Securities Fraud Action Against Citigroup

Complaint alleges fraud and misrepresentation in sale of risky derivative securities to small towns and villages in Norway

OSLO, Aug. 11 - The Bankruptcy Estate of Terra Securities ASA and seven Norwegian municipalities commenced an action yesterday in New York seeking over $200 million from Citigroup for violations of the United States securities laws. The lawsuit contends that Citigroup misled Terra and the municipalities in 2007 and thereby induced the municipalities into purchasing notes linked to a "tender option bond," or TOB, fund purportedly managed by Citigroup. TOB funds involve leveraged investments in United States municipal bonds. Ultimately, the municipalities lost approximately $90 million to Citigroup, and Terra, a Norwegian securities firm, suffered additional losses when it was forced into bankruptcy.


The case was filed in the United States District Court for the Southern District of New York and names as defendants Citigroup, Inc., Citigroup Global Markets, Inc. and Citigroup Alternative Investments LLC. Kasowitz, Benson, Torres & Friedman LLP represents Terra and the Norwegian municipalities of Bremanger, Hattfjelldal, Hemnes, Kvinesdal, Narvik, Rana and Vik.


"Citigroup's marketing materials contained misleading statistics that concealed from both Terra and the municipalities the significant risk inherent in the fund-linked notes," said Jon Skjorshammer, the court-appointed administrator of Terra from the Norwegian law firm Selmer & Co. "Moreover, Citigroup specifically directed Terra to present these deceptive materials to the municipalities. We believe we have substantial claims against these defendants, and we intend to pursue them fully."


According to the lawsuit, Citigroup, through Terra, marketed and sold to the municipalities over $115 million in notes linked to the TOB fund in May and June 2007. In deciding to purchase the notes, the municipalities contend they relied on Citigroup's solicitation materials, which allegedly contained statistical data that falsely represented the TOB fund was properly hedged against volatility when in fact it was not. By August 2007, the value of the TOB fund was falling, and in September 2007, the municipalities were required to post additional collateral. As a result of Citigroup's misrepresentations, the municipalities lost most of their original investment by May 2008, and Terra filed for bankruptcy in November 2007.


The lawsuit contends that the deceptive materials provided to Terra for presentation to the municipalities were prepared in New York by Citigroup Global Markets and Citigroup Alternative Investments. The materials and their general disclaimers made no adequate reference to the significant credit risk underlying the fund's strategy, presenting it instead as a low-risk arbitrage opportunity, according to the lawsuit.