Terra Securities, Norway Towns Sue Citigroup For Subprime Loss
In David and Goliath fashion, seven small Norwegian villages brought to the brink of bankruptcy are taking on banking giant Citigroup, suing the New York-based company for fraud and misrepresentation of sales tied to high-risk mortgage backed securities. The municipalities, together with the bankruptcy estate of the Norwegian brokerage firm that set up the investments, Terra Securities, are seeking more than $200 million in compensation, after suffering losses on $115 million worth of complex structured financial products known as fund-linked notes, or FLNs.
According to the complaint, Citigroup represented the FLNs as safe, conservative investments. In reality, however, the products were neither. Returns on the notes were linked to the U.S. housing market. When the bottom fell out of that market beginning in the summer of 2007, the value of the FLNs plummeted, causing the municipalities to lose tens of millions of dollars. By May 2008, substantially all of their original investment had evaporated and Terra Securities was in bankruptcy.
The lawsuit also contends Citigroup’s marketing materials contained misleading statistics that concealed from both Terra Securities and the municipalities the inherent risk factors associated with the fund-linked notes. Moreover, the group says Citigroup directed Terra Securities to present the deceptive materials to the municipalities.
“Clearly, as credit markets began to deteriorate, Citigroup sold the FLNs to Terra and the municipalities in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheet,” the lawsuit says.
The seven towns involved in the lawsuit lost some $90 million as a result of their investment with Citigroup, while Terra’s shareholders lost their entire stake.
Today, several of the Norwegian towns that invested in the FLNs are facing severe cutbacks of public services, including schooling and care for the elderly.
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