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Judge Rejects Citigroup Lawsuit Settlement

This article was written by Flexo in Investing. 3 comments.

The Securities and Exchange Commission, an organization designed to regulate and oversee the financial industry, is charged with acting in investors’ best interests. Most of the time, however, the SEC works on behalf of the large financial companies under its purview. As a result, when consumers demand that companies be held accountable for misleading investors or playing a role in a systemic collapse of the economy, the regulators tend to look the other way. Some companies get by with a slap on the wrist, settling lawsuits with a paltry penalty.

That appeared to be the case recently when Citigroup and the SEC came to an agreement whereby the company would pay $285 million, or 7.56% of that quarter’s profit, to settle a lawsuit that charged that the company did not properly disclose the risk when selling collateralized debt obligations (CDOs) and bet against the same investments the company sold to investors. The benefits of a settlement like this would be that Citi could pay the small fine from its cash reserves without admitting wrongdoing, promise they’ll never break the rules again, and continue to operate business as usual.

Judge Jed S. Rakoff of the Federal District Court in Manhattan was not pleased with the resolution or collusion between Citi and the SEC. The judge rejected the settlement because it was not fair, reasonable, adequate, or in the best interest of the public. He demanded the company and the regulator to shed light on the facts of the case, something this settlement might have avoided, protecting the company from any real criticism. A settlement would mean that affected investors could not sue Citi, but if the SEC were to successfully win a case against Citigroup, proving the company was in the wrong, that decision could be used by harmed investors who sue the bank. At the core of the matter is whether a company should be allowed to avoid admitting guilt.

The trial will begin in July 2012.

DealBook

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Citi Settles Lawsuit for $285 Million

This article was written by Flexo in Investing. 2 comments.

Without admitting any wrongdoing, Citigroup has settled a major lawsuit. The Securities and Exchange Commission claimed that Citi misled investors, and to settle the claims, the financial behemoth was ordered to pay $285 million to customers.

The issue focuses on collateralized debt obligations (CDOs) in 2007. The bank packaged subprime mortgages, loans with a good chance of defaulting particularly as the real estate market was not in a good position, into investments for sophisticated clients. According to the SEC, Citi didn’t disclose the real risk in these investments, so by selling the mortgages, Citi shifted the risk of default away from the company.

Furthermore, to appear unbiased, Citi claimed to investors that a third party selected the loans packaged into the CDO, but the bank did have a role in this selection, making it possible for the selection to be limited to loans most likely to default. While Citi earned $160 million in trading fees, the investors lost several hundred million dollars by November 2007. The biggest investor in Citi’s CDO has declared bankruptcy.

The investors affected most by Citi’s misleading claims are not individual investors or even most institutional investors. Individuals wouldn’t have had access to these investments at the bank. The $285 million in this settlement won’t be distributed to everyday Citibank customers, so unlike the Bank of America overdraft fee lawsuit, customers should not be looking for refunds from the bank. The Citi settlement funds will be distributed to the sophisticated companies who lost money investing funds through the bank’s Citigroup Global Markets division.

In the third quarter of 2011, Citi has reported a profit of $3.77 billion, at least on paper, helped in part by an accounting trick that allowed the bank to change the value of its debt. The financial industry took a hit with the recession, received government assistance, and is now profiting significantly while other sectors in the economy are still recovering. This settlement reflects 7.56% of this quarterly profit, which might seem significant, but is a slap on the wrist for the bank as Citi can easily handle this payment and has likely set aside funds for this outcome.

Washington Post, Wall Street Journal

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Bank of America Settles Overdraft Fee Lawsuit

This article was written by Flexo in Banking, Featured. 975 comments.

If you qualify for the Bank of America overdraft lawsuit settlement, you may have already received a postcard in the mail from the bank. Here is information on the overdraft lawsuit, only one of many class action lawsuits against Bank of America. If you recently received a check from Bank of America for about $98, you have received a benefit from an earlier class action lawsuit pertaining to the bank’s debit cards. This article pertains to a later lawsuit regarding overdraft fees.

December 2011 update: While the judge has approved Bank of America’s settlement related to the overdraft class action lawsuit and has ordered Bank of America to pay $410 million, a member of the settlement class who objected to the settlement has filed a notice to appeal the ruling. With an appeal filed, it could take at least a year for the issue to be resolved. If the appeal is denied, customers may still be disappointed. With 13.2 million affected customers in the class and fees to be paid from the settlement fund to the lawyers and class representatives, the benefits each customer will receive are sure to be less than the value of a refund of even one overdraft fee.

Any compensation to affected customers is on hold until the judge enters the settlement and any appeals are filed.

Like many banking institutions, Bank of America processes debit transactions not at the time they occur, but in a batch, from largest to smallest. If they don’t still take this approach currently, they did in 2009 when a class-action lawsuit combined several other legal actions. 24 other banks in the United States and Canada were named in the class-action lawsuit, including Citigroup, Chase, and Wells Fargo.

