Citigroup Slapped with 401(k) Suit

The company allegedly was negligent for investing more than $4 billion of plan funds in its own "risky" stock.

Participants in Citigroup’s 401(k) plans are suing the company and others for sinking a large chunk of their money into the company’s stock and allegedly causing them to lose more than $1 billion.

The complaint charges the company, former CEO Charles Prince, the plans’ administrative committee, and others with violating federal pension law by allowing the “imprudent investment” in Citigroup stock even though they knew it was “unduly risky” due to the company’s “serious mismanagement and improper business practices.”

The suit finds fault with the company for participating in off-balance-sheet structured investment vehicles, extending subprime loans, failing to disclose its subprime exposure, operating without proper internal controls regarding these loans, and understating loan-loss provisions.

The complaint alleges, among other things, that the defendants failed to prudently manage the plans’ assets, to provide participants with complete, accurate, and material information on Citigroup’s business and financial condition, and to monitor the performances of other fiduciaries.

The suit was brought by Stephen Gray on behalf of himself and other participants in Citigroup’s retirement plans from Jan. 1 to the present. It is seeking class-action status.

As of December 2006, the 401(k) plans held $4.13 billion in Citigroup stock, representing 32 percent of their assets. “Based on publicly available information, it appears that defendants’ breaches of fiduciary duties have caused the plans to lose well over $1.3 billion in retirement savings during the class period,” the lawsuit states.

“Citigroup’s employees have their retirement plans in turmoil as Citigroup continued to acquire huge amounts of company stock for the plans even as it gambled with high-risk business practices,” said Marian Rosner, of Wolf Popper LLP, which filed the lawsuit in U.S. District Court for the Southern District of New York. “The employees now pay the price as the company struggles to come to grips with its exposure to the subprime market and the enormous undisclosed contingent liabilities with respect to off-balance sheet transactions.”

A Citigroup spokesperson told CFO.com only that “we believe the suit has no merit and we will defend against it vigorously.”

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