Citigroup, Abu Dhabi fund in dust-up over convertible stock

Abu Dhabi's main sovereign wealth fund, which is alleging fraud over its $7.5 billion investment in Citigroup Inc., vowed to fight for its "legal rights."

Abu Dhabi’s main sovereign wealth fund, which is alleging fraud over its $7.5 billion investment in Citigroup Inc., vowed Wednesday to fight for its “legal rights” as it seeks compensation or an exit from the deal.

Word of the dispute emerged late Tuesday when Citi issued a brief statement saying it had been hit with an arbitration claim from the Abu Dhabi Investment Authority alleging “fraudulent misrepresentations” in connection with the two-year-old agreement.

ADIA, one of the world’s biggest government wealth funds, declined to provide a copy of the claim or discuss the dispute in detail.

“It is the policy of ADIA to pursue its legal rights fully,” an ADIA spokesman said. “ADIA declines to comment further due to binding confidentiality obligations, which ADIA intends to respect.”

Citigroup earlier promised to “vigorously” fight the claims, which it said had no merit. It said ADIA was seeking to terminate the deal, made at a time the New York-based bank needed capital to offset big losses from mortgages and other investments, or receive more than $4 billion in damages.

A Dubai-based spokesman for the bank had no additional comment Wednesday.

In exchange for its November 2007 investment, ADIA received mandatory convertible securities with a fixed coupon of 11%. The units were to be converted ino Citi stock in 2010 and 2011 at prices ranging from $31.83 to $37.24 per share. The number of shares ADIA receives will adjust based on Citi’s share price. A higher share price would leave the wealth fund with fewer shares.

At the time, the fund’s managing director said the investment reflected its confidence in “Citi’s potential to build shareholder value.”

Since then, Citi has proved to be among the lenders hardest hit by the credit crisis and rising loan defaults. It received one of the biggest U.S. government bailout packages — $45 billion in aid and protection against losses on more than $300 billion in assets.

Citi shares have plunged 89 percent from the $33 range at the time the ADIA deal was made to less than $4 now. At $37.24 per share, the conversion price would amount to more than 10 times Citi’s closing stock price Tuesday of $3.56.

ADIA is the largest of several investment funds Abu Dhabi uses to invest its oil wealth. The size of its holdings has not been made public, but it is believed by some to be the world’s largest sovereign wealth fund. Estimates of its size have ranged from less than $400 billion to $875 billion and up.

Abu Dhabi is one of seven semiautonomous sheikdoms that make up the United Arab Emirates, among OPEC’s top five oil producers. It serves as the federation’s capital, with control over the presidency and nearly all the country’s oil reserves.

On Monday, Abu Dhabi’s government agreed to pump an additional $10 billion in bailout funds into its struggling neighbor Dubai to keep one of that sheikdom’s star companies from defaulting on a loan.

That same day, Citi announced a deal to repay $20 billion in bailout aid. The U.S. government also will sell its 34 percent stake in Citi, which it had swapped for $25 billion in bailout loans.

Last week, Kuwait’s sovereign wealth fund booked a profit of $1.1 billion by selling the stake it took in Citigroup after ADIA’s investment less than two years ago.

The Government of Singapore Investment Corp., another government fund that came to Citi’s aid during the credit crisis, realizing a $1.6 billion profit in September when it cut its stake in the bank to below 5 percent.