Risk & Compliance

Citigroup Sued over Enron-Linked Notes

So-called Yosemite securities were tied to the creditworthiness of the ill-starred energy company.
Craig SchneiderAugust 27, 2004

On behalf of institutional investors, Bank of New York has filed suit against Citigroup regarding the sale of financial instruments linked to Enron, Reuters reported.

The lawsuit, filed in New York State Supreme Court, alleged that Citigroup knew Enron’s debts were far greater than the numbers presented to the public between 1999 and December 2, 2001, when the energy giant filed for bankruptcy. By 1999, added the court filing, Citigroup’s own exposure to Enron totaled almost $1.7 billion — four times the company’s internal limit on exposure to the energy company.

To reduce its exposure, Citigroup then approached major institutional investors to invest in a series of so-called Yosemite notes that were linked to the creditworthiness of Enron, according to The Wall Street Journal. If Enron fell into bankruptcy, Citigroup would reissue “clean” Enron bonds to the Yosemite note holders. In this case, “clean” meant that the bonds would rank relatively high in the list of claimants seeking repayment from the bankruptcy.

The problem: Enron reportedly said that the investors of the Yosemite notes rank lower than are other claimants. Accordingly, the group sued Citigroup, claiming it breached its contractual duty, defrauded investors, and concealed information.

A spokesman for Bank of New York noted that the firm filed the lawsuit as a trustee for the institutional investors, Reuters reported, adding that the bank has no financial interest in the Yosemite securities and that the lawsuit will not affect its financial results. According to the Journal, which cited a person familiar with the matter, the lawsuit could involve as much as $2.5 billion in liability for Citigroup.

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