* Manhattan federal judge asks if pact has deterrent effect
* Judge questions proposed fees for plaintiffs' lawyers
* Pact resolves lawsuit over exposure to toxic mortgage
By Nate Raymond
NEW YORK, April 8 A federal judge grilled
lawyers for Citigroup Inc and shareholders on Monday over
a proposed $590 million settlement of an investor lawsuit over
its exposure to toxic mortgage assets, asking if the accord was
fair given none of the bank executives named as defendants would
contribute money to it.
U.S. District Judge Sidney Stein in Manhattan said that
Citigroup's current shareholders have been left to pay for the
settlement under the current terms of the agreement. He said he
was concerned about the impact on future bank conduct, citing
the lack of any planned payments by individual defendants
including former Chief Executive Charles Prince.
"Should the plaintiffs not also be concerned with deterrence
as an issue in the settlement?" Stein asked.
At a three-hour hearing, Stein also asked questions related
to the settlement's allocation plan and whether he should award
plaintiffs' lawyers around $100 million in fees and expenses.
The judge held off on ruling on the settlement or fee request.
The hearing marked the latest instance of a judge
questioning the fairness of litigation settlements with large
Citigroup is separately waiting for an appeals court to
decide whether U.S. District Judge Jed Rakoff properly rejected
a $285 million settlement with the U.S. Securities and Exchange
In March, U.S. District Judge Victor Marrero in Manhattan
cited the SEC's pending Citigroup appeal in holding off on
approving the commission's $602 million insider trading
settlement with a unit of Steven Cohen's hedge fund SAC Capital
If approved, class action settlement with Citigroup would
resolve claims by shareholders from February 2007 to April 2008
that the bank misrepresented its exposure to securities known as
collateralized debt obligations that were tied to mortgage
investments. The settlement was announced last August.
The New York-based bank lost $27.68 billion in 2008. The
company's stock price plunged from $47.89 at the start of the
fourth quarter of 2007 to $2.80 by January 2009, the complaint
Under the accord, Citigroup is paying the full $590 million.
In an April 1 order, Stein asked whether the absence of any
payments from Prince and other individual defendants makes the
Ira Press, a lawyer for the plaintiffs at law firm Kirby
McInerney, said his job was to get the most money possible for
Corporate defendants such as banks also typically have
indemnification agreements with their officers, he said, meaning
Citigroup would have wound up paying for any settlements with
individual defendants anyhow.
"It'd have the same impact on Citi shareholders," Press
Richard Rosen, a lawyer for Citigroup, told the judge that
the U.S. Securities and Exchange Commission rather than
plaintiffs' lawyers properly has the role of bringing
enforcement actions against individuals to deter future
Current Citigroup shareholders also have an interest in
reaching a settlement to avoid a trial where damages could be in
the "tens of billions of dollars," Rosen said.
The judge also reviewed a request by plaintiffs' lawyers for
an award of $97.4 million in fees plus $2.8 million in expenses
in the case. The fee request would amount to about 16.5 percent
of the total settlement.
The proposed fees have drawn the objection of a prominent
class-action reform activist, Ted Frank, who criticized what he
called excessive rates billed by contract attorneys hired by the
Contract attorneys billed an average of $465 an hour on the
case, and their work reflected more than half of the amount the
plaintiffs submitted to support their request, according to
Frank told the judge the majority of corporate clients pay
less than $70 an hour for temporary contract attorneys.
Press said even if all the time for the document review work
by the contract attorneys was excluded, the firm's request for a
percentage of the settlement remained reasonable.
The case is In re: Citigroup Inc Securities Litigation, U.S.
District Court, Southern District of New York, No. 07-09901.