State Attorneys General are investigating Citigroup Inc.’s (C) alleged involvement in a major benchmark rate rigging, according to a quarterly filing with the Securities and Exchange Commission (SEC).
As part of such investigations, additional requests for information and documents have been received by some specific subsidiaries of Citi from a number of U.S. as well as non-U.S. governmental agencies, including the offices of the New York and Connecticut Attorneys General.
Notably, in addition to Citi, a number of big banks such as Bank of America Corporation (BAC) and HSBC Holdings plc. (HBC) are facing probes from regulators over their involvement in rigging the London interbank offered rate, or LIBOR. It is this rate that is used as a benchmark for financial products across the globe and for interbank lending purposes.
The authorities plan to levy charges against the wrongdoers and seek an appropriate judgment so as to avoid repetition of such unwanted incidences in the future. Companies that are involved in this incident would face heavy claims.
In addition to this benchmark prod, the company also faces probe from the New York Attorney General who has served subpoena on an affiliate of Citi in June. This subpoena is related to MAT Finance Fund LLC, ASTA Finance Fund LLC, and Falcon Strategies LLC.
Moreover, recently, the Massachusetts Attorney General served a Civil Investigative Demand on a Citi affiliate. Documents and information have been sought in both these cases from the respective State Attorneys General.
It is Citi’s role in managing and marketing the MAT, ASTA and Falcon funds that suffered significant losses during the financial downturn, which is being particularly investigated by the regulators. As a matter of fact, in the past, the Financial Industry Regulatory Authority (FINRA) fined Citi and ordered it to pay $60 million to some of the investors of those funds. The investors had accused the company of inclining them towards this fund by claiming it to be safe and more profitable than the other fixed-income investment options.
Our Take
We believe that the mounting legal claims can pose a risk for Citi and tarnish its image. If the company is found guilty, it is liable to be fined by authorities. Often, the company itself opts for settlements in order to reduce litigation hassles. Such a step on behalf of the company exhausts its financials, which could have been invested in growth initiatives. We remain skeptical and wait to see what the future holds.
Citi, otherwise, has a strong franchise and is on track to reduce its non-core business. Its global footprint and attractive core business are impressive, but a low interest rate environment and regulatory headwinds remain our concerns.
The shares of Citi retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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