselves or their colleagues at the expense
of or to the detriment of the shareholders;
(b) wasted corporate assets; and
(c) allowed Citigroup to disseminate material misleading or incomplete information.
48. In accordance with their duties of care, loyalty, good faith and candor,
Defendants were obligated to disclose all material facts to shareholders.
49. By reason of their positions as directors and/or fiduciaries of Citigroup and because of
their ability to control the business and corporate affairs of Citigroup, the Citigroup Defendants owe
Citigroup and its shareholders fiduciary obligations of loyalty, trust, candor and good faith and fair
dealing. Delaware law mandates that the Citigroup Defendants were and are required to act in
furtherance of the best interests of Citigroup and its shareholders.
SUBSTANTIVE ALLEGATIONS
Background of the Mortgage Industry
50. Traditional mortgage industry was characterized by lending institutions originating,
servicing and retaining the mortgages until they were repaid in full.
51. Now, rather than holding mortgage loans, lenders now regularly sell these mortgages
in the financial markets, either directly or to investment banks or Government Sponsored Enterprises
(GSEs), such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home
Loan Mortgage Corporation (Freddie Mac), who pooled the loans together, securitized and sold
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them to the general public as mortgage backed securities, whose sale proceeds in turn went back to
the lenders to finance new mortgages, increasing the lenders profits and aiding its stock price.
52. Throughout 2000 2006, the United States home market was booming. Part of this
boom was due to banks and individuals willingness or appetite to enter into subprime mortgage
transactions. These risky agreements were brought on by banks appetite for increased earnings and
supposed risk adversity due to rising home prices. In short, if banks had to foreclose, they could
recover their investment easily. If they did not have to foreclose, they would reap the benefits of
high interest rates for subprime lenders. Eventually this reckless strategy would show the problems
inherent with subprime lending practices.
53. This sudden downturn in the subprime housing market was not unforeseen. In fact,
one of Citigroups competitors, Goldman Sachs, dumped its subprime portfolio just before the
crisis occurred (with Citigroup buying a large portion). For years, as shown below there were
warnings, as there always is with a bubble-like market, that a crash was on the horizon. Citigroup
did not account for this eventual downturn or sufficiently control its lending practices in the
subprime market to adequately prepare for any downturn, let alone one of tremendous size. As
reported in The Wall Street Journal(WSJ): Citigroup's subprime exposure -- and source of its
problems -- is found in two big buckets that together total $55 billion in its securities and banking
unit, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans
that were being held, or warehoused, until they could be added to debt pools for investors. The
second, totaling $43 billion, covers so-called super-senior securities.
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54. These highly rated super-senior securities are portions of collateralized debt
obligations, or CDOs. CDOs are repackaged pools of lower-rated securities backed by subprime
loans into pieces with different levels of risk and return. Analysts estimate that $60 billion in such
super-senior tranches are sitting on the books of banks, insurers and investment funds. WSJ, Heard
on the Street, 11/5/07.
55. Indeed, Citis troubles stem back to the heyday of the U.S. housing boom, when Citi
became one of the biggest players in the lucrative world of CDOs backed by subprime-linked bonds.
Overall, Citi was the second-largest underwriter of CDOs in 2006, doing $34 billion in deals,
according to data provider Dealogic. As a result, Citi's holdings of subprime exposures varies from
the actual loans to the most highly rated slices of CDOs, the bank said. They include securities the
bank had warehoused to later package into CDOs, extended to the super-senior tranches of CDOs
that Citi helped create. Banks often kept the super-senior pieces of CDOs, because their low returns
made them unattractive to investors despite their extremely high ratings. WSJ, Heard on the Street,
11/5/07.
56. Defendants, who, as further detailed below knew about the impending crash and
were well aware of the necessity of internal controls and disclosure obligations because of Citis
involvement in the Enron scandal1 -- attempted to either cover-up or ignore the problem by serially
misstating or omitting material information regarding the Companys health and well being. From
1This is not Citigroups first encounter with problematic subprime mortgages. As part of a 2003
investigation by the Federal Reserve Board, Citigroup agreed to: (a) evaluate the effectiveness of
Citigroup's then-current risk management program; (b) ensure the fundamental elements of the
credit risk program; (c) ensure that credit decision-makers possessed all necessary information;
and (d) analyze whether risk identification mechanisms were adequate and effectively measured
risk. Defendants ignored their representations in this agreement.
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January 2007 until November 2007, the Company failed to properly disclose the extent of its
subprime exposure. Defendants were either knowingly or recklessly misstated this information to
the detriment of Citigroup and its shareholders. This violated the Defendants duties to Citi and its
shareholders.
Defendants Ignored Clear Indications that the Subprime Market was
Headed for a Downturn and The Board Refused to Act in the Face of a Major Financial Crisis
57. Beginning in mid-2005, there were very public signs that the housing bubble the
lifeblood of the subprime industry would bust and that the U.S. housing market would suffer
disastrous consequences. Far from idle speculation and conspiracy theories, below demonstrates the
red flags that Defendants ignored in allowing Citi to continue and indeed increase its risky financial
investment in subprime mortgages.
May 27, 2005: Now Nobel-Prize winning Economist Paul Krugman of theNew
York Times reported that he saw signs that America's housing market, like the stock
market at the end of the last decade, is approaching the final, feverish stages of a
speculative bubble. Paul Krugman, Running Out of Bubbles, 2005, New York
Times, 2005 WLNR 8403889.
June 9, 2005: Federal Reserve Chairman Alan Greenspan, testified to the Joint
Economic Committee that he saw signs of froth in some local markets where home
prices seem to have risen to unsustainable levels. Alan Greenspan,Bubbling Up,
Journal of Accountancy, 2005, 2005 WLNR 18122269.
