By Nate Raymond
NEW YORK (Reuters) - A federal judge grilled lawyers for Citigroup Inc and shareholders on Monday over a proposed $590 million (386 million pounds) settlement of an investor lawsuit over its exposure to toxic mortgage assets, asking if the accord was fair given none of the bank executives named as defendants would contribute money to it.
U.S. District Judge Sidney Stein in Manhattan said that Citigroup's current shareholders have been left to pay for the settlement under the current terms of the agreement. He said he was concerned about the impact on future bank conduct, citing the lack of any planned payments by individual defendants including former Chief Executive Charles Prince.
"Should the plaintiffs not also be concerned with deterrence as an issue in the settlement?" Stein asked.
At a three-hour hearing, Stein also asked questions related to the settlement's allocation plan and whether he should award plaintiffs' lawyers around $100 million in fees and expenses. The judge held off on ruling on the settlement or fee request.
The hearing marked the latest instance of a judge questioning the fairness of litigation settlements with large financial companies.
Citigroup is separately waiting for an appeals court to decide whether U.S. District Judge Jed Rakoff properly rejected a $285 million settlement with the U.S. Securities and Exchange Commission.
In March, U.S. District Judge Victor Marrero in Manhattan cited the SEC's pending Citigroup appeal in holding off on approving the commission's $602 million insider trading settlement with a unit of Steven Cohen's hedge fund SAC Capital Advisors LP.
If approved, class action settlement with Citigroup would resolve claims by shareholders from February 2007 to April 2008 that the bank misrepresented its exposure to securities known as collateralized debt obligations that were tied to mortgage investments. The settlement was announced last August.
The New York-based bank lost $27.68 billion in 2008. The company's stock price plunged from $47.89 at the start of the fourth quarter of 2007 to $2.80 by January 2009, the complaint said.
Under the accord, Citigroup is paying the full $590 million. In an April 1 order, Stein asked whether the absence of any payments from Prince and other individual defendants makes the settlement "unfair.
Ira Press, a lawyer for the plaintiffs at law firm Kirby McInerney, said his job was to get the most money possible for shareholders.
Corporate defendants such as banks also typically have indemnification agreements with their officers, he said, meaning Citigroup would have wound up paying for any settlements with individual defendants anyhow.
"It'd have the same impact on Citi shareholders," Press said.
Richard Rosen, a lawyer for Citigroup, told the judge that the U.S. Securities and Exchange Commission rather than plaintiffs' lawyers properly has the role of bringing enforcement actions against individuals to deter future misconduct.
Current Citigroup shareholders also have an interest in reaching a settlement to avoid a trial where damages could be in the "tens of billions of dollars," Rosen said.
The judge also reviewed a request by plaintiffs' lawyers for an award of $97.4 million in fees plus $2.8 million in expenses in the case. The fee request would amount to about 16.5 percent of the total settlement.
The proposed fees have drawn the objection of a prominent class-action reform activist, Ted Frank, who criticized what he called excessive rates billed by contract attorneys hired by the plaintiffs' lawyers.
Contract attorneys billed an average of $465 an hour on the case, and their work reflected more than half of the amount the plaintiffs submitted to support their request, according to court records.
Frank told the judge the majority of corporate clients pay less than $70 an hour for temporary contract attorneys.
Press said even if all the time for the document review work by the contract attorneys was excluded, the firm's request for a percentage of the settlement remained reasonable.
The case is In re: Citigroup Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 07-09901.
(Reporting by Nate Raymond in New York; Editing by Martha Graybow)