Citigroup, Wachovia, Wells Fargo agree to suspend litigation

(RTTNews) - Citigroup, Inc. (C), Wachovia Corp. (WB | Quote | Chart | News | PowerRating) and Wells Fargo & Co. (WFC | Quote | Chart | News | PowerRating) said Monday that in consultation with the U.S. Federal Reserve, they have agreed to a standstill of all formal litigation activity effective immediately.

The companies have also agreed to cease any formal discovery activities, and cooperate in good faith to agree among themselves to secure orders where necessary in all applicable cases in all jurisdictions tolling any schedules for the filing of litigation papers or court appearances or any other formal litigation deadlines, with the goal of preserving the status quo during the litigation standstill period.

The standstill agreement will expire at noon on Wednesday, October 8, unless otherwise extended.

There were media reports earlier today that Federal Reserve officials have been in talks with Wells Fargo and Citigroup in the hope of getting the parties to come to some sort of compromise.

The involvement of Federal Reserve officials was obviously prompted by the bitter legal battle over the takeover of Wachovia.

Citigroup announced earlier Monday that it has filed a complaint with the Supreme Court of the State of New York against Wachovia, Wells Fargo and the directors of both companies.

In its complaint, New York-based Citigroup is seeking more than $20 billion in compensatory damages and more than $40 billion in punitive damages from San Francisco, California-based Wells Fargo for tortious interference with Citigroup's contract with Wachovia.

Citigroup is also seeking relief from Charlotte, North Carolina-based Wachovia for its bad faith breach of that contract.

On September 29, Citigroup agreed in principle to acquire the banking operations of Wachovia for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp.

Under the deal with Wachovia, Citigroup would have acquired the bulk of Wachovia's assets and liabilities, including five depositary institutions for about $2.16 billion in stock and assumed Wachovia's senior as well as subordinated debt totaling about $53 billion. Wachovia would have remain a public company and retain its asset management, retail brokerage and certain select parts of its wealth management businesses, including the AG Edwards brokerage franchise and the Evergreen Investments wealth management division. The FDIC had agreed to provide loss protection in connection with about $312 billion of mortgage-related and other Wachovia assets.

The deal was approved by the boards of both companies and was subject to approval by Wachovia's shareholders in addition to regulatory approvals. The closing of the transaction was expected by December 31.

However, four days later on October 3, Wells Fargo announced that it has signed a definitive agreement to buy Wachovia for about $15.1 billion in a stock-for-stock transaction.

Citigroup swung into action immediately and said in a statement Friday that Wachovia's agreement to a deal with Wells Fargo is in clear breach of an exclusivity agreement between Citigroup and Wachovia.

Citigroup had demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the exclusivity agreement. Citigroup said it has substantial legal rights regarding Wachovia and that transaction.

Then, the legal battles began over the weekend. A New York state judge on Saturday granted emergency injunctive relief to Citigroup extending its exclusivity agreement with Wachovia until further order of the court. However, a New York State appeals court vacated the court's ruling on Sunday.

In its complaint filed Monday with the Supreme Court of the State of New York, Citigroup alleged that had it not reached a deal with Wachovia on September 29, Wachovia would have failed the following day and the debt issued by its holding company would have collapsed, with potentially devastating implications for the stability and security of the financial markets.

Citigroup has also alleged that though Well Fargo was once a potential suitor for Wachovia in connection with a process for the rescue of Wachovia facilitated by regulators, it had determined not to participate in the process of rescuing Wachovia by September 28.

In its complaint, Citigroup said the illegitimate Wells Fargo deal triggered the golden parachutes of Wachovia CEO Robert Steel and its other senior executives, which would enable these executives to bestow upon themselves a $225 million windfall.

Citigroup said when the Wells Fargo- Wachovia deal was announced, it was finalizing the agreements required to consummate its FDIC-assisted open bank transaction with Wachovia. Citigroup reiterated that it has been providing liquidity and market support to Wachovia ever since their deal was announced.

"This was always a deal Citi wanted rather than one we needed. We were and remain very excited about this transaction and how it will benefit the clients and shareholders of Citi and Wachovia, as well as help preserve the stability of the financial system. The Citi/Wachovia transaction would have been signed and announced on Friday, October 3rd if it had not been subverted by the unlawful conduct of Wachovia, Wells Fargo, and their officers and directors and outside advisors," Citigroup said in a statement on Monday.

Citigroup shares closed Monday's regular trading session at $17.41, down 94 cents or 5.12% and lost an additional 26 cents or 1.49% in after hours trading, Wachovia shares closed the day's session at $5.78, down 43 cents or 6.92% and lost an additional 4 cents in after hours trading. Wells Fargo shares closed Monday down 92 cents or 2.66% at $33.64 and lost an additional 64 cents or 1.90% in after hours trading.

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