Italian Bank Sues Citigroup Over 2007 Total Return Swap Pact

An Italian bank and two of its insurance units sued Citigroup Inc. (C) on Tuesday, alleging Citi misrepresented the risk of a fund-linked total return swap in January 2007.

The lawsuit, filed in U.S. District Court in Manhattan, alleges Citigroup made false and misleading representations that didn't allow Banca Carige SpA (CRG.MI) to access the true risk of the arrangement.

"The plaintiffs, a bank and its subsidiary insurance companies, had no interest in risky or speculative investments and were looking only to obtain good, consistent returns with as little risk as possible," the lawsuit said.

Banca Carige is seeking at least $47 million in damages.

In January 2007, Citigroup sold a EUR10 million fund-linked note to Banca Carige's subsidiary insurance companies and then entered into a EUR25 million fund-linked total return swap with Banca Carige, representing the investments were "safe and conservative."

The investments weren't safe and conservative and substantially all of the original investment was gone by December 2009, according to the lawsuit.

Citigroup represented the investments were linked to a tender option bond investment fund the purportedly earned reliable returns through an arbitrage opportunity with municipal bonds, according to the lawsuit.

However, the success of the tender option bond investment fund allegedly depended upon a "highly questionable hedging strategy" that was "deeply flawed," according to the complaint.

"Citi believes these claims are without merit and we will defend ourselves vigorously," a Citigroup spokeswoman said in a statement.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; [e-mail]