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Citigroup Can’t Block Arbitration in Court

(CN) - A federal judge properly refused to enjoin arbitration over Abu Dhabi's $7.5 billion loss during the 2008 financial crisis, despite Citigroup's claims of redundancy, the 2nd Circuit ruled.

The Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund, had made its investment back in 2007, taking a 4.9 percent stake in Citigroup, at the time the biggest bank in the United States.

When the financial crisis hit just one year later, American taxpayers bailed Citigroup out three times at a cost of more than $300 billion.

As the bank issued preferred shares to other investors after its financial rescue, however, The ADIA's investment was rendered nearly worthless in the process.

It took the bank to arbitration, alleging fraudulent inducement, but both a federal judge and the 2nd Circuit ultimately confirmed the award for Citigroup.

The ADIA attempted to serve Citigroup with a new notice of arbitration in 2013, while the 2nd Circuit was still considering whether to affirm the last case, based on the same issues.

Citigroup in turn brought a federal complaint to enjoin that second arbitration, which it said amounted to an "assault" on the first arbitration award.

A federal judge refused to grant the bank such relief, however, and the Manhattan-based 2nd Circuit affirmed on Jan. 14.

"The FAA's [Federal Arbitration Act] policy favoring arbitration and our precedents interpreting that policy indicate that it is the arbitrators, not the federal courts, who ordinarily should determine the claim-preclusive effect of a federal judgment that confirms an arbitration award," Judge Peter Hall wrote for the three-judge panel.

The panel found no justification in the All Writs Act, relied upon by Citigroup, to justify asserting its authority in the matter.

"In the cases on which Citigroup relies, the main justification given for resorting to the All Writs Act is that the district court that resolved the merits of a case is in the best position to protect its judgment because it is the most familiar with what it considered and decided in the proceedings leading to that judgment," Hall wrote.

"We need not, and do not, consider whether we agree with this justification because it is simply absent from this case," he added.

In confirming the first arbitration award last year, the District Court considered only the arbitrators' decision to apply New York law rather than Abu Dhabi law.

The arbitrators' lengthy decision of 65 pages, relatively unusual in arbitration matters, is confidential.

"A district court unfamiliar with the underlying circumstances, transactions, and claims, is not the best interpreter of what was decided in the arbitration proceedings, the result of which it merely confirmed," Hall wrote.

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