A New York appeals court says that Citigroup (C) must face a collateralized debt obligation lawsuit accusing the firm of lying about the risks involved in nearly $1 billion of securities. The plaintiff is Loreley Financing, a group of investment companies in the Channel Islands that was set up to invest in CDOs. It has made similar allegations in separate CDO fraud cases against other banks.
In 2012, Loreley sued Citigroup Global Markets Inc. in New York State Supreme Court in Manhattan. The plaintiff alleged that the bank secretly selected the most high-risk mortgages for sale in CDOs while purchasing credit default swaps in order to bet against them. The investment group says that Citigroup employed a similar strategy to help clients get rid of mortgage-backed securities that were toxic.
According to Loreley, it purchased $965 million of notes through Citigroup, which then made money by charging fees and getting rid of loans that were likely to sustain losses. The investment group wants the purchases rescinded and its money returned.