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From Securities Regulation Daily, August 2, 2013

Court approves $590 million settlement in action alleging concealment of CDO risks

By Rodney F. Tonkovic, J.D.

The U.S. District Court for the Southern District of New York approved a settlement and plan of allocation in a securities fraud action against Citigroup, Inc. While the $590 million settlement was just “a fraction of the damages that might have been won at trial,” the court stated, the amount was still “substantial and reasonable in light of the risks faced if the action proceeded to trial.” The court also awarded the lead counsel attorney fees, but in a lower amount than requested (In re Citigroup Inc. Securities Litigation, August 1, 2013, Stein, S.).

Background. The plaintiffs brought this suit on behalf of purchasers of Citigroup common stock between February 26, 2007 and April 18, 2008. According to the complaint, Citigroup misled investors by understating the risks associated with collateralized debt obligations (CDO) backed by residential mortgage backed securities (RMBS). The investors charged Citigroup with making public statements in 2007 that gave the impression that it had minimal exposure to CDOs and was relatively safe from the market’s concerns about falling CDO values. Citigroup, however, had more the $50 billion in exposure to CDOs.

In November 2007, Citigroup disclosed that it held $43 billion in CDOs. The investors asserted that Citigroup left out another $10.5 billion in hedged CDOs and overstated the CDOs’ value, continuing to do so until a final corrective disclosure in April 2008. The investors contended that as a result, Citigroup common stock was overvalued and claimed as damages the amount by which they allegedly overpaid.

The parties entered into settlement negotiations in early 2012, after voluminous discovery concerning class certification and the merits of the CDO-based claims. The details of the settlement were eventually finalized and the parties entered into a Stipulation and Agreement of Settlement. In August 2012, the court preliminarily approved the proposed settlement, certified the class for settlement purposes, appointed the proposed representatives as class representatives and appointed Kirby McInerney LLP as lead counsel for the class.

Settlement approved. The court approved the proposed settlement after finding it to be fair, reasonable and adequate. The court first found that the settlement was procedurally fair, as it was negotiated at arm’s length by the parties. The court then concluded that the substantive terms of the settlement supported the presumption of fairness arising from the arm’s length negotiations. The court considered the nine factors set forth by the 2nd Circuit in City of Detroit v. Grinnell Corp. and found that nearly all of the factors strongly supported approval, noting in particular the “truly impressive recovery.”

At this point the court noted that the Citigroup executives allegedly responsible for Citigroup’s wrongs will pay nothing. The court was concerned that this was no deterrent for the executives and, moreover, that Citigroup’s shareholders would be stuck with the bill, but stated that the Rule 23 settlement approval process did not provide an opportunity for the court to consider how the settlement amount was allocated among the defendants. Having said that, the court concluded that “nearly every traditional indicator of a settlement’s fairness points in favor of approval of this settlement” and granted the motion to approve the settlement.

Allocation. The court then approved the plan of allocation, finding that the basis for the plan was rational and that the plan itself was fair and adequate. The allocation plan was based on the estimated drop in price following each corrective disclosure that was attributable to revelation of the misstatements and omissions. The court interpreted this plan to apply to a group of objectors who purchased Citigroup stock through an employee stock–purchase plan, in which shares were awarded in semi–annual blocks, because their monthly plan activities were affected by the fraud.

Attorney fees. Next, the court concluded that the lead counsel was entitled to a fee award, but in a lower amount than requested. The counsel requested $97.5 million in attorney fees, which is approximately 16.5 percent of the settlement fund. The court remarked that the lead counsel secured an impressive recovery and that the Goldberger factors supported a substantial fee, but the proposed lodestar was “significantly overstated.”

The lead counsel’s proposed lodestar was $51.4 million. From this, the court cut $7.5 million in post–settlement discovery work, $4 million of another firm’s work before joining the lead counsel, and $12 million based on the reasonable hourly rate for all remaining contract attorney work. The court then cut another $2.8 million for waste and inefficiency, leaving a lodestar of $25.1 million.

Using the lodestar as a cross-check on the requested fee, the court concluded that a significant multiplier was justified here, but not one as high as the 3.9 multiplier based on the reduced lodestar calculated by the court. Using a “high, but not excessive” multiplier of 2.8, the court determined that a reasonable fee here would be 12 percent of the $590 million common fund, or $70.8 million dollars.

This is case No. 09 MD 2070 (SHS).

Attorneys: Bradley Syfrett Odom (Odom & Barlow P.A.) and Martin Bruce Sipple (Ausley & McMullen, P.A.) for Wendy Mackey and Sandra Stewart. Daniel Brecher pro se. Victor H. Polk , Jr. (Greenberg Traurig LLP ) for Citigroup Global Markets, Inc. Michael B. Cosent (Seegel, Lipshutz & Wilchins, P.C) for Leslie G Shumsker.

Companies: Citigroup Global Markets, Inc.

MainStory: TopStory Enforcement FraudManipulation NewYorkNews

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