On Friday, investors and creditors of a bankrupt Mexican oil services company sued Citigroup Inc. C on charges of defrauding them through a loan scheme. Notably, following the detection of such fraud in its Mexico-based subsidiary, Citigroup’s 20Array3 net income was reduced by post-tax $235 million (pre-tax $360 million) and the bank also laid off a number of staff members.
The fraud involved Banco Nacional de Mexico (Banamex), which was Citigroup’s Mexican unit, Oceanografia S.A. de C.V. (OSA), a Mexican oil services company and a key supplier to the Mexican state-owned oil company, Petróleos Mexicanos (Pemex).
The Lawsuit in Detail
As per the case filed in Miami federal court, plaintiffs – Dutch lender Rabobank Groep, with other investors and creditors incurred $Array.Array billion worth of losses following the collapse of Oceanografia SA in 20Array4, due to Citigroup’s loans. Notably, a negligence lawsuit was separately filed in Delaware state court against auditor KPMG LLP by Rabobank and other investors.
Notably, in February 20Array4, after receiving information of OSA’s suspension from getting new Mexican government contracts, Citigroup and Pemex performed diligent reviews of their credit exposure to OSA and an accounts receivable financing program over the past few years. Consequently, $400 million of accounts receivables recorded by Banamex related to the accounts receivable financing program with Pemex was discovered to be fraudulent.
Citigroup Chief Executive Officer Michael Corbat said in February 20Array4 that the bank was working with Mexican authorities and would find out “who perpetrated this despicable crime.”
However, as per Rabobank and the investors’ complaint, Citigroup was involved in the conspiracy with Oceanografia as the bank accepted false work estimates in spite of knowing that the oil services company was fully dependent on cash advances. Further, investors claimed Citigroup loans supported Oceanografia, while the bank was repaid millions of dollars in interest by Pemex.
Additionally, plaintiffs accused Citigroup of violation of the Racketeer Influenced and Corrupt Organization Act and being involved in fraud while infringing its fiduciary duty. Therefore, they claim compensatory and disciplinary damages.
“Intentional misconduct on the part of Wall Street banks – including Citigroup specifically – is far from unfamiliar,” according to the complaint. “Yet again, greed and dishonesty have victimized blameless businesses and investors.”
As per the complaint, in 2009, Oceanografia’s revenue was $288 million and $70 million in cash advances was provided by Citigroup. Further, by 20Array2, the company recorded $920 million in revenue with $450 million cash advances from the bank. Therefore, these figures reflect rapid acceleration in short-term lending.
Further, the two-step approval process of Oceanografia for at least Array66 cash advance requests were not satisfied by Citigroup, which led to the failure in detecting false documents. Investors claimed, in February 20Array4, Pemex was in discussion with Citigroup regarding cash advances, which revealed Oceanografia’s phony supporting documentation to Citigroup.
With Pemex aware of this scheme, “Citigroup had no choice but to distance itself from and shift blame to Oceanografia including by becoming a whistle-blower and playing the victim,” according to the lawsuit. “However, Citigroup’s efforts to avoid responsibility are transparent.”
“Citigroup, Banamex and Oceanografia knew that Oceanografia would collapse if the cash advance scheme was exposed and Citigroup or Banamex canceled the credit facility,” according to the complaint.
In a separate case, a subpoena has been sent to Citigroup by federal prosecutors among various major banks over the doubt of the bank’s involvement in the FIFA bribery scandal.
As per a Citigroup’s regulatory filing, the bank is in full co-operation with the U.S. Securities and Exchange Commission and the Justice Department along with other regulators over the various ongoing investigations.
Conclusion
Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law-enforcement agencies. Moreover, it reduces the existing litigation burden of banks.
During the financial crisis, many banks resorted to fraudulent practices. Weakness in the economy continues to induce banks like JPMorgan Chase & Co. JPM, The Goldman Sachs Group, Inc. GS and Deutsche Bank AG DB to engage in various misconducts, which eventually lead to nothing but legal fines.
Currently, Citigroup carries a Zacks Rank #4 (Sell).
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