Citigroup Inc. (C) and its Chief Executive Vikram Pandit can breathe a sigh of relief now after winning the dismissal of a lawsuit that indicted them for not disclosing its risk during the financial meltdown in 2008, according to a Reuters report.
The Allegation
The lawsuit filed by Sheldon Solow, a New York real estate developer, alleged Citigroup for his losses, which he claimed to be of 87% over a $510,000 investment in 40,000 Citigroup shares. The shares were purchased between September and November 2008 and sold in March 2009.
The lawsuit accused Citigroup of hiding its risk profile during the financial crisis in 2008. The company was indicted for overstating its financial condition and is said to have even hyped its solid capital levels as well as liquidity position.
At that time, Citigroup was even contending to buy Wachovia Corp but Wells Fargo & Co. (WFC) made its way and was ultimately successful in acquiring the business. Citigroup finally made a quick move towards the federal bailout through which it infused $20 billion of new capital in its business.
Notably, on a nationwide basis, share and bondholders of Citigroup have brought forward litigation over the company’s revelations related to its risky mortgage debt exposures. However, the Solow lawsuit is different from that.
The Dismissal
The lawsuit was discharged by U.S. District Judge Robert Sweet in Manhattan. According to Sweet, Solow could not prove that he was significantly hoodwinked about the company’s liquidity as well as capital position by the defendants. He also failed to relate such accused suppressions of risks to the fall of the company’s stock price. In fact, he could not prove that his loss was a result of the realization of such risks.
Notably, Solow was given the option to replead, following the discharge of the earlier complaint. However, this time, the discharge is made “with prejudice” implying that the suit cannot be placed another time. Sweet concluded that the liquidity crisis of Citigroup was a result of the lack of confidence in the company instead of the realization of risk that the company is accused of hiding.
Our Take
We believe that this dismissal provides a sort of relief for Citigroup. However, considering the several litigations that the company is involved in, we cannot say that it has achieved a substantial reduction in litigation overhang. Yet, we believe that a prudent fight on behalf of Citigroup by its lawyers would help in dismissing some of the suits and help in checking fund outflows as damages.
Citigroup shares currently retain a Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
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