A Manhattan federal judge on Monday rejected Citigroup Inc's bid to dismiss a class-action lawsuit by bondholders who said the bank misled them about its exposure to toxic mortgages.

U.S. District Judge Sidney Stein said the bondholders could pursue allegations that the bank did not reveal the exposure in offering materials for 48 bond offerings from May 2006 to August 2008, in which it raised more than $71 billion.

The bondholders, led by seven pension funds and an insurer, said their holdings sank in value after Citigroup revealed its exposure in November 2008, making it apparent the bank was insolvent and would need a government bailout.

The core of plaintiffs' allegations, Stein wrote in a 50-page opinion, turn not on Citigroup's management of its assets and liability, but instead on the manner in which they disclosed those assets and liabilities.

Monday's ruling is a defeat for Citigroup as Chief Executive Vikram Pandit tries to sell unwanted assets and restore the health of the third-largest U.S. bank by assets.

A series of federal bailouts starting in late 2008 left taxpayers owning one-third of New York-based Citigroup, which suffered tens of billions of dollars of losses on risky assets that became illiquid as credit markets tightened.

Stein let the plaintiffs pursue claims that Citigroup failed to properly disclose exposure to $66 billion of collateralized debt obligations backed by subprime mortgages, and did not reserve enough for residential mortgage losses.

He dismissed some claims over exposure to $100 billion of structured investment vehicles backed largely by subprime mortgages, and $11 billion of auction-rate securities.

Citigroup spokeswoman Danielle Romero-Apsilos said the bank was pleased that some claims were dismissed and will vigorously defend the remaining claims on the merits.

Andrew Zivitz, a lawyer representing the bondholders, did not immediately return a call seeking comment.


The plaintiffs include pension funds in Florida, Louisiana, Minnesota and Pennsylvania, including the Southeastern Pennsylvania Transit Authority rail system, as well as New Jersey-based American European Insurance Co.

Citigroup had alleged that the plaintiffs lacked standing or else did not deserve relief under federal securities laws.

Twenty-eight current and former Citigroup officers and directors are among the defendants, including Pandit and his predecessor, Charles Prince, and former senior adviser Robert Rubin.

Nearly 80 co-underwriters on the bond offerings, including Bank of America Corp, Goldman Sachs Group Inc and Morgan Stanley, were also named as defendants, though 61 have been dismissed from the case, Stein said.

The U.S. Treasury Department has been selling some of its equity stake in Citigroup, and on July 1 said it had reduced that stake to 17.6 percent from about 27 percent.

Citigroup shares were up 6 cents, or 1.5 percent, at $4.10 in afternoon trading on the New York Stock Exchange.

The case is In re: Citigroup Inc Bond Litigation, U.S. District Court, Southern District of New York, No. 08-9522.

(Reporting by Jonathan Stempel; Editing by Tim Dobbyn, Leslie Gevirtz and John Wallace)