Hedge Fund Sues Citi, Wachovia Over Credit-Default Swaps

Mar 4 2008 | 2:09pm ET

A Florida hedge fund is suing Citigroup and Wachovia, claiming the investment banks “suckered” it into losing more than $18 million on credit default swaps.

According to the complaints from Del Ray Beach-based VCG Special Opportunities Master Fund, Citigroup downplayed the risk involved in the derivatives, in addition to charging “far in excess of what Citibank actually required.” It is suing the Wall Street giant for beach of contract and unjust enrichment.

In a separate complaint, VCG accused Wachovia of knowing “it would simply extract additional collateral under the pretext of the writedowns” to the initial contract.

VCG filed its suit against Wachovia on Nov. 28. Citigroup was sued on Feb. 14. The $58 million hedge fund is seeking repayment of losses and punitive damages.

Stephen Mintz, a lawyer for VCG, characterized the banks’ actions as squeezing a smaller hedge fund to minimize their own losses.

Both banks call VCG’s complaints “without merit,” and Wachovia filed a countersuit on Feb. 15, alleging breach of contract and seeking $1 million plus interest.

The lawsuits were first reported in The Wall Street Journal.

According to VCG—formerly the CDO Plus Master Fund—Citi bought $10 million in protection against a collateralized debt obligation. When the credit crisis struck, the bank allegedly sought increasing amounts of collateral, eventually totaling almost the entire $10 million notional of the swap, VCG said.

As for Wachovia, VCG alleges that the bank demanded the hedge fund, which had put up an initial $750,000, boost its collateral almost fourteen-fold on credit protection. When it refused the final request for an additional $1.49 million in collateral, VCG says Wachovia seized the $9 million it had already put up.

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