Seven Norwegian municipalities and a Norwegian securities broker are suing Citigroup Inc for more than $200 million in damages after they lost millions of dollars on investments sold by the U.S. bank two years ago.

The municipalities and Norwegian firm Terra Securities claim Citigroup misrepresented certain structured notes as a conservative investment, according to a filing made on Monday in a New York court.

Citi sold the notes, whose return it said was linked to a municipal bond arbitrage fund, in May and June 2007 -- but by May 2008 nearly all the towns' original investment was gone and Terra was in bankruptcy, according to the claim.

The court documents allege Citi sold more than $115 million of the notes in order to unload what was becoming significant risk from either its own or its preferred customers' balance sheets.

We believe this suit is without merit, a spokeswoman for Citigroup said.

The New York law firm Kasowitz, Benson, Torres & Friedman are acting on behalf of Terra and the seven towns: Bremanger, Hattfjelldal, Hemnes, Kvinesdal, Narvik, Rana and Vik.

Terra's bankruptcy and the losses of the municipalities led Norway to tighten rules relating to the sale of securities to nonprofessional


The towns borrowed money to buy the notes and last September they said they would not repay $176 million they owed the country's largest bank group, DnB NOR, on the loan.

After the losses emerged, legal authorities deemed the notes to be against the local Municipal Government Act and so the municipalities claimed that, since it was against the law for them to buy the notes, the loan agreements with DnB NOR were invalid.

The case is Terra Securities ASA Konkursbo et al v. Citigroup, U.S. District Court, Southern District of New York (Manhattan), No. 09-7058.

(Reporting by Elinor Comlay; editing by Andre Grenon)