(Photo: Reuters)
(Photo: Reuters)

A US judge refused to give the greenlight on Citigroup's proposed $590m settlement, for shareholders claiming that the bank hid billions of dollars of toxic mortgage assets, after questioning the fairness of the legal fees and settlement allocation.

US Manhattan Federal Judge Sidney Stein forced the third-largest US bank and a group of shareholders to revisit the components of the settlement, including requested legal fees, expenses and how the settlement fund would be allocated, before signing off on the proposal at a fairness hearing scheduled for 8 April.

Judge Stein asked both sides to address questions about how settlement funds would be allocated and for more information over how much a reasonable client would pay to justify fees for lead counsel and how expenses being claimed are generated.

The lawsuit was originally filed on 8 November 2007 by a number of former employees and directors of Automated Trading Desk Inc, which is a company that was bought by Citi in October 2007 for around $680m (€529m / £447m).

In August 2012, Citi proposed the bumper settlement to shareholders, in order to resolve claims from 26 February 2007 to 18 April 2008 that the bank had concealed the risks of backing its debt with subprime mortgages and failing to properly write down that toxic debt.

However, only two weeks ago, The Association of Corporate Counsel sent a friend-of-the-court letter to Manhattan Federal Judge Stein, voicing its objection to a $100m fee request in a securities class action against Citigroup.

The prominent association of in-house lawyers says in the letter that "even without the fee-multiplier, the plaintiffs' lawyers request hundreds of dollars per hour for many individual contract lawyers. But almost no law firms today charge such high rates for contract lawyers."

It adds that the "plaintiffs' fee request ignores these marketplace realities" and that the plaintiffs' lawyers either paid their contract lawyers more than the market rate or "padded the actual rates with the sort of unjustifiable profit margins that paying clients would refuse."

"Either way, there is no basis in the law or in the market to justify the fee request for contract lawyers," says the letter.

The case is Re: Citigroup Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 07-09901.

Citi Still Awaits Another Settlement Decision

Citi lost $27.68bn in 2008, as a result of the credit crisis, and by March 2009, the bank's market value tanked by $250bn from the start of the class period.

While it still has to wrangle out the final settlement with Automated Trading Desk Inc, it is also still awaiting sign-off by Manhattan Federal Judge Stein on a separate $730m settlement with bondholders, it proposed in March this year.

In a statement on their website, Citi says that, subject to court approval, it will pay the amount to settle a class action lawsuit brought on behalf of investors who purchased the bank's debt and preferred stock during the period 11 May 2006 through 28 November 2008.

However, Citi still denies allegations that it misled investors it says it is entering into this settlement "solely to eliminate the uncertainties, burden and expense of further protracted litigation."

That case is re Citigroup, Inc. Bond Litigation, Master File No. 08-cv-9522 (S.D.N.Y.).

The settlements are the latest in a line of regulator and investor complaints, litigation and investigations into banks selling financial products or fund around the time of the onset of the credit crisis.

In the UK, the Financial Services Authority hit UBS with a fine following the mis-selling and a series of failings in a fund sale that left nearly 2,000 investors exposed to asset backed securities that are financial instruments that have been largely blamed for the global financial crisis.