Citi Deal Unfair to Retail Investors: Shareholder

Citigroup's recent arrangement for converting some of the government’s preference shares into ordinary shares causes a significant loss to the retail investor, Citigroup shareholder Victor Filatov, former president of Capula Investment Management, told CNBC.

"People felt lucky when they first heard about the deal because they were afraid that they were going to get nothing, that bankruptcy or full nationalization was imminent and consequently, what are we going to get for that," he said.

"An institutional investor or retiree … they should look at what their rights are," Filatov added. "Citigroup owes some answers as to why there's no vote, as to why there's a discount, why are they cutting the dividend, and what's going to happen."

Last week, Citigroup and the US government announced a deal that would see the bank convert preference shares into ordinary shares and the US take a 36 percent stake in the company.

In exchange, Citigroup got a reduction of the coupon they are required to pay out on the government’s preference shares and an improvement in the measures of liquidity within the bank because of the way preference and ordinary shares are treated in capital terms.

"There were set terms for the conversion of preferred shares into common stock for the private investors and for the government," Filatov said.

When Citigroup did the deal, the public and the retail investor were not offered anything close to the deal the private investors and government got. It was a premium over par, he added.

"It's making the government and the wealthy private investors feel that they're getting white-glove treatment versus the other investors. Their justification is illiquidity, 'we talk to them first', 'we need them in the future'," Filatov told 'Squawk Box Europe', adding that Citi seems to favor the private investors and the government over the other investors.

However, after Friday's announcement of the deal, Citi have revised the discount to offer a 5 percent discount to ordinary investors, which is not as big a loss as originally planned.

"Since they announced the offer last week, they thought about it and said 'we better not hurt them too much' and that's why it came out at only a 5 percent discount, rather than what was originally expected," Filatov said.

"There should be a vote on the part of all shareholders. That vote has not been mentioned at all," Filatov added.

"The government TARF that doesn't buy the shares or convert to the shares is going to be converted into a higher ranking convertible stock, leaving the public that does not convert the only remaining group in that particular preferred share class, and they're going to waive the dividends on those shares. That's another significant disadvantage to the retail investor."

"Inevitably, there will be some class action lawsuits," he told CNBC. "If the stock continues to fall, you might see a negotiation on what those conversion terms are going to be."

Citigroup has received $45 billion of taxpayer money since October, and on Friday got a second government bailout that could boost the U.S. stake in the bank to 36 percent, according to Reuters.

The bank lost $27.7 billion last year, and analysts interviewed by Reuters expect it to lose money every quarter this year.

Shares in Citigroup were up over 4 percent in pre-market trade Wednesday.

(Disclosure: Filatov currently owns 5,000 shares in Citigroup)

Disclaimer