Judge blocks auction rate arbitration against Citigroup


For the second time in a week, a federal judge has blocked a securities arbitration against Citigroup Inc , allowing the bank to avoid fighting a multi-million dollar case before Financial Industry Regulatory Authority arbitrators.

Banks have repeatedly challenged whether large plaintiffs can bring cases over damages incurred during the financial crisis as arbitrations before FINRA, the financial industry's self-regulator, rather than in the courts. Some plaintiffs prefer FINRA as a venue, in part because the arbitration process is considered quicker than if a dispute plays out in court.

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At a hearing on Friday, District Judge Jesse Furman in Manhattan entered a preliminary injunction preventing North Carolina Eastern Municipal Power Agency from moving forward with an arbitration, a Citigroup spokeswoman said.

The case stemmed from the agency's issuance of $223 million in auction rate securities underwritten by Citigroup.

Auction rate securities are a type of bond where investors placed bids that set interest rates. The market for the securities collapsed in February 2008 when banks stopped propping it up through support bids.

The agency, which provides wholesale power to 32 cities in North Carolina, filed an arbitration in December 2012 accusing Citigroup of misrepresenting its role in supporting the market. The bank brought the federal lawsuit to try to escape the arbitration.

"We are pleased with the decision in this matter," said Danielle Romero-Apsilos, the Citigroup spokeswoman.

James Swanson, a lawyer for the power agency at Fishman Haygood Phelps Walmsley Willis & Swanson, did not respond to a request for comment.

Last Thursday, U.S. District Judge Louis Stanton in Manhattan entered a permanent injunction preventing Saudi Arabian investor Ghazi Abbar from pursuing a $383 million arbitration case before FINRA. Abbar had accused Citigroup of "virtually wiping out" his family's wealth.

FINRA become an attractive venue in recent years for some plaintiffs with big cases, as it can take much longer for a securities lawsuit to make it to trial in U.S. courts than for a dispute to be resolved at arbitration. Arbitration awards are also generally more difficult to overturn than a jury verdict on appeal.

Increasingly large awards began spilling out of FINRA as a result of the economic meltdown that began in 2008. Of the 10 largest U.S. securities arbitration awards ever, seven were issued since that year, according to Securities Arbitration Commentator Inc.

The largest during that period was a $406.6 million award STMicroelectronics NV won in February 2009 in a case against a unit of Credit Suisse Group AG over auction-rate securities.

By April 2012, the number of arbitrations pending with more than $10 million at stake had hit around 200, according to a FINRA spokeswoman. The number has since dropped to 180, she said.

The figure mirrors a decline in cases of all sizes overall as the 2008 stock market collapse moves further into the rearview mirror.

In disputes over whether these arbitrations can go forward, the arguments generally have focused on whether the plaintiffs constituted a "customer" of a broker-dealer under FINRA rules and could bring an arbitration, or whether plaintiffs agreed despite their customer status to have their disputes heard in court.

In the North Carolina case, Citigroup said while FINRA rules say broker-dealers and customers must arbitrate their cases if the customer asks for it, the bank and power agency contracted out of the system and agreed instead to have any dispute heard in Manhattan federal court.

While Citigroup succeeded in winning an injunction, in other lawsuits banks have failed to block arbitrations.

In January, the 4th U.S. Circuit Court of Appeals allowed Roanoke, Virginia-based Carilion Clinic to proceed with an arbitration against UBS AG and Citigroup over $234 million in auction rate securities.

The case is Citigroup Global Markets, Inc. v. North Carolina Eastern Municipal Power Agency, U.S. District Court, Southern District of New York, No. 13-01703.

(Additional reporting by Suzanne Barlyn; Editing by Martha Graybow and Chris Reese)