June 16, 2005: The Economist print edition: Perhaps the best evidence that
America's house prices have reached dangerous levels is the fact that house-buying
mania has been plastered on the front of virtually every American newspaper and
magazine over the past month. Such bubble-talk hardly comes as a surprise to our
readers. We have been warning for some time that the price of housing was rising at
an alarming rate all around the globe, including in America. Now that others havenoticed as well, the day of reckoning is closer at hand. It is not going to be pretty.
How the current housing boom ends could decide the course of the entire world
economy over the next few years.Leaders: After the fall After the fall; House
Prices, The Economist, Vol. 375, Iss. 8431, pg. 11, 2005.
July 26 2005: WSJreported that Mortgage lenders are continuing to loosen their
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standards, despite growing fears that relaxed lending practices could increase risks
for borrowers and lenders in overheated housing markets. Ruth Simon,Mortgage
Lenders Loosen Standards, Wall Street Journal, Sec. D, 2005, 2005 WLNR
11734780.
December 2005: Financial Accounting Standards Board Chairman Robert Herzbrought FASB Staff Position SOP 94-6-1, Terms of Loan Products That May Give
Risk (FSP SOP 94-6-1), to the forefront by issuing an unusual six-page reminder
to both investors and preparers that warned investments in subprime mortgages were
risky. See FASB on Subprime: We Warned You, CFO.com, Tim Reason and
Marie Leone, May 1, 2008. By taking this unusual step, the FASB made obvious
the true gravity of the situation. Furthermore, according to Chairman Herz, the
financial vehicles into which these non-traditional mortgages were packaged (such as
CDOs backed by RMBS) became ticking time bombs that started to explode.
According to FSP SOP 94-6-1, 2, The FASB staff is aware of loan products whose
contractual features may increase the exposure of the originator, holder, investor,
guarantor, or servicer to risk of nonpayment or realization.
December 2005: Some CDO traders warned the housing bubble could burst. Jason
Schechter, then head of CDO trading at Lehman Brothers, echoed other participants
at the Opal Financial Group CDO Summit when he said: What concerns me though
is: is this liquidity here to stay, or are we at risk for a sizable downturn? (Asset
Securitization Report, December 12, 2005).
May 2006: Ameriquest Mortgage, one of the United States leading wholesale
subprime lenders, announced the closing of each of its 229 retail offices and
reduction of 3,800 employees. At this time, Ameriquest stated that in the future it
would make its loans through mortgage brokers, a channel not covered by theJanuary 2006 predatory-lending settlement with the Attorneys General. Alex Veiga,
Mortgage group closing 229 branches ACC Capital Holdings plans to lay off one-
third of its 11,000 employees, consolidate operations, Contra Costa Times, 2006,
2006 WLNR 7528556.
September 13, 2006: The Senate Banking Committee heard testimony from
leading economists as to the economic ramifications of the housing bubble,
including from Richard Brown of the FDIC, who stated, According to the Federal
Housing Finance Board, over 30 percent of all conventional mortgages closed in
2004 and 2005 were ARMs. The ARM share moderated to 25 percent by the second
quarter of 2006. The percentage of ARMs among subprime mortgages is higher.
Within subprime mortgage backed securities, the share of ARMs was far higher,
close to 80 percent. The prevalence of subprime loans among all mortgage
originations doubled from 9 percent in 2003 to 19 percent in 2004. Slowdown Soon
For PO ARMs?, National Mortgage News, 2006, 2006 WLNR 16175140.
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October 23, 2006: Bloombergarticle reported that [d]elinquency trends and
home prices show a weakening real estate market, said Scott Eichel, head of credit
trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds
backed by mortgages. A lot of investors that have concerns about the housing
market are using the ABX index to speculate on a continued drop, he said. Darrell
Hassler and Hamish Risk, Housing in U.S. Poised to Worsen, Derivatives Show,Bloomberg News, 2006, available athttp://www.bloomberg.com/apps/news?pid=20601103&sid=adbsVAhN68TM&refer=us.
October 26, 2006: The United States Department of Commerce reported that the
median price for a new home sold in September was $217,100, a drop of 9.7 percent
from September 2005. It was the lowest median price for a new home since
September 2004 and the sharpest year-over-year decline since December 1970. The
weakness in new home prices was even sharper than a 2.5 percent fall in the price of
existing homes last month, which had been the biggest drop on record. William
Sluis,Price cuts follow glut in housing Median new-home price falls; incentives for
buyers may grow, Chicago Tribune, 2006, 2006 WLNR 18656511.
December 14, 2006: The Mortgage Bankers Association reported in its quarterly
National Delinquency Survey that late payments and new foreclosures on U.S. homes
rose in the third quarter and are likely to grow as a massive wave of adjustable-rate
mortgages reset at higher interest rates. MBA also reported that delinquencies rose
for all home loans, but most notably for adjustable loans to subprimne borrowers
who were already stretched before mortgage rates climbed and predicted that
between $1.1 trillion and $1.5 trillion of mortgages face rate resets in 2007.
Associated Press, Late payments sharply higher in 3rd quarter; rates blamed,
Chicago Tribune, 2006, 2006 WLNR 21555246.
December 22, 2006: Center for Responsible Lending study revealed that 2.2
million American households were likely to lose their homes and as much as $164
billion due to foreclosures in the subprime mortgage market. CRL's research
suggested that risky lending practices triggered the worst foreclosure crisis in the
modern mortgage market, projecting that one out of five (19.4%) subprime loans
issued during 2005-2006 would fail. Sue Kirchhoff, Some consumers run into big
problems with auto title lending Loans with interest rates that can hit 300% spread
across USA, USA Today, 2006, 2006 WLNR 22526660.
