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  • Writer's pictureKirk Hartley

Valuing Litigation Risks – Remember Arbitrations – An Example from CITI and FINRA Arbitr

A good question these days is how one should value a massive financial house, such as CITI. One part of the answer lies in assessing its litigation industry risks from the various claims against it arising from alleged frauds and alleged breaches of other duties. One part of answering the litigation risk question is to monitor arbitrations, as well as litigation. That’s not easy to do, but information can be obtained. One source is known as the Securities Arbitration Commentator, an informal reporter of FINRA issues on a paid subscription basis.

As to impacts from arbitrations, consider, for example, this online Bloomberg article by Donal Griffin. The article details papers from a FINRA arbitration claim against CITI for $ 383 million. Set out below are some key excerpts from the article:

"Saudi businessman Ghazi Abbar, who claims in an affidavit he lost $383 million of his family’s fortune on investments with Citigroup Inc., was sold one of the transactions even though the bank questioned his ability to properly manage them, according to an internal memo.

The memo, an exhibit in arbitration proceedings with the Financial Industry Regulatory Authority, warned that Abbar didn’t have the risk-management capability of the large hedge funds that were typical clients of the bank’s “hybrid” desk, which in 2006 was trying to persuade him to move his family’s money into complex derivative securities.

Soured deals struck with wealthy clients are haunting Citigroup Chief Executive Officer Vikram Pandit. Finra awarded $54 million in April to customers of the New York-based bank’s municipal-bond hedge funds, and in February, Brazilian investor Bernardo Valentini sued the bank, claiming he lost more than $24 million on derivatives Citigroup told him had “no risk of loss.”

“The case is a setback in Pandit’s vision of delivering financial services with a higher sense of responsibility to customers,” said David Knutson, a credit analyst with Legal & General Investment Management in Chicago. “As each issue bubbles up, analysts or providers of capital to the firm have to say, ‘OK, what other tape bombs are lying in the dusty lines of Citi’s balance sheet?’”

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