NEW YORK A federal judge has approved a settlement in which Citigroup Inc agreed to pay bondholders $730 million to resolve claims that the bank concealed its exposure to billions of dollars of toxic mortgage assets prior to the financial crisis.
U.S. District Judge Sidney Stein in Manhattan approved the settlement on Tuesday, less than three weeks after approving a similar $590 million settlement for Citigroup shareholders.
Lawyers for the bondholders have said the latest settlement is the second-largest recovery in securities class-action litigation ever brought on behalf of bond investors.
The settlement resolves claims by investors who bought Citigroup bonds and preferred stock in 48 offerings between May 2006 and August 2008, in which the bank raised more than $71 billion, court papers show.
They accused Citigroup of downplaying its exposure to roughly $166 billion of collateralized debt obligations and structured investment vehicles backed by risky assets such as subprime mortgages, overstating the credit quality of those assets and understating its reserves to offset loan losses.
Stein said the settlement was fair, reasonable and adequate, even though the bondholders might otherwise have deserved more.
"Certainly, the settlement does not represent the best possible recovery for plaintiffs; their damages experts estimate that to be approximately $3 billion," he wrote.
"Nevertheless, a recovery of $730 million represents a substantial sum, and the risk that the class would recover nothing or would recover a fraction of the maximum possible recovery must factor into the decision-making," he added.
The New York-based bank denied wrongdoing in agreeing to settle. "Citi is pleased to put this matter behind us," said Citigroup spokesman Mark Costiglio.
Steven Singer, a partner at Bernstein Litowitz Berger & Grossmann representing the bondholders, also said he is pleased that the court approved the settlement.
The third-largest U.S. bank lost $27.68 billion in 2008, and obtained three federal bailouts as its market value plummeted by more than $250 billion, with its share price bottoming out at 97 cents in March 2009, prior to a reverse stock split.
Citigroup has returned to profitability, after Chief Executive Michael Corbat and his predecessor Vikram Pandit shed money-losing assets, scaled back in slower-growing markets and reduced the bank's risk taking.
Stein has yet to rule on the request by the bondholders' lawyers for a fee of 20 percent of the settlement amount, or $146 million. Lawyers in the shareholder case were awarded $73.6 million, less than the $100.2 million they had sought.
The case is In re: Citigroup Inc Bond Litigation, U.S. District Court, Southern District of New York, No. 08-09522.
(Reporting by Jonathan Stempel in New York; editing by Gerald E. McCormick, G Crosse)