Litigation issues arising from mortgage securities are far from over for Citigroup Inc. (C - Analyst Report). The company is now entangled in a lawsuit filed by Swisscanto Asset Management AG for presenting distorted information regarding the company’s financial health between 2006 and 2009, according to a Bloomberg report. However, the damage amount has not been specified by Swisscanto.
The lawsuit, which was filed in the Manhattan federal court, particularly charged Citi and its former officers and directors of repeatedly providing misleading information to investors related to losses arising from the company’s mortgage securities. As a result, the complaints ended up buying Citi securities at an exaggerated price.
Notably, related to the same claims, a class-action or group lawsuit is already pending in the Manhattan federal court. Swisscanto, however, requested to be excepted from the class. On the other hand, Citi planned to strongly oppose this lawsuit.
Citi, being hit hard by the impact of the financial crisis, had to seek refuge in government bailouts to stay afloat. Its market value significantly plummeted since the crisis and the company is still battling the aftermath of the crisis. Citi’s conduct related to mortgage securities has been questioned several times and the Swisscanto lawsuit has added to its woes.
However, owing to the litigation overhangs, Citi needs to engage its resources to resolve them. This consequently increases legal costs, compelling the company to opt for settlements. Yet, this in turn exhausts the company’s financials, which could have been steered towards its growth initiatives, had it not been subject to such litigations.
Citi, otherwise, boasts an impressive global footprint and attractive core business. The company has restructured its business and overhauled its risk management. It is reducing its risky exposures by trimming the problem assets, which in turn frees up capital to be invested in its core business.
Moreover, to rightsize its business and increase efficiency across the organization, the company has recently announced significant layoffs. While such efforts are encouraging, the low interest rate environment, regulatory headwinds and litigation risks remain our concerns.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock. Among its peers, Bank of America Corp. (BAC - Analyst Report) and KeyCorp (KEY - Analyst Report) also have a Zacks #3 Rank.