An Italian Bank Files a $47 Million Fraud Suit Against Citigroup


Just a few days after the Securities and Exchange Commission filed fraud charges against Goldman Sachs (GS), an accusation is being leveled at Citigroup (C). Italian bank Banca Carige and two of its insurance subsidiaries have filed suit against Citi for fraud, alleging that the investment bank misrepresented the risks associated with a fund-linked "total return swap." The Italian bank is seeking $47 million in damages, according to the report.

The complaint was filed in the U.S. District Court in Manhattan. Banca Carige is a small Genova, Italy-based chain of retail banks, which operates roughly 640 locations, mostly in Liguria. Last month, it posted a full-year 2009 profit of 205.4 million euro (about $276 million), roughly flat with 2008.

The total return swaps in question allow one bank to take on the costs (including interest and capital gains) of an asset owned by another bank, while reaping the returns associated with it. The transaction is attractive to a bank that wants an asset's financial upside without actually carrying it on its books.

Bait and Switch?

The risk is that if the value of the asset declines, the so-called receiver bank (the one that keeps the returns) is also on the hook to pay the owner of the asset for the decline in valuation.

Banca Carige claims that in this case, the value of its original investment had essentially evaporated by December 2009.

In January 2007, when Banca Carige reportedly entered the 25 million euro transaction (roughly $33 million) , it says it was told the investment was "safe and conservative." The fund supposedly generated reliable returns through an arbitrage opportunity with municipal bonds. Instead, Banca Carige alleges, the fund depended on a high-risk hedging strategy.

A Citigroup spokesperson responded by email that the company "believes these claims are without merit and we will defend ourselves vigorously." Shares of Citigroup were most recently up 12 cents, or 2.4%, at $5 on the New York Stock Exchange.