The Abu Dhabi Investment Authority (ADIA) has filed a claim against Citigroup in New York, alleging fraud over a US$7.5 billion (Dh27.54bn) investment it made in the US banking giant two years ago. In its arbitration claim, ADIA is seeking damages of $4.4bn or an end to its obligation to convert its investment in the bank into Citigroup shares, which have fallen from about $33 at the time of the deal to $3.44 in early trading yesterday.
Citigroup called the allegations of "fraudulent misrepresentations" in connection with the investment "entirely without merit". The bank said it would vigorously defend against ADIA's claims. An ADIA spokesman said the sovereign wealth fund's policy was to "pursue its legal rights fully" and declined further comment. The action is being taken under international arbitration law and any decision will be binding and in confidence. Lawyers are uncertain whether parties to arbitration give up their right to formal legal action in the courts, but appeals against arbitration decisions are rare.
The dispute stems from a $7.5bn investment in the banking group in November 2007, in the early stages of the financial crisis. ADIA was one of a number of sovereign funds that propped up the firm when it faced enormous losses in the onset of the crisis. ADIA gave Citigroup the money in return for interest payments of 11 per cent a year, with a promise to repay the full amount in blocks of Citigroup shares on various dates next year and in 2011.
The deal valued Citi shares at between about $32 and $37. If the shares traded above that range, ADIA would book profits. But with Citi shares having fallen by almost 90 per cent since the investment, a conversion into shares starting next year would mean big losses for ADIA. Given ADIA's sway on the global stage, with assets estimated at more than $300bn, and its history of making large investments in banks at troubled times, some observers say it might be in Citi's best interest to quell the dispute.
"It will be very interesting to see how this gets resolved," said a banker in Dubai who specialises in advising sovereign funds. "It requires a delicate balance for Citigroup. "On the one hand, the bank will not want to let ADIA off the hook so easily. On the other hand, they know that ADIA is potentially important for its future and that they are worth a lot of capital." ADIA's potential losses contrast sharply with gains other large investors have made on their bailouts of Citigroup. The Kuwait Investment Authority this month sold its stake in Citi for $4.1bn, booking a $1.1bn profit. The Government of Singapore Investment Corporation in September booked profits of $1.6bn on a $6.88bn investment in the firm.
Gulf funds have made billions of dollars on investments in other struggling western banks. The International Petroleum Investment Company, an Abu Dhabi Government-owned investment vehicle, in June took $2.42bn in profits when it sold a stake in Barclays, the British banking giant. Citigroup was one of the hardest-hit US lenders in the financial crisis. It received $45bn in government aid, $25bn of which was converted into a 34 per cent government stake.
The bank said yesterday it would repay the remaining $20bn with help from money raised by issuing shares. @Email:uharnischfeger@thenational.ae