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Citicorp’s Multi-Billion Settlement and the Terror Arrest of Ahmed Khatallah

Linking the massive, $7 billion settlement between Citicorp and the Government and the capture of terror suspect Ahmed Abu Khatallah might seem an odd connection between two, disparate big news events, but it was precisely that media link that almost torpedoed the deal with Citicorp.

The WSJ report that the deal, which is expected to be announced Monday, almost fell apart because government officials who were frustrated over the constant haggling warned that a lawsuit would be filed immediately. But then the Khatallah arrest occurred and plans were placed on hold.

As the WSJ reports:

News had leaked that afternoon, June 17, that the U.S. had captured Ahmed Abu Khatallah, a key suspect in the attacks on the American consulate in Benghazi in 2012. Justice Department officials didn’t want the announcement of the suit against Citigroup—and its accompanying litany of alleged misdeeds related to mortgage-backed securities—to be overshadowed by questions about the Benghazi suspect and U.S. policy on detainees. Citigroup, which didn’t want to raise its offer again and had been preparing to be sued, never again heard the threat of a suit.

Instead, the two sides returned to the table. Were it not for that unconnected event, Citigroup and the Justice Department might not have the deal they are expected to announce tomorrow.

This reconstruction of the events leading up to the deal is based on interviews with people close to the talks.

The two sides had been negotiating for months. They had started with numbers that were orders of magnitude apart: Citigroup opened negotiations with an offer of $363 million in cash to settle Justice Department claims, plus more for consumer relief. The Justice Department had opened by demanding a number that was roughly $12 billion, which would include consumer relief. The two sides were narrowing the gap but still were arguing over the merits of the case, and the government had raised the threat of a lawsuit.

A pivotal point came on Tuesday morning, June 17, when Tony West, a top lieutenant of Attorney General Eric Holder, met with his boss and presented him with a choice: return to the negotiating table, or move ahead with plans to file a lawsuit the next day. Mr. Holder chose the lawsuit. Mr. West called Ted Wells, a top outside lawyer for Citigroup, and told him the news.

The Justice Department began to plan for an announcement. Colorado U.S. Attorney John Walsh, whose office was working on the case along with its counterpart in Brooklyn, boarded a flight from Denver to Washington for a news conference. Citigroup by then had raised its offer several times and told the Justice Department that it wasn’t willing to do so again. At the time, it was offering $7 billion.

Then, the news of Mr. Khatallah’s capture broke. Justice Department officials thought attention would be focused on his interrogation and prosecution, distracting from the announcement of the lawsuit.

So that evening, Mr. West called Mr. Wells to tell him that the lawsuit had been delayed. Mr. West said the department had a lot going on, and that the lawsuit wouldn’t be filed that week or the following week, as he and Mr. Holder would both be traveling. Privately, some bank officials wondered if the Justice Department didn’t want a lawsuit. Within days, the two sides had returned to the table.

The eventual settlement, and the behind-the-scenes haggling that created it, is being watched closely throughout Washington and Wall Street, where it could help set a precedent for similar talks under way with Bank of America Corp.

The negotiations are stoking banks’ fears that the Justice Department is getting increasingly heavy-handed against the industry, while investors are worried that bank penalties will be decided not by a formula but by the subjective measures of the government. The deal also could be seen as a key test for Citigroup CEO Michael Corbat, who was given the top job in 2012 with a mandate to improve the bank’s relationship with the government.

Meanwhile, Mr. Holder has faced constant criticism from Congress and elsewhere that his Justice Department has been too soft on financial institutions. Negotiations with Citigroup heated up as the department appeared emboldened: In May, it won a guilty plea from Credit Suisse Group AG, its first such plea by a major financial institution in two decades, and was seeking another from BNP Paribas SA.

Read more at the Wall Street Journal

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