Citi Hit With Another Lawsuit Over 401(k) Plan

Citigroup, which suffered a recent management shakeup over its subprime mortgage crisis fallout, has been charged with imprudently allowing 401(k) company stock investments despite “serious mismanagement.″

Stephen Gray, a participant in the financial giant’s 401(k) plans, made the allegations of a fiduciary breach under the Employee Retirement Income Security Act (ERISA) in a federal court lawsuit filed by New York law firm Wolf Popper.

The suit, which included a request to be certified as a class action, featured an allegation that the decline in the company’s share price during 2007 represented a loss of more than $1.3 billion in the plans’ assets.

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According to the suit, the share price dropped from $54.26 in June 2007 to $37.73 last week with the Citigroup 401(k) Plan holding $4.13 billion in company stock – 32% of the plan’s assets – as of December 31, 2006.

Allegations

Among other things, Gray’s 51-page suit accuses the company of:

  • Participating in the formation and management of off-balance sheet structured investment vehicles “without disclosing Citigroup’s contingent liabilities or risks entitled therein,”
  • Causing the structured investment vehicles to issue billions of dollars worth of commercial paper and short-term loans based on false and misleading statements,
  • Marketing and extending subprime loans made on a “low documentation” basis without adequate consideration of the borrower’s ability to pay and “with unreasonably high risk of borrower default,” and
  • Operating without the requisite internal controls to determine appropriate loan loss provisions.

“In short,” Gray alleged in the suit, “the company was seriously mismanaged and faced a dire financial crisis due to such mismanagement, which rendered company stock an imprudent investment.’

According to the suit, filed in the U.S. District Court for the Southern District of New York, chief among the non-disclosed information was the extent of the losses facing the company.

“By at least January 2007, Citigroup became aware of an extraordinary increase in the default of its subprime loans and the heavy losses which the company would inevitably recognize,’ the suit charged. “Despite these troubles, Citigroup failed to disclose its subprime loss exposure. Instead, the company slowly revealed its losses and loss exposure (since the beginning of 2007) to blunt the impact and mask the depth and breadth of the crisis.’

Selling Stock Investments

Gray’s suit also includes an allegation oft-heard in ERISA stock-drop cases: the company continued to push the company stock shares as a smart investment for participants.

“Despite the defendants’ knowledge of Citigroup’s risky business practices (since the beginning of 2007), the company fostered a positive attitude toward Citigroup as a plan investment,” the complaint said. “Management touted strong company performance and stock benefits. Employees continually heard positive news about Citigroup’s growth, were led to believe that Citigroup stock was a good investment and that the plans were prudently managed.”

Personnel Changes

In addition to the company, the plans’ administrative and investment committees and unnamed Citi executives, the complaint also names as a defendant Charles Prince, who resigned as chairman and chief executive on Sunday.

Citigroup has named Sir Win Bischoff, head of its European operations, as interim CEO and former Treasury Secretary Robert Rubin as interim chairman.

The company has said it will write off between $8 billion and $11 billion to reflect declines in the value of its subprime-mortgage-related securities since September 30.

“We are currently reviewing the complaint, but at this time we believe it is without merit and plan to vigorously defend Citi’s actions,” said Mike Hanretta, a Citigroup spokesman, in a statement released to the Associated Press.

The case has been assigned to U.S. District Judge Sidney H. Stein. The complaint can be viewed here.

The lawsuit comes on the heels of a suit filed last week that alleging violations of the Employee Retirement Income Security Act (ERISA) against self-dealing and imprudent investing in improperly having its 401(k) plan do business with its affiliates and subsidiaries (See Citigroup Sued Over Possible ERISA Violations).

COLI Use As NQDC Funding Vehicle Increases

Non-qualified deferred compensation (NQDC) plans continue to be widely utilized and more employers are turning to corporate-owned life insurance (COLI) to informally fund them, according to a new executive benefits plans survey by Clark Consulting.

The use of NQDC plans is the highest it has been since the Clark survey’s 1993 inception, the release said. Among financial institutions, NQDC plan prevalence remained at 92%.

Some 56% of respondents reported making corporate matching contributions to NQDC plans. Of those respondents, 51% utilize a 401(k) restoration match formula.

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Supplemental executive retirement plan (SERP) prevalence, while lower overall, remains high among financial institutions. Some 82% of financial institutions indicated they have adopted a SERP and 67% of all responding companies reported having SERPs, continuing a downward trend from 2004’s reported high of 83%. Meanwhile, the number of respondents that administer their SERPs in-house has dropped significantly to 30% from 44% two years ago.

Plan Funding

Three quarters (74%) of respondents who informally fund their SERPs choose COLI as the funding vehicle, up from 64% in 2004. The COLI funding vehicle use showed a continued increase since its 2003 survey low.

“We have continued to see growth in the use of COLI for informally funding both SERPs and NQDC plans, especially over the past three years,” said Kurt Laning, President of Clark Consulting, in a press release. “More companies are coming to realize that this is often the best funding tool available for these key executive programs.”

TPA Use

The survey also found that due to the complexity of NQDC and SERP plan administration, more companies are choosing to utilize third-party administrators. The percentage of companies that use a combination of in-house and third party administration for their NQDC plans continues to trend upward, reaching its highest level (49%) since 1993.

The survey report is available here.

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