OSLO -- Seven Norwegian towns, some clustered around the Arctic Circle, have sued US banking giant Citigroup for more than 200 million dollars of losses plus damages linked to the sub-prime mortgage crisis, their lawyer said Tuesday.
The lawsuit was filed in a New York court after the provincial outposts, the largest of which has a population of just 33,000, were brought to the brink of bankruptcy by what they claim was misleading selling of complex and high-risk mortgage-backed investments.
Together with the bankruptcy estate of now-defunct Norwegian brokerage firm Terra Securities that set up the investments, local leaders of the seven -- Bremanger, Hattfjelldal, Hemnes, Kvinesdal, Narvik, Rana and Vik -- are seeking 141 million euros in compensation as well as punitive damages.
In some of the towns, services including schooling, care for the elderly and even a municipal pool in the frozen north of Scandinavia have all been cut, according to reports citing local leaders.
Citigroup has described the allegations as unfounded, spokesman Adam Castellani in the United States telling Dow Jones Newswires that the company "believes this lawsuit to be without merit."
"We are confident the risks of investing in the notes were described in the materials provided to Terra Securities," he added.
In a compelling morality tale which amplifies the acheing human cost of the global financial crisis -- and the rush among ordinary people to share in vast profits generated at the height of the post-millennium financial services boom -- the debacle began when the towns grew impatient with making modest investment profits.
Hoping to make huge gains, the towns then began investing in complex financial products linked to the US mortgage market which were created by Citigroup.
At first, the value of the investments soared, but returns soon crumbled as the bottom fell out of the US subprime housing market -- while a clause in the agreement forced the towns to keep pumping in more money.
"In May and June 2007, Citigroup marketed and sold over 115 million dollars in so-called 'fund-linked notes' (FLNs) to the municipalities through Terra by representing that the FLNs were safe, conservative investments," according to a copy of the suit posted online by Norwegian law firm Selmer.
"However, in fact, the FLNs were neither safe nor conservative: within a few weeks, and as a result of those sales, the municipalities had lost tens of millions of dollars, and by May 2008, substantially all of their original investment was gone and Terra was in bankruptcy," it said.
According to Selmer, "Citigroup's representations were false and misleading and failed to include material information necessary for Terra and the municipalities to assess the true risk of the FLNs.
"Clearly, as credit markets began to deteriorate, Citigroup sold the FLNs to Terra and the municipalities in order to unload what was becoming significant risk from either its own or its preferred customers's balance sheet," the lawsuit said.
The seven towns claim they lost a total of 541 million kroner (87.2 million dollars, 61 million euros at today's exchange rate), while Terra's shareholders lost their entire stakes.
Terra, which had its license withdrawn by financial authorities and immediately declared bankruptcy, was valued at 1.46 billion kroner (165 million euros, 233 million dollars), according to an estimate presented by the plaintiffs.
Making matters worse, some of the towns borrowed money to make their investments. When their losses became a fact, they had no choice but to cut back on local services.
"We emptied the municipal pool, closed a middle school, cut services to the elderly, and infrastructures suffered," the mayor of Vik, Marta Finden Halset, told the online edition of financial daily Dagens Naeringsliv.
"Now we hope to get our money back," she said.
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