Investors seek to revive claims over Citigroup's role in fraud at Mexican marine services company

(CN) — A federal appeals court in Miami heard arguments Tuesday over whether Citigroup should be held liable for its role in a massive fraud involving a Mexican marine services provider for the oil industry in the Gulf of Mexico.

A group of 30 international vendors, creditors and bondholders of Oceanografía S.A. claim to have lost more than a billion dollars as a result of transactions with and investments in the company. They argue that a lower court wrongfully dismissed their claims, first brought against Citigroup in 2016, seeking to recover losses sustained from dealings with the now-bankrupt Oceanografía.

Attorney David Cooper told a three-judge panel for the 11th Circuit that the companies invested in the company because of misrepresentations that it was financially stable, based on cash advances it received from Citigroup.

The New York-based multinational investment bank created a facility to pay Oceanografía based on services it was to provide to Mexico’s state-owned oil and gas company, Petróleos Mexicanos. The more Oceanografía requested in cash advances from the facility, the more money Citigroup made through interest payments.

Citigroup argues that the groups failed to specify the exact misrepresentations they relied on in making their decision to invest in or renegotiate loan terms with Oceanografía.

However, U.S. Circuit Judge Elizabeth Branch said that argument appears starkly contrast claims from Otto Candies, a Louisiana-based shipbuilding and leasing company that leased Oceanografía 21 vessels and restructured debt negotiations based on Citigroup’s participation. As part of an agreement to restructure Oceanografía’s debt to Otto Candies, if Oceanografía failed to pay any required monthly installments, Citigroup was required to pay.

Otto Candies is seeking to recover unpaid debt of approximately $120 million, and the loss of use of its vessels, worth hundreds of millions of dollars, which it has neither recovered nor been able to lease since Oceanografía’s collapse.

The Southern District Court of Florida sided with Citigroup, finding that the plaintiffs’ statements were mostly “vague and conclusory.” The lower court said the same of the investors’ claims that Citigroup knowingly agreed to participate in racketeering activity by approving false documentation submitted by Oceanografía.

“What gets you from ‘some employees knew’ to ‘all of Citigroup had knowledge of the fraud?’” U.S. Circuit Judge Brit Grant asked Cooper.

Cooper argued that Citigroup admitted its knowledge in a statement from then-CEO Michael Corbat saying it fired one employee, who it believed was involved in the fraud directly, and 11 other employees who failed to protect the company from fraud.

But attorney Adam Hakki told the court that the terminated employees could have been with Banco Nacional de México, Citigroup’s wholly owned Mexican subsidiary, and the firings don’t mean Citigroup as a whole knew the approved documents were forged.

Judge Grant asked if the group could plead its argument if those terminated were not employees of the Mexican subsidiary commonly known as Banamex.

Hakki replied that the Securities and Exchange Commission already fined Citigroup $4.75 million for not properly maintaining internal accounting.

The investors further argued that Citigroup’s culpability is supported by findings from the Mexican government, which seized Oceanografía and initiated restructuring proceedings, leading to its collapse. In April 2014, Mexican banking regulators reported that 10 Citigroup employees had violated Mexican criminal law by providing cash advances to Oceanografía based on forged documents.

The oil company was behind the accounts at Banamex, which showed $400 million in loans for supposed services to Petróleos Mexicanos. After several of the receipts were found to be suspicious, Mexico’s attorney launched its own investigation of Banamex and Oceanografía, while Citigroup came under investigation by the FBI and SEC. The revelations forced Citigroup to revise its 2013 earnings downward by $235 million.

Cooper said the findings made it “at the very least plausible” that Citigroup employees had knowledge of the fraud.

Branch asked Cooper if he could provide case law showing how findings from another country should weigh in the judges’ determination.

In the lower court’s ruling, U.S. District Judge Darrin Gayles wrote that “Mexican law does not necessarily mirror the standard this Court must apply,” and concluded that the group could not rely on the conclusions of the Mexican government to support their argument.

Grant and Branch, who were both appointed by Donald Trump, were joined on the circuit judge panel by U.S. Circuit Judge Jill Pryor, a Barack Obama appointee. They did not signal when they intend to release a ruling.

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