A Manhattan federal judge on Monday signaled he will not rubber-stamp Citigroup Inc.’s proposed $590 million settlement of a shareholder lawsuit accusing it of hiding tens of billions of dollars of toxic mortgage assets.
U.S. District Judge Sidney Stein asked lawyers for the bank and its shareholders to address several issues at an April 8 fairness hearing, including requested legal fees and expenses of roughly $100 million, and the absence of payments by former Citigroup executives.
Citigroup spokesman Mark Costiglio declined to comment. Peter Linden, a partner at the law firm Kirby McInerney who represents the shareholders, did not immediately respond to requests for comment.
Stein joined other judges in recent years to question the fairness of large legal settlements in the financial industry.
Citigroup awaits a decision from the federal appeals court in New York on whether Stein’s colleague Jed Rakoff properly rejected a $285 million settlement with the U.S. Securities and Exchange Commission over the alleged defrauding of investors.
On Thursday, U.S. District Judge Victor Marrero in Manhattan cited that case in delaying a decision to approve the SEC’s $602 million insider trading settlement with a unit of Steven Cohen’s hedge fund SAC Capital Advisors LP.
The $590 million settlement resolved claims by Citigroup shareholders from Feb. 26, 2007 to April 18, 2008 that the bank failed in those years to properly write down risky debt, often backed by subprime mortgages, and concealed the risks.
Citigroup lost $27.68 billion in 2008, and by March 2009 its market value had sunk roughly $250 billion from the start of the class period. The shareholder settlement is separate from a $730 million accord with bondholders last month.
According to court papers, the shareholder settlement also resolved claims against several former top Citigroup officials, including Chief Executive Charles Prince and senior adviser Robert Rubin. Stein asked whether this was proper.
“Does the absence of any payments from the individual defendants render the settlement unfair to class members who still hold the Citigroup stock they purchased during the class period?” he asked both sides to address.
Stein also asked for more information, including how much a reasonable client would pay to justify fees for lead counsel and other lawyers equal to 16.5 percent of the settlement amount, or about $97.4 million, plus $2.8 million for expenses.
The judge asked both sides to address questions about how settlement funds would be allocated.
Lead plaintiffs included several former employees and directors of Automated Trading Desk Inc., which Citigroup bought in October 2007 for about $680 million.
The case is In re: Citigroup Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 07-09901.