The financial crisis in the late 2000s was hell for the equity markets. Even businesses with limited exposure to the toxic mortgage-backed securities that were at the heart of the matter suffered enormous losses — the S&P 500 lost more than 40 percent of its value between February 2008 and February 2009. Very few companies emerged from the crisis without deep scars in their stock charts.
But financial companies with exposure to or holdings of assets backed by subprime mortgages were the hardest hit. For example, between February 2008 and 2009, Bank of America (NYSE:BAC) stock fell more than 85 percent, and shares of Citigroup (NYSE:C) fell more than 87 percent. Banks with less exposure, like JPMorgan (NYSE:JPM), glided through the crisis with relatively little damage — just about 40 percent for the same period.
While every major financial institution has received some sort of legal flak for its involvement in the high-risk financial markets ahead of and during the crisis, a few have been singled out by shareholders for allegedly misleading investors about the risks and the value of assets ahead of the crisis.
“Plaintiffs allege that Citigroup misled investors by understating the risks associated with assets backed by subprime mortgages and overstating the value of those assets,” begins an opinion written by U.S. District Judge Sidney Stein. “As a result, all those who purchased Citigroup common stock between February 26, 2007 and April 18, 2008 paid an allegedly inflated price.”
Citigroup stock declined by more than 52 percent over this period, falling from a high of about $550 to a low of about $186. During the beginning part of this period — from February 26, 2007, to November 4, 2007 — Citigroup allegedly “gave the impression that [it] had minimal, if any, exposure to CDOs when, in fact, it had more than $50 billion in exposure.”
These CDOs — collateralized debt obligations — were largely compiled from residential mortgage-backed securities. Citigroup allegedly failed to not only disclose the risks associated with the CDOs but overstated their value, leading the markets to overvalue the company’s assets, then overvalue the company, and through that overvalue the company’s stock.
“Class members, purchasing based on the market price, thus paid too much for the Citigroup stock they purchased, and so plaintiffs claim as damages the amount by which they allegedly overpaid,” Stein wrote in his Southern District of New York court opinion.
The case in its current form took shape in August 2008, when the court consolidated a number of different complaints against Citigroup that all alleged effectively the same thing. After a long legal battle, the settlement has finally come.
“The parties have now reached a settlement of their dispute for $590 million to be paid to the class,” Stein wrote. “The Court must determine whether that settlement is fair, reasonable, and adequate.”
With a nebulous liability quantified, Citigroup stock climbed 1.4 percent the day the news was released.
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