The financial crisis related issues seem to be far from over. Citigroup Inc. C has yet again been hit with a lawsuit by a collapsed hedge fund – Millennium Global Emerging Credit Fund Ltd. The news first reported by Bloomberg, stated that the New York-based banking giant has been accused of undervaluing assets when it closed out trades during the peak of the 2008 crisis, citing court papers filed in October.
The liquidators of the fund alleged that Citigroup quickly ended positions and at rates that did not correctly reflect the market. As a result the liquidators incurred losses of around $1 billion. Notably, the liquidators are demanding around $53 million in damages.
The suit claimed that Citigroup failed to undertake reasonable procedures when it terminated positions following the fund’s default in October 2008. For the 51 open transactions that were closed out, the bank agreed to shell out about $6.8 million. However, as per the fund’s calculation Citigroup should pay around $53 million.
In its defense, Citigroup stated that the concerned positions were illiquid and difficult to value even in normal market conditions. Although, the bank accepted that it incorrectly valued some trades, it noted that the adjustments were substantially less than those claimed by the fund. In a statement Citigroup noted that it is “vigorously defending” the claims.
The hedge fund filed for bankruptcy in Bermuda in late 2008 and Michael Balboa, the manager of the fund was charged in 2011. Last year, Balboa was sentenced to four years in prison for inflating the hedge funds assets in his portfolio by manipulating the value of Nigerian debt. Notably, KPMG in Bermuda is liquidating the fund.
The latest lawsuit further adds to the woes of Citigroup, which is already burdened with numerous investigations and lawsuits from investors and regulators. Though the company resolved certain litigations related to the sale of risky mortgage-backed securities and other issues, many of the cases are yet to be resolved. As Citigroup continues to work through its legal issues, we believe the company will continue to witness increased legal expenses and litigation provisions, which will likely hurt its financials.
Citigroup currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Enterprise Financial Services Corp. EFSC, Middlefield Banc Corp. MBCN and Blue Hills Bancorp, Inc. BHBK, each sporting a Zacks Rank #1 (Strong Buy).
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