2nd Circuit Tosses Saudi’s Citigroup Claims

(CN) - A Saudi investor cannot arbitrate claims of $385 million in hedge fund investment losses against Citigroup because he was not a domestic "customer," the 2nd Circuit ruled.

Citigroup Global Markets Inc. sued Ghazi Abbar in 2011, seeking to stop the arbitration before the Financial Industry Regulatory Authority. Abbar moved his investments from Deutsche Bank to Citigroup's Swiss affiliate in late 2005 when his private banker switched jobs.

When Abbar's investments were wiped out by 2009, he launched FINRA arbitration in New York against Citigroup's New York affiliate. Abbar has not written arbitration agreement with the New York affiliate - FINRA rules mandate arbitration only if Abbar is a "customer" of the New York affiliate.

Citigroup argued Abbar was not a "customer" of its New York affiliate, that risky leveraged options were purchased for his family's portfolio from Citigroup's United Kingdom affiliate. However, some of the investment bankers who helped develop Abbar's trading strategy were employed by the New York affiliate.

U.S. District Judge Louis Stanton agreed with Citigroup last year that Abbar was not a customer, halting the arbitration.

A three-judge panel with the 2nd Circuit unanimously affirmed the ruling on Aug. 1, saying New York employees "certainly provided services to Abbar," helping to structure and manage the option transactions.

"However, Abbar did not purchase those services from Citi NY," Judge Dennis Jacobs wrote for the Manhattan-based court. "His investment agreements were with Citi UK, and the fee for all services rendered by Citigroup personnel and offices was paid to Citi UK. Citi UK - not Citi NY - was the counterparty to the option agreements and the structuring services letters. While Abbar was certainly a 'customer' of Citi UK, that relationship does not allow Abbar to compel arbitration against its corporate affiliate."

In his claim to arbitrators, Abbar blamed his losses on Citigroup's Swiss bankers mismanagement of the funds.

"Although Citi NY personnel played no role in negotiating the loan, Abbar testified that the loan facility and the option transactions were a 'package deal,' and that the workout discussions proposed consolidation of the two transactions," the opinion states. "Abbar therefore claimed that Citi NY was responsible for the $147 million loss, and sought recovery in the FINRA arbitration."

Abbar lost $198 million on options transactions, $147 million on the loan facility and $38 million he injected into the transactions.

Abbar could not be reached for comment Thursday. Citigroup is pleased with the appeals court's ruling, a spokesman said.

Follow @davejourno

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit