Italian Bank, Banca Carige SpA (CRG.MI), is the latest to join a parade of companies suing Citigroup (NYSE:C) and other giant financial institutions over swaps.
In this case – concerning a total return swap – Citigroup is accused of misrepresenting the amount of risk related to the security, which Banca Carige says didn’t allow them to accurately measure the possibility of failure of the instrument.
According to the lawsuit, “The plaintiffs, a bank and its subsidiary insurance companies, had no interest in risky or speculative investments and were looking only to obtain good, consistent returns with as little risk as possible.”
How the deal worked was Citigroup has sold a EUR10 million fund-linked note to a couple of insurance companies which were subsidiaries of Banca Carige and then participated in a EUR25 million fund-linked total return swap with Banca Carige, which the Italian bank reiterated in the lawsuit that Citigroup said was a low-risk investment for them.
The actual underlying investment linked to the swap isn’t the specific issue in the lawsuit, which entailed a tender option bond investment fund which was said to have consistent returns in relationship to municipal bonds which could the bank could take an arbitrage position in, rather it was the hedging strategy surrounding those securities which is the reason for the lawsuit.
Banca Carige and its two subsidiaries are seeking a minimum of $47 million in damages from Citigroup. Citigroup said they will defend themselves “vigorously” in the case, and there is no merit to the claims made by their opponents.
