Tags: CITIGROUP | PANDIT | TESTIMONY | BANK | FINANCIAL | LAWSUIT | HEARING

Former Citi Manager's Testimony Helps Accusers

Monday, 12 Apr 2010 10:40 AM

A former Citigroup manager's testimony about the bank's underwriting practices could give ammunition to lawyers suing Citi for erasing shareholder value and misrepresenting the quality of assets it was selling.

Citigroup is the defendant in at least eight different kinds of lawsuits related to the credit crisis, according to its annual report.

At least 29 U.S. class action lawsuits name the bank as a defendant.

All that litigation likely shaped the testimony of current and past Citigroup employees at hearings on Wednesday and Thursday for a commission investigating the causes of the financial crisis, lawyers said.

Generally, Citigroup employees — and former employees — blamed broader, external forces for the bank's meltdown. The exception was Richard Bowen, a former underwriter for the bank, who pointed to numerous problems in his group that exposed Citigroup to billions of dollars of potential losses.

While Citigroup said it addressed Bowen's concerns, stories like his are catnip for plaintiff lawyers like Jacob Zamansky, whose clients are suing Citigroup.

"We're going to use his testimony in our case. I think it will be a significant piece of evidence," Zamansky said.

Zamansky represents retail brokers who worked at Smith Barney, bought Citigroup shares, and lost large sums of money as the bank's shares dropped by more than 90 percent between early 2007 and mid 2009.

Bowen identified the problems to his supervisors, and eventually alerted some of the bank's most senior advisers and executives, including Chief Financial Officer Gary Crittenden and Robert Rubin, a board member and bank adviser.

Bowen's 21-page prepared testimony paints a picture of a risk management culture run amok. In the third quarter of 2006, the risk officer dealing with Bowen's group began approving many loans that would have likely been turned down. Bowen worked with mortgages that Citigroup bought from other lenders and sold to investors, or in some cases held onto.

The bank told investors that the mortgages met Citigroup's underwriting standards, but Bowen found often the loans did not, exposing the bank to the risk that investors would force Citi to buy them back at par.

Bowen worked in banking for more than three decades. In early 2006, he oversaw 220 professional underwriters.

Bowen's testimony and history of complaints could make it harder for Citigroup executives to argue that they were ignorant of potential problems with the bank's loans and other assets, and that the bank was a victim of circumstance, said Stanley Grossman, a plaintiffs' lawyer.

"It's very rare that a company is so compartmentalized that the problems are not known by management," said Grossman, a veteran of securities lawsuits. Citigroup's write-downs and credit losses led it to receive more than $45 billion of government support in 2008 and 2009 in three separate rescues.

Citigroup spokeswoman Shannon Bell wrote in a statement on Wednesday that "The issues raised by Mr. Bowen were promptly and carefully reviewed when he raised them and corrective actions were taken."

What exactly that means is difficult to determine. Bowen complained for well over a year to his supervisors and other bank officials. Bell declined to elaborate on Friday.

A person close to the bank downplayed the importance of Bowen's testimony. He said that the part of Citigroup that underwrote loans often fought with the part of the bank that traded loans, and that each group was often trying to undermine the other, making it difficult for managers to know how much weight to assign complaints.

Current Chief Executive Vikram Pandit has made good progress in smoothing out that relationship, he added.

According to NERA Economic Consulting's database of class-action securities litigation, there are 29 class-action lawsuits in federal courts linked to the financial crisis that name Citigroup as a defendant. The bank is also fending off other lawsuits that are not seeking class-action status, or that were filed in state courts.

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A former Citigroup manager's testimony about the bank's underwriting practices could give ammunition to lawyers suing Citi for erasing shareholder value and misrepresenting the quality of assets it was selling. Citigroup is the defendant in at least eight different kinds...
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2010-40-12
Monday, 12 Apr 2010 10:40 AM
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