58. Indeed, beginning in late 2006, several indicators occurred, putting the Board
Defendants, especially the Audit and Risk Management Committee, on notice of the ongoing
housing crisis and the rapid deterioration of the subprime market:
December 28, 2006: Ownit Mortgage Solutions, the 11th largest United States
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issuer of subprime mortgages, went bankrupt, foreshadowed by the company abruptly
shutting its doors and told its 800 workers not to return a month before. E. Scott
Richard, Ownit seeks bankruptcy protection. The sub-prime lender, a casualty of the
changing mortgage market, owes more than $165 million, Los Angeles Times, 2006,
2006 WLNR 22715920.
January 30, 2007: J.P. Morgan's CEO, speaking at a Citigroup annual financial
services conference, stated that defaults are rising at J.P. Morgan a little bit,
adding, home equity is subject to deterioration from a recession, but that the bank
is well positioned to sustain a downturn in the economy. The bank has largely exited
the subprime lending area.Dimon sees a sign of recession, MarketWatch, January
30, 2007.
February 2: Bloombergreported the subprime market was facing record levels of
collapse:
Defaults on mortgages to people with poor credit histories or large debtburdens had risen in November above their worst levels during the last
recession six years ago, according to Friedman Billings Ramsey Group Inc.
The percentage of subprime mortgages packaged into bonds and delinquent
by 90 days or more, in foreclosure or already turned into seized properties
had climbed to 10.09 percent from 9.08 percent in October, analysts led by
Michael D. Youngblood at the Arlington, Virginia-based firm had reported.
The default rate fell to 5.37 percent in May 2005 from 10.05 percent in
November 2001, when economic growth resumed.
Defaults on subprime loans had surged as rates on ones made in 2002, 2003and 2004 adjust higher as their fixed-rate periods end following an increase in
short-term interest rates from the lowest in 45 years. Subprime mortgages
made in 2005 and 2006 were suffering from slumping home prices and looser
lending standards.
These borrowers are very leveraged and have little skin in the game
because they took out loans with small, or no, down payments and many of
them haven't seen their properties appreciate, Debashish Chatterjee, an
analyst at Moody's Investors Service in New York, had said in an interview
Jan. 26.
Jody Shenn, Subprime Loan Defaults Pass 2001 Peak, Freidman Says, 2007,
available at:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFGf71vlQkWM
February 5: Mortgage Lenders Network USA Inc., a company that catered to
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borrowers with weak credit, filed for bankruptcy. 880 of its 1,600 employees had
been laid off earlier in the year. Wall Street Roundup, Los Angeles Times, 2007,
2007 WLNR 2248166.
February 7: The Senate Banking Committee held the first hearing of the 110th
Congress addressing legislative solutions to predatory lending in the subprime sector.Stacy Kaper, First Predator Hearing Has Few Clues on Legislation, American
Banker, 2007, 2007 WLNR 2932257.
February 9: HSBC issued its first-ever profit warning and its chief executive
initiated a management shake-up at its U.S. consumer finance arm after losses from
bad home loans to high-risk borrowers. Nicola Clark,Bad loans in U.S. hurt HSBC
profit outlook, International Herald Tribune, 2007, 2007 WLNR 2565849.
February 12: ResMae Mortgage, a subprime lender, filed for bankruptcy.
According toBloomberg, in its Chapter 11 filing, ResMae stated that [t]he subprime
mortgage market has recently been crippled and a number of companies stoppedoriginating loans and United States housing sales have slowed and defaults by
borrowers have risen. Also in its filing, ResMae stated that it could not cope with
the enormous surge in loan defaults.
February 13: Dr. Mark Dotzour, the chief economist for the Real Estate Center at
Texas A&M University, issued a warning with respect to these rescue loans
because homebuyers who bought homes with subprime loans are especially
vulnerable. Texas Economist Warns of Foreclosure Rescue Scams,
www.mortgagefraudblog.com, February 13, 2007.
February 20: NovaStar Financial, a company specializing in originating, investing,and servicing non-conforming residential mortgages, reported a substantial loss.
Floyd Norris ofThe New York Times noted as follows: The class of 2006 may live
on as a very bad memory in subprime land. Vikas Bajaj and Julie Creswell,Home
Lenders Hit by Higher Default Rates, NY Times, 2007, 2007 WLNR 3451362.
March 1: Fremont General announced it was delaying fourth-quarter results in an
annual filing with the SEC, sparking concern about its subprime mortgage business.
The next day, Fremont General announced it was going to stop making subprime loans
and put its subprime business up for sale. E. Scott Reckard, California and the West
New Century fails to file 10-K report, Los Angeles Times, 2007, 2007 WLNR
4021193.
March 2: The Federal Reserve announced draft regulations to tighten lending
standards. E. Scott Recard and Jonathan Peterson, Troubles for sub-prime lender
grow New Century discloses a federal criminal probe, and Fremont says it is exiting
the business. Regulators propose stricter guidelines, Los Angeles Times, 2007, 2007
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WLNR 4102822.
March 8: New Century Financial, the second largest subprime lender in 2006 was
prevented by the state of Massachusetts from making loans. Jerry Kronenberg and
Scott Van Voorhis,Mortgage meltdown State bars co. from lending, Boston Herald,
2007, 2007 WLNR 4832356.
March 20: People's Choice Home Loan, Inc., a mortgage lender for people with
credit problems, filed for bankruptcy. Kate Berry, In Brief: 2 Calif. Subprime
Lenders Hurting, American Banker, 2007, 2007 WLNR 5795353.
April 2: New Century Financial filed for bankruptcy. Ryland, warning of loss,
discloses 265 drop in homes sold in the quarter, Los Angeles Times, 2007, 2007
WLNR 6517067.
April 6: American Home Mortgage Investment Corporation, the tenth largest retail
mortgage lender in the United States, wrote down the value of risky mortgages ratedone step above subprime. American Home hit as: mortgage fallout widens, Boston
Globe, 2007, 2007 WLNR 6895395.
April 18: Freddie Mac announced plans to refinance up to $20 billion of loans held
by subprime borrowers who would be unable to afford their adjustable-rate
mortgages at the reset rate. Mortgage firms to off loan aid Programs to assist
subprime borrowers, Chicago Tribune, 2007, 2007 WLNR 7373620.