The banks say that by ordering debits from largest to smallest benefits customers. For example, mortgage or rent payments are generally the largest debits, so they should receive priority and should be the first to be paid. This is not how it works in practice, however. The system is designed to make more money in fees, particularly from the paycheck-to-paycheck class of customers.

For example, five debits may be scheduled to post on a Monday:

$800 mortgage payment (check)
$200 purchase at the grocery store (debit card)
$100 withdrawal at a different bank’s ATM
$25 purchase at the book store
$4 coffee

That’s the order the funds will be taken from this person’s account. If there is $900 in the bank account, the mortgage payment will be processed, but the four other transactions will generate overdraft fees, one for each, likely totaling more than $100. If the debits were processed from smallest to largest, only the mortgage payment would cause a problem, and the check will bounce. This could cost the account owner less money, but a bounced mortgage payment could be troublesome.

In the more likely event that there is only $500 in this checking account, ordering debits from largest to smallest ensures nothing will go through without generating a fee. However, ordering the debits from smallest to largest, only the mortgage payment would bounce, and there would be no overdraft.

Bank of America will be paying $410 million to settle the class-action lawsuit, which also notes that the banks did not tell customers they could waive overdraft protection, allowing certain transactions to fail rather than paying a fee. Not every bank handles activity posting the same way.

The deadline to opt out of or object to the settlement was October 3. The official website for the settlement is bofaoverdraftsettlement.com.

Photo: Wonderlane
Reuters

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Citigroup Accused in Death of Customer

This article was written by Flexo in Debt Reduction. 8 comments.

Three months ago, a healthy 49-year-old business man walked into a Citibank office in Jakarta, Indonesia to discuss the matter of a $5,500 debt on his Citi Platinum credit card. The events that followed are unclear, but four hours later, the man left Citi offices in a wheelchair. Citi cars drove him to a nearby hospital where he was announced dead.

Lawyers for the man’s widow allege that debt collectors physically harassed him in the office, pursuing a debt repayment of the equivalent of $12,000 including interest. He received a beating that eventually led to his death. The widow is suing Citi for $348 million. Citi’s lawyers contend that while there was some intimidation involved, the man died of unrelated causes.

The concept of debt in the developed world is not only mainstream, it’s interwoven in the fabric of the economy. Punishment for debt or consequences for owing money to another party are not severe. Debtors don’t go to jail, but in some circumstances, any income they generate can be transferred directly to creditors — essentially enabling indentured servitude (or worse, slavery). In Indonesia, like the United States, it is apparently customary for creditors to hire debt collectors to intimidate debtors, but unlike the United States, this intimidation can be severe. In this country, harassing phone calls, even to relatives and friends, is the practice of the seediest corporate-style debt collectors. Physical harassment for debt obligations is not the norm here, unless one deals with shady illegal practices.

A business moving into another region of the world needs to be aware of the local customs and the requirements for doing business. In some countries, it may be hard to build a business without a special application fee to the government, call it what you will. Business practices and expectations differ around the world. The promise of financial gain from having a presence in a developing nation like Indonesia is a strong incentive to enter the country for business, and for that company to succeed, it must adopt local customs and practices. Where those practices conflict with a code of ethics established for operation domestically, it can be tricky for a company to find the right balance that allows them to succeed in country while maintaining a moral standing.

Having a customer die in your office, particularly during an admitted session of intimidation, whether due to the intimidation or not, could be a pesky public relations problem. It sounds like Citi may not be to blame directly for this death, but a corporation would not permit this type of intimidation in the United States.

Bloomberg, Huffington Post

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Updated: Hackers Steal Credit Card Numbers From 360,000 Citi Customers

by Flexo

The latest big business security breach affected Citigroup and about 1 percent of the company’s credit card customers. Hackers were able to access the customer database, finding customers’ names, credit card numbers, and email addresses free for the taking. The hackers were not able to gain access to other personal information, like Social Security numbers, card ... Continue reading this article…

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Federal Reserve’s Secret Bailout Helped Banks Profit During Crisis

by Flexo

While the Federal Reserve was publicly providing money to member banks at interest rates of up to 0.5 percent during the financial meltdown of 2008, a different, less public program bailed out Credit Suisse, Goldman Sachs, and Royal Bank of Scotland with short-term loans with an interest rate of only 0.01 percent. Those banks received the bulk ... Continue reading this article…

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Citi Credit Card Reviews

by Flexo

Citigroup is the third largest bank holding company in the United States, and Citibank is the consumer banking entity owned by this behemoth company. Sometimes, size is an advantage. Citibank’s size allows it to have a massive credit card division, branded as “Citi Cards.” The size helps the bank offer some of the best deals ... Continue reading this article…

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The Causes of the Financial Collapse

by Flexo

In May 2009, the Financial Crisis Inquiry Commission was created to determine the primary factors that drove the economy to collapse, sparking the Great Recession. Their reports will be released in just a few hours to the public. The committee consists of members from both sides of the political aisle, and opinions within the report ... Continue reading this article…

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