Stephen Gray, a participant in the financial giant’s 401(k) plans, made the allegation of a fiduciary breach under the Employee Retirement Income Security Act (ERISA) in a federal court lawsuit filed by New York law firm Wolf Popper.
The suit, which included a request to be certified as a class action, featured an allegation that the decline in the company’s share price during 2007 represented a loss of more than $1.3 billion in the plans’ assets.
According to the suit, the share price dropped from $54.26 in June 2007 to $37.73 last week with the Citigroup 401(k) Plan holding $4.13 billion in company stock – 32% of the plan’s assets – as of December 31, 2006.
Among other things, Gray’s 51-page suit accuses the company of:
- Participating in the formation and management of off-balance sheet structured investment vehicles “without disclosing Citigroup’s contingent liabilities or risks entitled therein,”
- Causing the structured investment vehicles to issue billions of dollars worth of commercial paper and short-term loans based on false and misleading statements,
- Marketing and extending subprime loans made on a “low documentation” basis without adequate consideration of the borrower’s ability to pay and “with unreasonably high risk of borrower default, ” and
- Operating without the requisite internal controls to determine appropriate loan loss provisions.
“In short,” Gray alleged in the suit, “the company was seriously mismanaged and faced a dire financial crisis due to such mismanagement, which rendered company stock an imprudent investment.”
According to the suit, filed in the U.S. District Court for the Southern District of New York, chief among the non-disclosed information was the extent of the losses facing the company.
“By at least January 2007, Citigroup became aware of an extraordinary increase in the default of its subprime loans and the heavy losses which the company would inevitably recognize,” the suit charged. “Despite these troubles, Citigroup failed to disclose its subprime loss exposure. Instead, the company slowly revealed its losses and loss exposure (since the beginning of 2007) to blunt the impact and mask the depth and breadth of the crisis.”
Gray's suit also includes an allegation oft-heard in ERISA stock-drop cases: the company continued to push the company stock shares as a smart investment for participants.
"Despite the defendants' knowledge of Citigroup's risky business practices (since the beginning of 2007), the company fostered a positive attitude toward Citigroup as a plan investment," the complaint said. "Management touted strong company performance and stock benefits. Employees continually heard positive news about Citigroup's growth, were led to believe that Citigroup stock was a good investment and that the plans were prudently managed."
In addition to the company, the plans' administrative and investment committees and unnamed Citi executives, the complaint also names as a defendant Charles Prince, who resigned as chairman and chief executive on Sunday.
Citigroup has named Sir Win Bischoff, head of its European operations, as interim CEO and former Treasury Secretary Robert Rubin as interim chairman.
The company has said it will write off between $8 billion and $11 billion to reflect declines in the value of its subprime-mortgage-related securities since September 30.
"We are currently reviewing the complaint, but at this time we believe it is without merit and plan to vigorously defend Citi's actions," said Mike Hanretta, a Citigroup spokesman, in a statement released to the Associated Press.
The case has been assigned to U.S. District Judge Sidney H. Stein. The complaint is here .