April 24: The National Association of Realtors announced that sales of existing
homes fell by 8.4% in March from February, the sharpest month-to-month drop in 18
years. Housing: Going down, The Economist Newspaper, 2007, 2007 WLNR7917385.
May 25: The National Association of Realtors reported that sales of existing homes
fell by 2.6 percent in April to a seasonally adjusted annual rate of 5.99 million units,
the slowest sales pace since June 2003. The number of unsold homes left on the
market reached a record total of 4.2 million. Mary Umberger, Existing homes
building up Biggest supply since 92; sales picture not pretty, Chicago Tribune,
2007, 2007 WLNR 9904873.
June 12: RealtyTrac announces U.S. foreclosure filings surged 90 percent in May
from May 2006. Foreclosure filings were up 19% from April. There were 176,137
notices of default, scheduled auctions and bank repossessions in May. Gretchen
Morgenson and Vikas Bajaj, Rising Rates Start to Squeeze Consumers and
Companies, 2007, 2007 WLNR 11187154.
June 14: Goldman Sachs reported flat profit from the previous year due to
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mortgage market problems. Goldman Sachs Group, Boston Globe, 2007, 2007
WLNR 11225537.
June 22: Bear Stearns pledged up to $3.2 billion to bail out one of its hedge funds
because of bad bets on subprime mortgages. Jody Shenn and Yalman Onaran,
Hedge-fund bailout may cost firm less, Seattle Times, 2007, 2007 WLNR 12067298.
July 10: Standard and Poor's and Moody's downgraded bonds backed by subprime
mortgages, prompting investors to get rid of the securities. Fitch followed suit.
According to Christopher Wallen, an analyst from Institutional Risk Analytics,
when ratings agency puts a whole class on watch, it will force all the credit officers
to get off their butts and reevaluate everything. This could be one of the triggers
we've been waiting for. Insurers called safe from subprime woes, Chicago Tribune,
2007, 2007 WLNR 13181585.
July 18: Bear Stearns announced its two hedge funds that had invested heavily in
the subprime market were essentially worthless, having lost over 90% of their value,equal to over $1.4 billion. Ben Steverman,Banks Battle Housing Woes Increasingly,
industry players may be judged on how well their mortgage businesses navigate a
tricky housing market, Business Week Online, 2007, 2007 WLNR 1451060.
July 18: Commerce Department announces housing starts were down 19.4% over
the last 12 months. Also announced was a 7.5% plunge in permits to build new
homes, the largest monthly decline since January 1995. Permits were 25.2% below
their level from the previous year, reflecting continued pessimism among builders
over the near-term outlook for new homebuilding. Housing remains drag on
economy, Chicago Tribune, 2007, 2007 WLNR 13751676.
July 18 and 19: In two days of testimony in Congress, Chairman Bernanke said
there will be significant losses due to subprime mortgages, but that such losses are
bumps in market innovations (referring to hedge fund investments in subprime
mortgages). Bernanke reiterated that problems in the subprime mortgage market have
not spilled over into the greater system. Bernanke also said the problems likely will
get worse before they get better. Peter Coy,Bernanke on the Grill, Business Week
Online, 2007, 2007 WLNR 14591094.
July 27: Citigroup itself is mentioned in article that declares: The turmoil were
witnessing in global financial markets is nothing less than the popping of an
enourmous credit bubble that built up over the past fiver years, artificially inflating
the market prices of stocks, bonds and reals estate. Steven Pearlstein, Will the Lead
Ruin the Engine? Washington Post, 2007, 2007 WLNR 14425551.
July 30: IKB Deutsche Industriebank, a German bank, was bailed out because of
bad bets on U.S. mortgage-backed securities. Gretchen Morgenson, The reality of a
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bad mortgage loan, International Herald Tribune, 2007, 2007 WLNR 15068767.
August 1: Two hedge funds managed by Bear Stearns that invested heavily in
subprime mortgages declared bankruptcy. Investors in the funds filed suit against
Bear Stearns, alleging that the investment bank misled them about the extent of the
funds' exposure. Karyn McCormack, Bankruptcy Buzz Bugs Beazer, Business WeekOnline, 2007, 2007 WLNR 14823632.
August 6: American Home Mortgage one of the United States' largest home lenders
files for bankruptcy. According to the Associated Press on August 7, 2007, A weak
housing market and a spike in payment defaults scared investors from mortgage debt
including bonds and other securities backed by home loans. American Home
Mortgage Seeks Chapter 11 Bankruptcy Protection, 2007, 2007 WLNR 15129221.
August 9: American International Group, one of the biggest U.S. mortgage lenders,
warned that mortgage defaults were spreading beyond the subprime sector, with
delinquencies becoming more common among borrowers in the category just abovesubprime. IBDs Top 10 Thursday,Investors Business Daily, 2007, 2007 WLNR
15407957.
August 9: BNP Paribas, a French bank, suspended three of its funds because of
exposure to U.S. mortgages. Id.
August 9 and 10: European Central Bank and Federal Reserve intervened in the
credit markets by pumping in billions of dollars of liquidity. Id.
August 13: Aegis Mortgage Corp, one of the United States' top 30 mortgage
lenders, filed for bankruptcy. The Company also fired 782 out of 1,302 employees.Subprime Lender Seeks Protection From Creditors, NY Times via Bloomberg news,
2007, 2007 WLNR 15694965.
August 16: Countrywide Financial, the nation's largest mortgage lender, drew down
$11.5 billion on its credit lines. Conrad Tan, STI plunges, then rebounds in V-shaped
trading, Business Times (Sing.), 2007, 2007 WLNR 16023874.
August 22: RealtyTrac Inc. announced foreclosures were up 93% in July 2007 from
July 2006. The national foreclosure rate in July was one filing for every 693
households. There were 179,599 filings reported in July, up from 92,845 a year ago.
Foreclosures on the rise, Chicago Tribune, 2007, 2007 WLNR 16389352.
