Citigroup must face South Korean bank's lawsuit over failed CDO

[NEW YORK] A US appeals court on Wednesday revived a lawsuit in which South Korea's Woori Bank accused Citigroup Inc of defrauding it into buying risky mortgage securities that Citigroup was betting against, prior to the financial crisis.

The 2nd US Circuit Court of Appeals in New York said a lower court judge erred in finding that Woori waited too long to sue over its US$25 million investment in 2007 in Armitage ABS CDO Ltd, a collateralized debt obligation that Citigroup sold.

Citigroup declined to comment.

Woori was the South Korean financial sector's biggest victim of the US subprime mortgage crisis, and wrote off much of a US$1.5 billion stake in CDOs and credit default swaps. It later sued a few banks in the United States to recoup some losses.

According to court papers, Woori invested in Armitage in March 2007, only to see the CDO default that December. Woori said it shed its "worthless" stake in Armitage in August 2008.

But the Seoul-based bank did not sue until May 15, 2012, which Citigroup argued was too late under a three-year statute of limitations prescribed under South Korean law.

Woori countered that it had lacked "practical and specific awareness" of its claims, which under South Korean law would start the clock, until 2011.

In that year, the US Financial Crisis Inquiry Commission issued its report on the 2008 crisis, and Citigroup settled US Securities and Exchange Commission charges including that it had shorted a CDO that was a component of the Armitage CDO.

Last August, US District Judge Katherine Forrest in New York said 69 publicly available news articles, press releases, lawsuits and other documents that predated May 15, 2009 should have alerted Woori to its potential claims.

But the 2nd Circuit said that apart from the lawsuits, there was "nothing specific" about Citigroup to let Woori properly plead fraud.

It said that based on these and other documents, including "pitch books" that Citigroup had provided about Armitage, "Woori has plausibly alleged claims that are not time barred." The 2nd Circuit returned the case to Forrest for further proceedings.

REUTERS