Citigroup may be backing down from its bid for Wachovia, but it wants blood.
The New York financial firm said Thursday evening it will continue litigation against Wells Fargo, and “plans to pursue these damage claims vigorously on behalf of its shareholders.”
Citi says that Wells wrongly interfered in its bid for Wachovia. Citi is also suing Wachovia, saying the Charlotte bank broke an agreement not to talk to other suitors.
Carl Tobias, a law professor at the University of Richmond, says Citigroup has already proven that it's serious about litigation, as it's been filing claims since the day after Wells pulled the rug out from under it. “They want their pound of flesh, and I don't blame them,” Tobias said. “They put their necks on the line, and now they have nothing.”
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But Tobias also said that further legal wrangling will move along at a more normal pace, without the sense of urgency that was necessary before. “Some of the pressure is off,” Tobias said. “The judges will calm them down – not that weekend stuff and night stuff.”
Monday, Citigroup said it will seek $60 billion in damages from Wells, but it's difficult to tell how strong a case it has. “If their claim was so good, they'd still be in it,” said Gary Townsend, a former analyst who has launched a Maryland-based investment firm.
At any rate, Wells doesn't want a big lawsuit hanging overhead as it works on its deal for Wachovia. But the only way to avoid one, said Thomas Hazen, a law professor at UNC Chapel Hill, is to settle out of court. And that's not likely, he said, because the negotiations have ended without an agreement to pay Citi.
A lawsuit seeking damages could last “a couple years,” involving months of pretrial discovery, likely some motions to dismiss – and after a trial, some appeals, Hazen said.
Elizabeth Nowicki, a law professor at Tulane, said that in most merger agreements, there's a termination fee of 2 to 3 percent of the purchase price. In this case, Wachovia and Citi hadn't reached that agreement yet. She said a fair payoff would be a little higher, because “Citigroup has a decent legal claim that Wachovia acted in bad faith.”
“If I were Wachovia and wanted Citi to go away, I would offer at least $100 million,” Nowicki said.
There are several ways the court fight could unfold, Nowicki said. Wachovia, which filed a suit in federal court recently asking a judge to permit the Wachovia-Wells deal, could keep that suit, amending the complaint to ask a judge to declare that Citi has no right to damages. But, she said, “the ball is more in Citi's court in terms of litigation.”
Nowicki said she thinks Citi has a strong case for damages. The legal documents filed “really make clear that Citi was duped,” she said.
Citi has repeatedly said that it was the only bank willing to buy up Wachovia when it was on the brink of failure. Nancy Atkinson, a senior analyst at the Aite Group, said Citi could ask the federal government to compensate it for keeping Wachovia afloat.
A 10-line provision in the federal bank bailout bill could also play a key role in litigation. It says that no one can be prevented from buying all or part of a bank, though Wells and Citi are arguing over whether that provision applies to their case.
Wells Fargo declined to comment on Citi's litigation. Wachovia said its merger agreement with Wells is “valid and proper.”