September 6: The Mortgage Bankers Association released a quarterly report
showing that the delinquency rate (the number of people who were behind in their
payments but had not yet entered the foreclosure process) for mortgage loans on one-
to-four-unit residential properties was 5.12% of all loans outstanding in the second
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quarter of 2007, up 28 basis points from the first quarter of 2007, and up 73 basis
points from the previous year. The delinquency rate for subprime loans was up from
13.77 in the first quarter to 14.82% in the second quarter. The delinquency rate for
prime loans rose from 2.58% to 2.73%. Compared to the same time the previous year,
the seriously delinquent rate was 23 basis points higher for prime loans and 304 basis
points higher for subprime loans. Kenneth R. Harney, Finding Bright Spots Amongthe Dark Clouds, Washington Post, 2007, available at:
www.washingtonpost.com/wpdyn/content/article/2007/09/14/AR2007091401154.
html
September 14: Merrill Lynch & Co., Inc. (Merrill Lynch) the biggest underwriter
of collateralized debt obligations, signaled that the subprime mortgage crisis might
hurt third-quarter earnings. The New York-based firm reported that it made fair
value adjustments for potential losses to date on unspecified holdings and financing
commitments. Fed hopes drive stock rebound after sell-off, Los Angeles Times,
2007, 2007 WLNR 18067317.
September 17: NovaStar Financial Inc. gave up its real estate investment trust,
effectively abandoning the lending business, because it could pay a $157 million
dividend. Movers: Best Buy, Lehman Brothers, Kroger, E*Trade, Business Week
Online, 2007, 2007 WLNR 18345072.
September 17: Merrill Lynchs $1.3 billion bet on subprime lending took a turn for
the worse when the world's largest brokerage confirmed job cuts at its First Franklin
Financial Corp. unit. Merrill Lynch declined to say how many jobs were being cut.
Recently filed reports with U.S. banking regulators showed that Merrill Lynch Bank
& Trust Co., where a lot of the First Franklin franchise was housed, lost $111 million
through the first half of 2007. James Quinn, Sub-prime job losses at Merrill, DailyTelegraph, 2007, 2007 WLNR 18224806.
September 21: HSBC Holdings announced its plans to close its U.S. subprime unit,
Decision One Mortgage, and to record an impairment charge of about $880 million.
HSBC stated that it no longer believed the mortgage business was sustainable.
Approximately 750 U.S. employees were expected to be affected by the decision.
Tim Mazzucca,HSBC to Shut a Subprime Wholesale Unit, American Banker, Vol.
172, Issue 184, 2007, 2007 WLNR 18569354.
September 27: Luminent Mortgage Capital, a home-loan investment company,
downgraded its second-quarter profit as the company struggled to gain access to
credit and bankers seize assets. Problems Mount for 2 Mortgage Firms, New York
Times, 2007, 2007 WLNR 18960269.
October 1: UBS reported its first quarterly loss in nine years. The largest wealth
manager in the world planned to write down $3.4 billion in its fixed-income portfolio
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and other departments and to cut 1,500 jobs in its investment bank. The loss was
attributed to the spreading credit crisis stemming from the emerging housing
depression. Three-Minute Digest, Business Times (Sing.), 2007, 2007 WLNR
19220970.
October 4: The credit ratings agency, Moodys Investors Service, reported thatsubprime mortgage bonds originated in the first half of 2007 included loans that are
going delinquent at the fastest recorded rate. The Moodys report predicted that
accelerating delinquencies from 2007 bonds were likely to surpass the number of
delinquencies in 2006, which hit a peak not seen since 2000. 2007 subprime loans
have most delinquencies, Chicago Tribune, 2007 WLNR 19519049
October 11: Countrywide Financial Corp reported that September mortgage
lending was down 44.3% from a year ago. Funding for adjustable-rate mortgages fell
76%, which was still lower than the 92% decline in nonprime loan funding.
Delinquencies as a percentage of unpaid principal balances rose 1.81% to 5.85%
from a year earlier. Gretchen Morgenson, U.S. inquiry urged on share sales Chief ofmortgage lender increased selling before price slid, International Herald Tribune,
2007, 2007 WLNR 20074204.
October 18: Standard & Poor's cut the credit ratings on $23.35 billion of securities
backed by pools of home loans that were offered to borrowers during the first half of
the year. The downgrades even hit securities rated AAA, which was the highest of the
10 investment-grade ratings and the rating of government debt.
October 24: Merrill Lynch wrote down $7.9 billion due to exposure to CDOs and
subprime mortgages. As a result, the firm took a $2.3 billion loss, the largest in
Merrill Lynch's history. Briefing.com: Stock Market Update, 2007.
October 29: John Robbins, former Chairman of the Mortgage Bakers Association,
stated that approximately a half of a million United States mortgage borrowers risked
foreclosure each year during the next few years. One million borrowers would lose
favor with their lenders each year, and 500,000 would not be able to save their home
loans. Hurdles to Home buying First Mortgages More Difficult to Obtain, South
Florida Sun-Sentinel, 2007, 2007 WLNR 21363185.
59. Indeed, the above events were not and could not have been a secret to the Citigroup
Board. Many of these events directly affected Citigroups competitors and/or clients.
60. Instead of fulfilling its fiduciary duties to act in the face of a known and apparent
crisis that would materially affect Citigroup, Citigroups Board decided to watch a major part of
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Citis business deteriorate.
Subsequent News Reports Confirm that the Board Defendants Knew of the Impending Crisis
61. On October 7, 2007, The New York Times (NYT) reported that: In late July,
Charles O. Prince III began daily meetings with about 10 of Citigroups highest-ranking executives
in his cherry-paneled library to discuss financial threats looming over the world's largest bank. Mr.
Prince had recently presided over Citigroups most profitable quarter since he became chief
executive four years earlier, but the banks brain trust was worried.
62. To steel itself against potential losses, Citigroup had already squirreled away an extra
$2.52 billion in reserves in the quarter. Still, a housing and credit meltdown was ravaging the
financial markets, and he wanted to know how bad the damage to Citigroup might be -- and if there
were opportunities to be seized. NYT10/7/07.
