A 'Citi' sign stands outside Citigroup Center near Citibank headquarters in Manhattan

Some of Citigroup’s biggest investors have said they want the bank to go to court rather than pay as much as $10bn to settle an investigation over the sale of mortgage-backed securities with the Department of Justice.

One top-10 shareholder, who has discussed the matter with a handful of other major Citi shareholders, said: “We’re all in agreement that there’s a line of responsibility that is acceptable – but, past that, it becomes questionable.”

The DoJ is preparing to file a lawsuit against Citi as it investigates big US banks over the sales of mortgage-backed securities in the lead-up to the financial crisis. JPMorgan Chase paid the DoJ a $2bn civil penalty and agreed to $4bn in consumer debt relief as part of its $13bn settlement last year. Citi and Bank of America are yet to strike deals with the DoJ.

The unusual stance from Citi’s shareholders comes after a year in which US authorities have levied unprecedented penalties on US banks over alleged wrongdoing – ranging from the mis-selling of mortgage products to helping Americans evade paying taxes.

If Citi fights the DoJ, it risks a protracted legal battle with an uncertain outcome. Faced with a similar scenario, JPMorgan concluded that it risked too much going to court, including a possible criminal indictment that might be fatal for a bank.

The top-10 shareholder added: “Once the line is as far past as it seems to be in this case, we would support management and the board to get a reasonable judgment.”

The government could file a lawsuit against Citi as soon as this week after Tony West, a top DoJ official, called off talks in a late night phone call on June 9 after little progress had been made, a person familiar with the situation said.

DoJ officials made an opening bid of $10bn as part of its negotiations, the person said, but if a settlement is reached it is expected to be less. Citi was a much smaller issuer of mortgage-backed securities than either BofA or JPMorgan and a settlement of $10bn is well in excess of investor expectations.

“I’m so tired of watching the big banks roll over on everything,” said William Smith, chief executive of Sam Advisors, a small investment management firm that has held Citi stock since 2006. “Why not take a swing at fighting this a little bit? I think shareholders would stand behind that.”

A Citi spokesman declined to comment.

Wells Fargo bank analysts wrote in a note this week that Citi should pay about $2bn if it settled on the same proportion of its mortgage securities issuance as JPMorgan. In April, AllianceBernstein analysts put the figure at about $1.5bn.

If Citi were to reach a deal at about $6bn, it would shave the bank’s Basel III tier one common equity ratio by about 50 basis points to – a still healthy – 10 per cent, according to JPMorgan analysts.

BofA is in talks to pay at least $12bn in cash and homeowner relief to end a long-running civil investigation by the DoJ alleging that it mis-sold mortgage-backed securities.

“Nobody wants to go up against the government,” said another institutional Citi shareholder. “There’s no good PR to go through what your underwriting practices were and the losses that resulted.”

Additional reporting by Kara Scannell

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