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Citigroup agrees to $590 million mortgage bond settlement

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Citigroup will pay $590 million to shareholders for understating the risks associated with assets backed by subprime mortgages and overstating the value of those assets.

According the U.S. District Court Southern District of New York, the plaintiffs, four former owners of Automated Trading Desk, acquired their Citigroup (C) stock through a merger in which Citigroup purchased ATD in exchange for a mix of cash and Citigroup stock.

The plaintiff’s representatives, Kirby McInerney, accused Citigroup of misleading the plaintiffs on common stock purchased during the financial crisis between Feb. 26, 2007 through April 18, 2008. 

In result, ATD paid an allegedly inflated price and filed a securities fraud action against Citigroup and its officials. According to the ruling today, Citigroup "painted a misleading portrait" of its exposure to a group of collaterolized debt obligations backed by residential mortgage-backed securities. Citi gave investors the impression it would not face large losses on its CDO investment, when it actually faced more than $50 billion in potential losses, the court ruled. Therefore, stock investors overpaid for shares purchased during said period.

The court found the proposed settlement by the plaintiffs to be fair. However, the court noted, "The $590 million recovery is a fraction of the damages that might have been won at trial, it is substantial and reasonable in light of the risks faced if the action proceeded to trial."

Meanwhile, the plan of allocation is still being approved, pending the clarification of how to the purchases are compensated in connection with the settlement.

Earlier this year, Citigroup agreed to pay certain investors in previous bond and stock offerings $730 million in cash to resolve claims that the mega bank misrepresented financial risks from its exposure to mortgage-backed securities.

"Citi is a fundamentally different company today than at the beginning of the financial crisis. We have overhauled risk management and reduced risk exposures, while shedding assets and businesses that are not core to our strategy," Citigroup said.

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