63. Taking part in these meetings was [Defendant] Robert E. Rubin, the former Treasury
secretary and the chairman of the bank's executive committee, who was both an influential adviser
and one of [Defendant] Princes strongest advocates on the Citigroup board. NYT10/7/07
64. As the weeks wore on, Citigroups problems grew more serious. Prices of subprime
mortgage bonds and other complex securities were deteriorating rapidly, sweeping up Citigroup and
most of its competitors into a financial crisis.NYT10/7/07
65. As Citigroups longtime bond-trading engine continued to sputter, its lending units
faced swaths of souring mortgages. The bank was on the hook for billions of dollars' worth of huge
buyout loans that few investors wanted, and its core consumer banking business was strained. It also
became increasingly clear that [Defendant] Prince, for the fifth time since taking the reins as chief
executive, would have to disclose a major problem to his board. NYT10/7/07
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66. Meredith A. Whitney, a banking analyst at CIBC World Markets said: Under his
watch, reserves got bled down to precarious levels. Under his watch, the firm made very aggressive
loans. Under his watch, the firm delved into subprime mortgage assets.NYT10/7/07
67. Even when turmoil was upon Citigroup, the Board continued to back its CEO,
Defendant Parsons commented that 'Chuck is doing a good job, and I think he has been working in
an extraordinarily complex situation through difficult markets.NYT10/7/07
68. Similarly, on November 6, 2007, theNew York Postreported that: Citigroups board
saw the writing on the wall months ago, but did little to stop the world's largest bank from crashing
and taking the rest of Wall Street with it.New York Post11/6/07.NYT10/7/07
69. TheNew York Postquoted: A handful of Citigroups highly paid directors did take
a few timid baby steps last summer to find a replacement for then-chief Chuck Prince, but backed
down almost as soon as they had embarked on their quiet coup, according to a source familiar with
the matter.New York Post10/7/07
70. Further, theNew York Postsaid that [g]overnance experts said the brunt of the blame
for Citigroup's problems and turmoil rests with its 13 directors, excluding Prince, who collectively
earned $43.8 million in compensation last year. Indeed, as Sandler ONeill analyst Jeff Harte said,
Public comments in support of Mr. Prince and recent management changes made by Mr. Prince
suggest that the board was as surprised as anyone by [Citi's] CDO related exposures.New York Post
11/6/07.
71. Notably, theNew York Postreported that: Insiders said some directors had been
anticipating carnage from its junk mortgages as far back as the summer of 2006, with the board's
risk-management panel holding more sessions than any other committee in that year and in early
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2007.New York Post11/6/07.
72. The New York Post also recognized that insiders were unloading shares at the
artificially high prices. Robert Rubin - the boards key director who was named the chairman
Sunday - unloaded the most stock. He sold $4.5 million worth of shares on Jan. 24, 2007, at $55.05
before shares collapsed.New York Post11/6/07.
73. Indeed, as reported by theNYTon June 20, 2008, Citigroup deviated from industry
practices: the chief financial officer of Citigroup said the company would use internal models to
price mortgage bundles known as collateralized debt obligations rather than use the dismally low
market prices as the only factor. On the other end of the spectrum, firms like Goldman Sachs say that
market prices should be the driving factor in pricing.
74. The above articles show that Citis Board acted in bad faith in both allowing Citi to
delve into complicated and risky investments, but also ignored red flags that eventually caused
tremendous damage to Citi.
Defendants Representations in Offering Materials Show That Defendants Knew, or Should
Have Known of the Companys Massive Subprime Exposure in RMBS CDOs
Citis Board Participates in Misleading Bond Offerings
75. Beyond approving Citis Massive securities fraud and ignoring Citis exposure to
subprime assets, as In re Citigroup Bond Litigation, 08-9522 alleges, the Citi Board directly
participated in and signed Shelf Offerings that formed the basis for 48 fraudulent bond offerings.
76. On March 2, 2006, March 10, 2006 and June 20, 2006, Board Defendants Armstrong,
Belda, David, Derr, Mulcahy, Prince, Ramirez, Rodin, Parsons, Rubin, Ryan and Thomas,
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participated in materially misleading bond offerings that shows their knowledge or bad faith
abdication of fiduciary duties in hiding Citis massive subprime exposure.
77. The Board Defendants, by signing shelf registrations, represented their knowledge of
Citis well-being, and attested to the accuracy of the shelf registrations and offerings made pursuant
to those shelf registrations.
78. Specifically, from May 2006 to August 2008, Citi conducted 48 public offerings
of bond securities that are the basis forIn re Citigroup Bond Litig., 08-9522 (S.D.N.Y.)(Bond
Action)2. The Bond Action alleges that Citis Board of Directors directly participated in
offerings that contained untrue statements of material fact and/or omitted to disclose material
facts regarding:
a. Citis direct exposure to as much as $66 billion of CDOs containing subprimeRMBS;
b. Citis exposure to $100 billion of securities held by its Special InterestVehicles;
c. Citis approximately $213 billion portfolio of residential mortgage loans;d. The value of Citis assets;e. The Companys well-capitalized status;f. Citis net income; andg. Citis financial results during the period.
Bond Litigation Complaint 150.
79. These untrue statements of fact and/or omissions were material to investors
2 All references added to the First Amended Complaint that appear in the Bond Litigation are
cited as Bond Litigation Complaint __. Citations toIn re Citigroup Securities Litigation, 07-
9901 (S.D.N.Y.) are cited as Securities Litigation Complaint __.
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because the undisclosed exposures noted above, as well as Citigroups multi-hundred billion
dollar residential mortgage portfolio, posed a substantial risk to the Companys solvency and
capital adequacy the basic measure of financial viability for a financial institution like
Citigroup. The fundamental metric of Citigroups capital adequacy was its Tier 1 capital ratio,
which measured the Companys readily available capital as a percentage of assets that were
potentially at risk of default (known as its Risk-Adjusted Assets). Bond Litigation Complaint
151.
