No Relief for Citigroup in Risky CDOs Lawsuit - Analyst Blog

As per a report in Bloomberg, legal hassles continue to bother Citigroup Inc. C, as a New York appeals court recently upheld an ongoing lawsuit against the banking behemoth. The case is associated with the sale of faulty mortgage backed securities.

The ruling favored Loreley Financing, a group comprising nine investment firms that had filed the lawsuit way back in Jan 2012. Though these investment firms can proceed with the charge of fraud on Citigroup, they cannot sue the company for undue profit from the sale of collateralized debt obligations (CDOs).

Loreley Financing alleged that Citigroup had sold risky CDOs worth nearly $1 billion which resulted in huge losses for these investment firms. Moreover, Citigroup had the knowledge that these securities were designed to fail. Hence, to secure itself against any potential future losses the bank had purchased credit default swaps against the CDOs.

Despite the odds against it, Citigroup had placed its request to dismiss the case as Loreley Financing was unable to prove that their decision to buy the securities was based on the bank's documents. The appeals court, however, overruled the plea and added that the disclaimer in the bank's document did not specify the risks associated with the CDOs.

A similar ruling had recently favored Basis Capital Funds Management Ltd., an Australian hedge fund. The case was connected to the sale of the The Goldman Sachs Group, Inc.'s GS CDOs also known as Timberwolf and Point Pleasant.

Financial companies including Citigroup, Goldman, Morgan Stanley MS and JPMorgan Chase & Co. JPM continue to pay for their malpractices in the pre-crisis period. Though this weigh against their profitability, it also keeps them cautioned against any further wrong doings in future. This paves the way for a relatively secured investment environment in the upcoming quarters.

Citigroup currently carries a Zacks Rank #3 (Hold).