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Citigroup settles with shareholders who accused the bank of hiding its subprime exposure during financial crisis

Citigroup is to pay $590 million to settle the claims of a group of shareholders that accused the bank of hiding its exposure to the subprime lending markets during the 2008 financial crisis.30 Aug 2012

The bank said that the payment would enable it to "put this matter behind us"; however, in a statement it continued to deny allegations that it had "fraudulently misled" its shareholders through "misstatements and omissions" as part of its corporate disclosures during the financial crisis.

"Citi is fundamentally a different company today than at the beginning of the financial crisis," the bank said in a statement. "Citi has overhauled risk management, reduced risk exposures and through our core businesses in Citicorp, we are focussed on the basics of banking, leveraging our unique presence throughout the emerging and developed markets to serve our clients and the real economy."

The cost to the bank of the settlement, which has been provisionally approved by the New York District Court where the class action is pending, will be met by "existing litigation reserves", the bank said. A final decision on whether the settlement is "fair, reasonable and adequate, and in the best interests of [the shareholders]" will be taken in January 2013, according to court papers (50-page / 3.5MB PDF).

The action was brought by investors who held shares in the bank between 26 February 2007 and 18 April 2008. Shareholders allege that former senior officers and directors with the bank "materially misrepresented" the extent to which the bank was exposed to collateralised debt obligations (CDOs), as well as the value of those CDOs, in their representations to their shareholders. By holding this information back, the shareholders claim, the price of shares in Citigroup plunged further than they otherwise would have done when the information was eventually disclosed to the public.

CDOs are a type of asset-backed security offering varying degrees of risk. Their increasing popularity among investment banks in the years running up to the financial crisis enabled smaller banks and brokers to make 'subprime' mortgages available to people more likely to have difficulty maintaining their agreed repayment schedule.

The settlement is one of the biggest payouts to date connected with the global financial crisis, according to the BBC. The bank ultimately lost $27.7 billion, it said, and its shares are currently valued at around a tenth of their price before the 2008 crash. Wells Fargo and Bank of America have already settled similar claims.