80. In order to be considered well capitalized, federal regulations required the
Company to maintain a Tier 1 capital ratio of at least 6% (i.e., capital equal to at least 6% of its
risk adjusted assets). Maintaining its well capitalized status was critical to Citigroups financial
condition. If the Company accumulated large amounts of risky exposures that depleted its Tier 1
capital, investors would conclude that the Company lacked the capital to fund its potential losses
and would lose faith in its viability. Accordingly, in each of its SEC filings issued during the
Offerings Period, Citigroup represented that it maintained a well capitalized position. Bond
Litigation Complaint 151.
81. Citigroup operated with a very high degree of leverage, holding a small amount of
capital against a massive asset base. As its assets declined in value, Citigroups leverage ratio
increased to dangerous levels. For example, in 2007, the Company reported over $1.25 trillion of
risk-adjusted assets (itself an incorrect number because Citigroup was not reporting the true
market risk of its deteriorating subprime-related assets) and only $89 billion of Tier 1 capital.
Thus, Citi had a razor-thin margin for error, and even small losses to its risk adjusted assets could
destroy much or even all of its Tier 1 capital, rendering the Company under-capitalized and
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causing investor flight. Indeed, a November 1, 2007 analyst report concluded that losses of $16
billion or just 4.2% of the Companys undisclosed exposures to 36 CDOs, SIVs, and residential
mortgages would deprive Citigroup of its purported well capitalized status. Bond Litigation
Complaint 152.
82. It was critical for the Company to adequately disclose to investors in the Offerings
the extent and risks of its exposures to CDOs, SIVs, and residential mortgages. All disclosures
or omissions in these assets are material. And, as set forth below, Citigroup misrepresented or
failed to fully inform investors about those risks and their impact on its overall financial health.
Bond Litigation Complaint 153.
83. A series of post-Offering disclosures concerning these subjects revealed the
Companys true financial condition and demonstrated that the Public Offering Materials
contained untrue statements and omitted material facts. Additional specific untrue statements and
material omissions contained in the Public Offering Materials are identified in Section VII
below. Bond Litigation Complaint 154.
Citis Directors Caused Citi to Disseminate Public Offering Materials that Misstated and
Omitted Material Facts Regarding Citigroups Exposure to as Much as $66 Billion of
Subprime Mortgage Backed CDOs
84. Throughout the Offerings Period, Citigroup consistently informed investors that it
was one of the countrys largest originators and sellers of CDO securities. As explained below,
however, Citigroup failed to disclose that the Company had retained direct exposure to as much
as $66 billion of CDO securities backed by subprime mortgages. This exposurewhich was
more than 3.3 times the capital cushion the Company maintained to preserve its well capitalized
status, and more than four times the total amount of subprime mortgage exposure that the
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Company had disclosed to investors in previous Offeringswas sufficient by itself to leave the
Companys ability to operate its business in question because of a lack of available capital. Bond
Litigation Complaint 155.
85. Despite the markets focus on the risks of subprime-backed CDOs, (see 57-59
above) the Company did not disclose that it had retained any direct subprime CDO exposure at
all until July 20, 2007, and, even then, the Company understated its direct exposure by tens of
billions of dollars. Specifically, on a July 20, 2007 conference call, Defendant Crittenden, the
Companys CFO, stated that the Companys total on-balance sheet subprime exposure in its
Securities and Banking division was $13 billion as of the second quarter of 2007, which had been
materially reduced from $24 billion at the end of 2006 (a figure never before disclosed).
Defendant Crittenden also announced that the Company would mark down its subprime-backed
securities by approximately $1.3 billion. According to Crittenden, Think about this as the
CDOs, the CLOs, and the secured assets that we hold on our balance sheet. I think our risk team
did a nice job of anticipating that this was going to be a difficult environment, and so set about in
a pretty concentrated effort to reduce our exposure over the last six months. Bond Litigation
Complaint 166.
86. Based upon these disclosures, analysts concluded that Citigroups subprime CDO
exposure was both small and manageable. For example, after the Companys second quarter
2007 earnings release and conference call, a July 23, 2007 Buckingham report stated that the
impact of subprime on Citigroups balance sheet was small because broker balance sheets
are not static, with turnover of subprime assets related to securitizations rapid. Due to the
ostensibly small amount of the Companys subprime exposures, the Buckingham report
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reiterated a Strong Buy recommendation. Similarly, a July 23, 2007 Bear Stearns report noted
that the Companys statements regarding its subprime exposure suggested that the banks risks
are both relatively small and manageable. Bond Litigation Complaint 167.
87. In a conference call to discuss the Companys third quarter financial results on
October 15, 2007, Defendant Crittenden falsely reported that Citigroup had again reduced its
direct exposure to subprime-backed securities from the $13 billion he reported previously. The
same information led analysts to conclude that concerns of Citigroups capital adequacy were
overdone and Citigroups exposure to subprime and CDO assets was well below the exposure of
its peer investment banks. Bond Litigation Complaint 168.
88. In reality, by the middle of 2007, the Company held direct exposure to
approximately $66 billion of subprime-backed CDO securities. Bond Litigation Complaint 169.
89. The Company accumulated this exposure in two ways. First, Citigroup had
retained the risk of loss with respect to $25 billion of subprime mortgage-backed CDO securities
issued between 2003 and the end of 2005, by selling those securities to investors but specifically
attaching a guarantee to them known as a liquidity put. Citigroup wrote the liquidity puts on its
so-called commercial paper CDOs. The Companys commercial paper CDOs functioned just
like a typical CDO, except that, in addition to drawing income from the underlying RMBS, the
CDO also created income by issuing short-term commercial paper. Bond Litigation Complaint
170.
