Court Upholds CDO Lawsuit Against Citi

May 9 2014 | 9:57am ET

Citigroup can’t escape the fallout from the implosion of a group of collateralized debt obligations which Magnetar Capital allegedly had a hand in creating.

A New York appeals court yesterday allowed Loreley Financing to proceed with its fraud lawsuit against the bank, although it did throw out a claim of unjust enrichment. Loreley alleges that Citi allowed Magnetar to secretly choose the securities underlying the CDOs, which happened to be the riskiest available, while the bank protected itself with credit default swaps.

Loreley has not sued Magnetar, and the hedge fund has denied any wrongdoing. The company, which was created to buy the $965 million in CDOs from Citi, wants its money back.

Citi has argued that Loreley hasn’t proved that it relied on the bank’s representations in making its decision to buy the CDOs. The appeals court ruled that, while “carefully drafted documents” are usually enough to inoculate a bank in such a case, Citi’s disclosures on the CDOs did not cover Loreley’s allegations.

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