Citigroup Can’t Block Abu Dhabi Arbitration Over $7.5bn Stake

A U.S. judge has rejected Citigroup Inc’s effort to block the Abu Dhabi Investment Authority from seeking a second arbitration over the sovereign wealth fund’s $7.5 billion investment in late 2007 to shore up the then-struggling bank.

U.S. District Judge Kevin Castel in Manhattan said on Monday that arbitrators, not federal judges, had power to decide whether Citigroup’s success in the first arbitration barred the ADIA from pursuing a second arbitration, in which it seeks $2 billion of damages or to rescind its investment.

The case arose from one of Citigroup’s earlier efforts to shore up its capital base, in the wake of billions of dollars of writedowns tied to subprime mortgages. Citigroup ultimately required three federal bailouts, which it has since repaid. It is now the third-largest U.S. bank by assets.

In November 2007, the ADIA invested the $7.5 billion in exchange for a 4.9 per cent stake in Citigroup, surpassing Saudi Prince Alwaleed bin Talal as the New York-based bank’s largest individual shareholder.

Two years later, the fund began arbitration proceedings in which it accused Citigroup of fraudulently inducing its investment, in part by issuing preferred shares to other investors that diluted its stake.

An arbitration panel rejected the ADIA’s claims in October 2011, and U.S. District Judge George Daniels in Manhattan confirmed that ruling in March.

But the ADIA in August sought a second arbitration, raising two claims it had raised in the first: breach of contract, and breach of an implied covenant of good faith and fair dealing.

Citigroup sought an injunction to block the second arbitration, calling it an “assault” on the first that would threaten U.S. judges’ ability to enforce their own rulings.

But Castel said the law, and the terms of the 2007 investment agreement, left him without power to decide whether the first arbitration precluded a second.

“The broad arbitration clause was the product of intensive, arm’s length negotiations,” Castel wrote. “The court is confident that a panel of arbitrators will be fully competent to apply established principles of claim preclusion to determine, as threshold matter, whether the second arbitration is foreclosed by the judgment in the first.”

Citigroup spokeswoman Shannon Bell declined to comment.

Peter Calamari, a partner at Quinn Emanuel Urquhart & Sullivan representing the ADIA, did not immediately respond to a request for comment.

As part of its investment, the ADIA had received securities from Citigroup that could be converted to common stock at prices between $31.83 and $37.24 from March 2010 to Sept. 2011.

After adjusting for a 1-for-10 reverse stock split, Citigroup shares have not traded that high since December 2007.