90. Under the terms of the liquidity puts that Citigroup used to sell its CDO securities
to outside investors, if the CDO could not issue commercial paper at a specified interest rate in
order to fund its obligations profitably, then Citigroup itself was obligated to directly satisfy the
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obligations on the CDOs outstanding securities. Citigroups guarantee that it would fund the
CDO securities if the CDO trust could not issue commercial paper at a profitable rate directly
contradicted the non-recourse risk transfer that the Company described in the Public Offering
Materials. Citigroup did not disclose the existence of these liquidity puts until November 2007.
Bond Litigation Complaint 171.
91. In addition, between 2004 and 2007, Citigroup had created approximately $28.4
billion of subprime mortgage-backed CDO securities that it was unable to sell, which the
Company retained on its own balance sheet. Further, more than $8 billion of the $28.4 billion in
subprime-backed CDO paper that Citigroup could not sell to third parties consisted of especially
risky mezzanine CDO securities, which were most vulnerable to default in the collapsing housing
market. The Public Offering Materials for Offerings which preceded November 2007 failed to
disclose the existence of the Companys exposure to $28.4 billion of these retained, subprime
mortgage-backed CDO securities. Bond Litigation Complaint 172.
92. Accordingly, by the third quarter of 2007, Citigroups exposure to subprime
mortgage-backed CDOs amounted to approximately $66 billion, and not the $13 billion that had
been disclosed with the second quarter 2007 earnings. This undisclosed exposure was highly
material to investors in the Offerings because it equaled approximately 60% of Citigroups Tier 1
capital at the end of 2007, and thus posed a substantial risk to the Companys capital adequacy.
Bond Litigation Complaint 173.
93. To make matters worse, throughout this time, Defendants were making false and
misleading statements to the public about Citis financial health in the wake of the subprime debacle.
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May 5, 2006; August 4, 2006; February 23, 2007; and August 3, 2007 Misstatements
94. On May 5, 2006, August 4, 2006, February 23, 2007 and August 3, 2007, Defendant
made the following false statements The Company is not the primary beneficiary of these VIEs
under FIN 46-R due to its limited continuing involvement and, as a result, we do not consolidate
their assets and liabilities in our financial statements. This statement changed in Citis November 3,
2006 10-Q, its May 4, 2007 10-Q, stating in both that: When an entity is deemed a VIE under FIN
46-R, the entity in question must be consolidated by the primary beneficiary; however, the Company
is not the primary beneficiary of most of these entities and as such does not consolidate most of
them.
95. As shown below, both of these statements were made by the Board Defendants
through the bond offerings and false because Citi was obligated to consolidate the SIVs.
The January 19, 2007 Misstatement
96. January 2007 began Citis series of misstatements in which the extent of Citis
massive subprime risk and impending collapse was never discussed or disclosed.
97. On January 19, 2007, Citigroup Inc. reported net income for the 2006 fourth quarter
of $5.13 billion, or $1.03 per share return on common equity was 17.2%. For the full year 2006, net
income was $21.54 billion, or $4.31 per share, and return on common equity was 18.8% in 2007, the
stock price closed at $54.50.
98. Specifically, Citis press release disclosed a view of the Company that was merely a
mirage, stating:
Management Comment
Our results were highlighted by double-digit revenue growth in our corporate and
investment banking, wealth management and alternative investment businesses. In U.S.
consumer, we continued to see positive trends from our strategic actions. Performance in
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these businesses was partially offset by lower results in international consumer, which
included significant charges in our Japan consumer finance business. Customer balances
continued to grow strongly, partly driven by our investment in new distribution, said
Charles Prince, Chairman and Chief Executive Officer of Citigroup.
Our 2007 priorities are clear: generating sustainable growth in U.S. consumer,
growing international consumer, corporate and investment banking and wealthmanagement businesses more quickly, focusing sharply on expense management, and
remaining highly disciplined in credit management. We will continue to invest to
integrate our businesses and expand our reach, while at the same time taking a
thorough review of our entire expense base to ensure that we operate as efficiently
and effectively as possible, said Prince.
Fourth Quarter Summary
Revenues were a record, up 15%, driven by 14% revenue growth in corporate and
investment banking, 79% in alternative investments, and 21% in global wealth
management. Global consumer revenues increased 9%.International revenues grew 11%, with international corporate and investment
banking up 20% and international wealth management up 48%. International
consumer revenues increased 2%, including the impact of charges in Japan consumer
finance.
Deposits and loans grew 20% and 16%, respectively. In global consumer, investment
AUMs increased 17%. Capital markets and banking ranked #1 in global debt
underwriting, #2 in announced M&A and #2 in global equity underwriting and global
loan syndications for the full year 2006. In global wealth management, client assets
under fee-based management grew 15%.
Operating expenses increased 23%, including 4 percentage points due to increased
investment spending, 3 percentage points due to acquisitions and foreign exchange,
and 2 percentage points due to SFAS 123(R) accruals. The remaining expense growth
was driven by higher business volumes, and the absence of a net release of legal
reserves that lowered expenses in the prior-year period.
The company opened a record 380 new branches, including 288 internationally, and
92 in the U.S. For the full year 2006, a record 1,165 branches have been opened, of
which 862 are international and 303 are in the U.S.
Credit costs increased 10%, as lower costs in U.S. consumer were more than offsetby increased credit costs in international consumer and corporate and investment
banking. U.S. consumer credit costs declined due to lower bankruptcy filings. In
international consumer, credit costs primarily reflected portfolio growth, including a
significant increase in Mexico due to target market expansion. The international and
U.S. consumer credit environment was generally stable. The global corporate credit
environment also remained stable.
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Excluding charges in Japan consumer finance, the net interest margin was even with
the 2006 third quarter.
Share repurchases totaled $1 billion, or approximately 19 million shares. For the full
year 2006, share repurchases totaled $7 billion and dividends paid to commonshareholders totaled $9.8 billion.
Capital Markets and Banking
Fixed income markets revenues increased 32% to $2.75 billion, primarily driven by
improved results in interest rate and credit products and foreign exchange.
Equity markets revenues grew 17% to $90