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Citigroup moves to block new arbitration by Abu Dhabi fund

A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012. REUTERS/Brendan McDermid
A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012. REUTERS/Brendan McDermid

By Nate Raymond

NEW YORK (Reuters) - Citigroup Inc has gone to court to block a new effort by Abu Dhabi Investment Authority to pursue an arbitration over a $7.5 billion investment the sovereign wealth fund made in the bank amid the subprime mortgage meltdown in 2007.

In a complaint unsealed Tuesday in U.S. District Court in New York, Citigroup said that by filing a claim last month, ADIA had made an "assault" on a federal court ruling in March that upheld the bank's win in an earlier international arbitration.

ADIA in the initial arbitration accused Citigroup of fraud and sought $4 billion.

Only after losing that case did ADIA discover it had more grievances stemming from its investment, Citigroup said in its complaint.

ADIA now seeks $2 billion for each of its claims, the lawsuit said. ADIA is asserting claims of breach of contract and breach of the implied covenant of good faith and fair dealing.

"ADIA's new arbitration is nothing more than an improper attempt to litigate claims that ADIA knew about, could have brought, and in significant part did bring to light in the first arbitration," Citigroup said in the lawsuit.

Citigroup is seeking an injunction against the new ADIA arbitration, which was filed August 20 with the American Arbitration Association.

The bank's lawsuit was filed August 28 and U.S. District Judge Kevin Castel in New York ordered it unsealed on Tuesday.

In court papers filed Tuesday, ADIA moved to dismiss Citigroup's lawsuit, saying it is up to arbitrators rather than the court to hear Citigroup's arguments.

Peter Calamari of Quinn Emanuel Urquhart & Sullivan, a lawyer for ADIA, declined comment.

SUBPRIME MORTGAGE WRITEDOWNS

The lawsuit is the latest development in a multi-billion dollar brawl spilling out of problems that besieged Citigroup with the decline of the U.S. housing market in 2007. It also provides more details on the spat, which has often been cloaked in secrecy.

In November 2007, ADIA took a 4.9 percent stake in Citigroup, investing $7.5 billion that helped the bank boost its balance sheet in the wake of billions of dollars in writedowns on subprime mortgage investments.

As part of the deal, ADIA received securities from Citigroup that would convert to common stock at prices between $31.83 to $37.24 between March 2010 and September 2011.

But by December 2009, ADIA had commenced arbitration, accusing Citigroup of misrepresenting facts during the negotiations, Citi's new lawsuit said. ADIA claimed that Citigroup's conduct diluted the fund's investment and drove down the bank's stock, the complaint said.

In particular, ADIA complained that Citigroup issued tens of billions of dollars in preferred shares to other investors and the conversion of those shares to common stock, which diluted the value of ADIA's investment, Citigroup's lawsuit said.

The lawsuit does not cite which investments those were. But the arbitration came a year after the U.S. government agreed in 2008 to provide a $45 billion bailout to Citigroup amid the financial crisis.

The U.S. government, which received securities in exchange for the bailouts, earlier this month offered the last of its stake in Citigroup for sale.

In October 2011, an arbitration panel ruled for Citigroup. ADIA subsequently went to court to vacate the decision, calling it "fundamentally unfair.

But in March, U.S. District Judge George Daniels in Manhattan upheld Citigroup's arbitration win. An appeal of that decision to the 2nd U.S. Circuit Court of Appeals is pending.

Citigroup's shares were trading at $49.41 on Wednesday, significantly higher than the $3.56 closing price on the day Citigroup disclosed that it was the subject of initial arbitration in 2009.

The case is Citigroup Inc v. Abu Dhabi Investment Authority, U.S. District Court, Southern District of New York, No. 13-06073.

(Reporting by Nate Raymond; editing by Andrew Hay)

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