ADIA Arbitration Resurfaces for Citigroup - Analyst Blog
) litigation woes continue to increase. Recently, a U.S. judge
rejected the banking giant's bid to obstruct the Abu Dhabi
Investment Authority (ADIA) from seeking a second arbitration
related to the wealth fund's investment in Citigroup.
In Nov 2007, ADIA invested $7.5 billion in Citigroup, which made it the U.S. bank's largest individual stakeholder - with 4.9% stake. ADIA's investment provided a capital cushion to the bank after the latter suffered mortgage losses during the financial crisis.
The deal sanctioned the conversion of ADIA's investment into Citigroup common shares during the period of Mar 2010 to Sep 2011. The valuation of the shares was to range from $31.83 to $37.24, depending on the stock's market price during the period of conversion.
However, in 2009, ADIA filed for arbitration and demanded compensation of $4 billion. It alleged that Citigroup's issuance of preferred stock to other investors and the later conversion to common stock resulted in dilution of its stake. In 2011, an arbitration panel rejected ADIA's claims, which was confirmed by a U.S. judge in Mar 2013.
In August this year, ADIA again filed for arbitration. The sovereign wealth fund sought $2 billion for damages. ADIA accused Citigroup for breach of contract. Citigroup attempted to block the second arbitration by ADIA as it challenged the former ruling.
However, the U.S. District Court in Manhattan declared that judges did not have the authority to prevent ADIA from seeking a second arbitration simply because its former arbitration against Citigroup was turned down.
We believe, the aforementioned ruling will compound Citigroup's legal hassles and result in elevated legal expenses for the bank in the near term. Citigroup has recently been troubled by mounting litigation expenses. In Sep 2013, the bank announced a settlement with Freddie Mac ( FMCC ) worth about $395 million. Prior to this settlement, in Jul 2013, Citigroup announced the settlement of a lawsuit filed by Fannie Mae ( FNMA ) related to the similar issue, amounting to $968 million.
Citigroup currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the financial sector includes KeyCorp. ( KEY ), which carries a Zacks Rank #2 (Buy).
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