NEW YORK/LOS ANGELES - Citigroup Inc said on Tuesday the Abu Dhabi Investment Authority filed an arbitration claim against it, accusing the U.S. lender of misrepresentation over a $7.5 billion investment by the sovereign wealth fund.
The sovereign wealth fund, considered by some the largest in the world, bought securities from the U.S. bank in 2007. In the original deal, the Citigroup bonds must be converted into common stock at a price between $31.83 and $37.24 a share between March 2010 and September 2011.
Analysts said they were not surprised by the investment agency's attempt to mitigate its losses, but warned that if successful, it could set a nasty precedent for similar investors in Citigroup that had lost money.
Citigroup shares closed at $3.56 on Tuesday on the New York Stock Exchange. They were unchanged after-hours.
In an arbitration claim filed on Tuesday, ADIA alleges fraudulent misrepresentations and seeks rescission of the investment agreement or more than $4 billion in damages, Citigroup said.
Citigroup said it believed the allegations were without merit and intends to defend against them.
Rochdale Securities banking analyst Dick Bove said Citigroup may not want to set a precedent by refunding the investment, but must respond to the claim from an important client in a key area of the globe.
It's in Citigroup's interest to have (CEO) Vikram Pandit get on a plane to Abu Dhabi and cut the conversion price to $10 a share and make this problem go away, Bove said. They used to be the primary bank outside the Arab banks (in the Gulf region).
At the end of 2008, Citigroup had about a $1.92 billion loan exposure to the United Arab Emirates, of which Dubai is a part.
Walter Todd, portfolio manager for Greenwood Capital Management, said he was not surprised that Abu Dhabi is claiming damages from the investment.
But if they won this, it could open a can of worms for a lot of firms who were raising capital at the time, said Todd, who does not own Citigroup shares.
The claim by ADIA comes weeks after Kuwait Investment Authority and Singapore's GIC cashed in stakes in Citigroup for profits of over $1 billion each. ADIA has an estimated $500 billion to $700 billion of assets.
KIA said on December 6 it had transferred the preferred stock it owned in Citigroup to common shares and sold all of them for $4.1 billion, notching a 37 percent return on its January 2008 investment.
GIC halved its stake in Citigroup in September, cashing in on a market rally for a profit of $1.6 billion.
Common shares of Citigroup, which has posted more than $100 billion of write-downs and consumer credit losses since the credit crisis began, have lost about 85 percent of their value since January of 2008.
Abu Dhabi has provided its debt-laden neighbor Dubai with $10 billion in bailout money, to enable Dubai World to repay a $4.1 billion Islamic bond its property development unit Nakheel was due to honor.
(Additional reporting by Dan Wilchins; Editing by Edwin Chan, Gary Hill)