Scandals hit Citigroup for $1.5bn

Citigroup, the world's largest bank, yesterday warned it would take a $1.5bn (£1bn) charge primarily to meet compensation claims and litigation following Eliot Spitzer's damning investigation into investment banks.

About $1.3bn will be set aside in the fourth quarter of the financial year to cover costs related to the investigation by the New York Attorney General and the further lawsuits that are now expected from investors, while $200m is a charge for bad loans, Citigroup said.

The massive bill is the first attempt by an investment bank to put an estimate on what the total cost of the investigation will be. It is likely to be followed by hefty charges being taken by most of the other nine investment banks that finally reached an agreement with Mr Spitzer on Friday.

The 10 banks said they would pay up to $1.4bn between them to settle accusations that they misled investors during the 1990s stock market bubble. Citigroup incurred the biggest penalty, agreeing to hand over $400m. The rest of the money earmarked yesterday will be used to deal with compensation claims from investors who have been holding off until the outcome of the Spitzer investigation was known.

Citigroup said it had "substantial defences to the pending private litigations, which are at a very early stage".

But it added: "Given the uncertainties of the timing and the outcome of this type of litigation, the large number of cases, the novel issues, the substantial time before the cases will be resolved, and the multiple defendants in many of them, this reserve is difficult to determine and of necessity subject to future revision."

Citigroup also said Sallie Krawcheck, the new chief executive of Salomon Smith Barney arm, Citigroup's investment banking arm, would meet the group's board "periodically to discuss analyst independence".

Ms Krawcheck was appointed as part of the giant bank's drive to reassure its clients that its research is unbiased.

The move follows allegations that Salomon's former star telecoms analyst, Jack Grubman, issued flattering research about companies including WorldCom and Global Crossing.

Mr Grubman resigned in August with a $32m compensation package. Mr Spitzer's team singled Mr Grubman out on Friday, saying they had nearly reached an agreement that he would pay a $15m fine, which is separate from the banks settlement.

Other banks' analysts have come unstuck for research written during the dot.com boom. But Citigroup's rivals are not likely to have to take as large a charge to cover the legal action, which had been put off until after the industry-wide settlement with US authorities.

Sandy Weill, the chairman and chief executive of Citigroup, tried to strike an upbeat note about the bank's prospects, saying: "We look forward to the new year with renewed energy."

Friday's settlement resolved multiple investigations into whether banks tried to curry favour with corporate clients via rosy research or steering shares in "hot" initial public offerings to influential executives – a practice known as spinning.

The agreement bans IPO allocations to senior executives or directors, bars analysts from working with bankers on deals or being paid directly from deal proceeds, and requires banks to fund independent research.