The phenomenon of large institutional investors electing to pursue their own claims was a characteristic of many of the lawsuits arising from the corporate scandals during the last decade. Though these kinds of cases had seemed to have died down for a while, the New York lawsuit against Merrill and the Norges suit suggest that the individual lawsuits may be back – and that large institutional investors may be considering them in preference to class actions.
Norway's central bank has sued Citigroup Inc. over alleged misstatements about the company's financial condition during a two-year period leading up to and during the global financial crisis, and which it claims caused it to buy Citi shares at inflated prices.
Norges Bank claims that it lost more than $735 million on its investments in Citigroup common stock and more than $100 million on its investments in Citi bonds and preferred shares. The stocks and bonds were purchased between January 2007 and January 2009, according to the lawsuit.
The lawsuit, filed in Manhattan federal court Sept. 17, alleges that Citi made a series of misstatements about its financial health, particularly its exposure to subprime mortgages and other toxic assets.
Norges Bank isn't the first to say Citi made misleading statements about its exposure risky subprime assets. In July, Citi settled such claims brought against it by the Securities and Exchange Commission. U.S. District Judge Ellen Segal Huvelle previously raised concerns about that $75 million settlement, though she said Friday she would sign off on it after both sides agreed to add changes to the bank's disclosure policies.
The Abu Dhabi Investment Authority is another investor trying to recoup losses. It is seeking arbitration over its November 2007 investment of $7.5 billion in mandatory convertible notes, which could lead to billions in losses for the Middle Eastern investor.
The Norges bank lawsuit alleges Citi "made numerous untrue statements to investors" about the risk of its loans and subprime-related securities. It "did not disclose Citi's full exposure to subprime-related risk, and did not take write-downs in a timely manner that reflected the deteriorating value of those assets. Thus, throughout the Relevant Period, Citi's earnings and capital position were continually overstated because they did not take into account the degree of loss Citi would incur as a result of declining market conditions."
Like the SEC, the Norges Bank lawsuit said Citi's financial statements valued the bank's subprime securitized asset exposure at $24 billion at the beginning of 2007. "It was not until Nov. 4, 2007 that Citi revealed an additional $43 billion in CDO-related exposures, and yet another $10.5 billion came to light in January 2008," the lawsuit said. It alleges that Citi made "made untrue statements of material fact and omitted to state material facts."
Norwegian bank's lawsuit also alleges that Citi violated various accounting rules, including when it reduced its reserve for loan losses as a percentage of loans in 2006 and 2007, and that it overstated the value of mortgage-related securities. The amount banks keep in reserve is a contentious issue. The suit also says Citi "overstated its capital adequacy."
Norges Bank, through its investment arm, manages about $443 billion in assets on behalf of Norway's finance ministry. Last year, seven Norwegian municipalities and the bankruptcy estate of Terra Securities ASA sued Citigroup over the sale of more than $115 million in derivatives in 2007, claiming the notes were misrepresented as safe, conservative investments. That lawsuit is pending.
There are a number of interesting aspects to this case. The first is that the bank concluded that notwithstanding the existence of the shareholder class action lawsuit, its interests were better served by proceeding separately from the class. The other thing about the lawsuit is the sheer size of the claimed losses – its losses alone are far greater than the collective investor losses in most securities class action lawsuits.
The massive size of Norges’s claimed losses explains its desire to pursue litigation, but the initiation of a separate suit can only be explained either by Norges’s assumption that it will fare better separately than within the class, or perhaps that it will pay lower fees – or perhaps both.
The magnitude of Norges Bank’s claimed losses may be sufficiently unusual to raise a question whether there may be other investors similarly motivate to pursue separate lawsuits – there simply are going to be few individual investors in few circumstance with losses of that magnitude. Of course, there is always the possibility of smaller investors with smaller losses getting into the act, which they might do if they too believe they will fare better separately rather than within the class.
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