Off in a small corner of the judicial system is a big-time Wall Street lawsuit that neither side in the dispute wants anyone to know much about.
Thanks, however, to George B. Daniels -- the federal judge in the case -- we can catch a rare glimpse of what happens when a multibillion-dollar investment in a supposed pillar of Wall Street goes terribly wrong.
At issue is the $7.5 billion investment that Abu Dhabi Investment Authority, a large sovereign wealth fund, made in Citigroup Inc. in November 2007, just after the bank fired chairman and chief executive officer Chuck Prince. Michael Klein, one of Citigroup’s most senior investment bankers, negotiated the deal; Robert Rubin, the former Treasury secretary, in nearly his first official act after taking over for Prince as Citigroup’s chairman, flew off to Abu Dhabi to bless it.
A year later, of course, Citigroup collapsed, and American taxpayers bailed it out to the tune of $45 billion, plus another $306 billion to ring-fence a pile of toxic assets. ADIA, as the Abu Dhabi fund is known, lost nearly its entire investment after Citigroup’s shares were diluted down to pennies on the dollar by the rescue financing. (The contract also called for ADIA to get an annual dividend of 11 percent on its stock.)
By the convoluted rules of redress on Wall Street, ADIA’s only legal recourse against Citigroup was arbitration. In December 2009, ADIA filed a complaint with the International Centre for Dispute Resolution, a part of the American Arbitration Association, an independent nonprofit arbitration organization theoretically unaffiliated with Wall Street.
According to a heavily redacted copy of ADIA’s arbitration complaint, the wealth fund claimed it was “induced” to make the investment in Citigroup based on Citigroup’s “fraudulent misrepresentations” to ADIA.
ADIA also claimed that Citigroup committed a “willful and material breach” of the November 2007 investment agreement. Chief among Citigroup’s “misrepresentations” was that “it would not seek additional capital … as ADIA was agreeing to convert its investment into common stock at an agreed-upon conversion rate.” ADIA asked the arbitrators to rescind the original deal or, alternatively, award it $4 billion due to Citigroup’s “misconduct.”
No surprise, ADIA lost its arbitration claim in October 2011. Far from the norm, though, the arbitrators wrote a very lengthy ruling of 65 pages. I, for one, would love to see it, but the organization is keeping it confidential.
In January 2012, ADIA filed a federal lawsuit in the Southern District of New York against Citigroup, asking that the arbitration decision be vacated on the grounds that the panel incorrectly applied New York state law instead of Abu Dhabi law.
At a court hearing last month, David Eisberg, a lawyer for the wealth fund, argued that applying the New York law instead of the Abu Dhabi law was “like an umpire has the wrong rulebook and balls aren’t balls anymore and strikes aren’t strikes anymore and you’re sitting here saying I know that they were using the rules of football.” Judge Daniels, who deserves credit for following Eisberg’s mixed metaphors and shaky logic, is expected to rule in early 2013.
More interesting, though, were the few details about the case that slipped out during the various hearings. When ADIA filed the case in January, its complaint was sealed, which is unusual. At a hearing in February, Judge Daniels got into a discussion with Peter Calamari, another ADIA attorney, about why the arbitration record was being kept confidential. Calamari explained that the wealth fund is “a government agency and it has a very strong interest in keeping much of the factual information that was presented in this arbitration confidential.”
“There is information about their investment practices,” he continued. “There is information about their employees. There are commentaries about individual people who live and work in Abu Dhabi that should not be made public.” He also wanted the federal court record sealed.
Judge Daniels wasn’t persuaded. “I’m not particularly comfortable with saying that parties get to agree that they have a dispute and that if they want to resolve that dispute in a federal district court that they can agree to do that in secret and nobody gets to know what the nature of that dispute is,” he said. “It’s just not the way to conduct business.”
By last month, however -- when Eisberg and Calamari made their opaque legal argument about how the arbitrators applied the wrong law -- ADIA and Citigroup had agreed to be circumspect about what to put on the public record. Judge Daniels, with apparent reluctance, agreed to keep the arbitration documents and the original complaint sealed.
Still, there were a few revealing moments at the November hearing. According to transcripts, at one point Eisberg said of Citigroup, “Just days and weeks after taking seven-and-a-half billion dollars from ADIA, it turned out that three critical representations were not just wrong but were wrong by billions of dollars.” He also said a “top executive” at Citigroup provided ADIA with a transparency letter, the “gist” of which was that “we have been transparent about our financial conditions and our plans … and we don’t know of anything we need to tell you that would change the impression that we’ve given you.” He told Judge Daniels that under Abu Dhabi law, a misrepresentation of the transparency letter would be a “slam dunk” case.
Calamari added that ADIA’s case against Citigroup “was always a fraud case right from the beginning.” He elaborated, somewhat: “There were certain documents and representations that were made to ADIA in order to induce them to sign the contract that ultimately provided for the acquisition of the stock.”
As for the misrepresentation to ADIA about Citigroup’s capital needs, Calamari said Citigroup had “documents” that “would have shown what the capital needs truly were as opposed to what we were told was the capital needs.” He said the documents were not disclosed to ADIA at the time of its investment.
Les Fagen, the lawyer representing Citigroup, disagreed with the ADIA lawyers. He said of the arbitrators: “They listened to every argument. Everything you heard today that panel heard at length. Briefing, argument, analysis. They did everything. They spent zillions of hours on this matter.”
It’s incredible that in one year’s time ADIA could lose its $7.5 billion investment in Citigroup and not have a colorable civil claim against the bank for why things went so wrong.
What’s more incredible is that both ADIA and Citigroup were bound and determined to make sure nobody found out the details of their disagreement.
The real question, though, is why the full record -- of both the arbitration and the federal suit -- isn’t publicly available. Judge Daniels, the taxpayers who bailed out Citigroup deserve to know what it was up to in its dealings with Abu Dhabi.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions he expressed are his own.)
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