By Dakin Campbell and Andrew MacAskill
(Bloomberg) — The Abu Dhabi Investment Authority is trying to abort an agreement to buy $7.5 billion of Citigroup (C) stock at eight times today's price, saying the bank misled it about the investment.
ADIA, as the sovereign fund is known, filed an arbitration claim alleging "fraudulent misrepresentations," and is seeking more than $4 billion in damages if the deal is upheld, Citigroup said in a statement yesterday, adding that the claims have no merit. ADIA invested in November 2007, getting equity units that can be swapped into common stock at $31.83 to $37.24 a share from 2010. The shares closed at $3.56 in New York yesterday.
Citigroup, which on Dec. 14 said it would sell stock to repay $20 billion in bailout funds to the U.S. government, had turned to the world's biggest sovereign wealth fund to replenish capital battered by $118 billion of subprime writedowns. The stock has since dropped 89 percent, and Abu Dhabi is trying to avoid investment losses after this week agreeing to provide $10 billion to help Dubai World avoid a bond default.
"This is all about frustration: the Abu Dhabi Investment Authority had all these plans for this investment, none of them came to fruition and they want to know why," said Ralph Silva, a London-based strategist at Silva Research Network, which specializes in financial services firms. "The first people you yell and scream at are the ones that provided you the product. ADIA's chances of winning the case are slim to none."
ADIA will pursue its legal rights "fully," according to a statement read over the telephone by a spokesman who declined to be identified in line with company policy. He declined to comment further, citing confidentiality obligations.
Citigroup spokesman Stephen Cohen declined to comment. The bank said in its statement that the allegations are "entirely without merit" and it would defend itself against them "vigorously". The stock rose to $3.66 in European trading today, up 2.8 percent from the New York close.
The Citigroup equity units ADIA purchased require the bank to remarket junior-ranking debt securities. Proceeds would then be used to buy Citigroup common stock in four equal installments starting next March, according to a 2007 statement.
The equity units can be swapped for as many as 235.6 million shares starting in 2010, Citigroup said at the time. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010, and Sept. 15, 2011.
'Pushing the Limit'
"It is going to be tough" for ADIA to evade losses tied to the agreement, said Eric Barden, chief investment officer of Barden Capital Management in Austin, Texas. "They are pushing the limit in terms of how much they think Citigroup is willing to subsidize a mistaken investment."
The bank, the only major U.S. lender still dependent on what the government calls "exceptional financial assistance," said this week it will sell at least $20.5 billion of equity and debt to exit the Troubled Asset Relief Program. The U.S. Treasury Department also plans to sell as much as $5 billion of common stock it holds in the company, and will unload the rest of its stake during the next six to 12 months.
The company also plans to substitute "substantial common stock" for cash compensation, Citigroup said in a statement on Dec. 14.
The U.S. government agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal to repay TARP, the Washington Post reported today, citing an exception to long-standing tax rules issued by the Internal Revenue Service on Dec. 11.
The IRS exception will allow Citigroup to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors, the Washington Post report said.
Jacob Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice, said "it is impossible to draw any conclusions" about how the ADIA claim may affect Citigroup's plans.
"Whenever an investor is unhappy with an investment the natural thought is to sue," he said in a telephone interview. "The goal may not be the damages they claim. It could well be as simple as renegotiating the terms of the securities."
ADIA, ranked the world's biggest sovereign wealth fund by Deutsche Bank AG, had $700 billion assets under management according to a July report by the Frankfurt-based bank. The fund was created in 1976 its chairman is Abu Dhabi's ruler, Sheikh Khalifa Bin Zayed Al Nahyan.
Other Funds' Profits
Some sovereign wealth funds have profited by investing in financial firms. The Kuwait Investment Authority said Dec. 6 it sold its stake in Citigroup for $4.1 billion, reaping a profit of $1.1 billion.
Government of Singapore Investment Corp., the manager of more than $100 billion of the city's foreign reserves, cut its stake in Citigroup to less than 5 percent in September from more than 9 percent, netting a $1.6 billion gain.
In October, the Qatar Investment Authority made 615 million pounds ($1 billion) by selling its stake in London-based Barclays Plc a year after it helped bail out Britain's second- biggest bank. Another Abu Dhabi-government investment fund, the International Petroleum Investment Co., made a profit of 1.46 billion pounds when it sold a separate stake in Barclays in June.
Saudi Arabia's Prince Alwaleed bin Talal, who has been among Citigroup's top shareholders since he helped rescue it from near-collapse in the early 1990s, remains a shareholder. He said Dec. 1 that he expects 2010 to be a year of "stabilization" for the bank.
To contact the reporter on this story: Dakin Campbell in San Francisco at firstname.lastname@example.org; Andrew Macaskill in London at email@example.com