01/24/2012 06:34 pm ET Updated Mar 26, 2012

Citigroup Faces $1 Billion Fraud Lawsuit Over CDOs

* Sued over collateralized debt obligations bought in 2006, 07'

* Citigroup says suit without merit (Adds Citigroup comment)

By By Karen Freifeld

NEW YORK, Jan 24 (Reuters) - Citigroup Inc was sued for fraud by Loreley Financing over nearly $1 billion worth of collateralized debt obligations purchased in 2006 and 2007.

Citigroup is accused of defrauding Loreley into purchasing "fraudulent investments that are now worthless," Loreley said in a complaint filed Tuesday in New York State Supreme Court in Manhattan.

Citi used the CDOs to offload the risks of toxic mortgage-backed securities on its books and to help preferred clients "short" the housing market, the lawsuit claims.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in an email, "We believe the suit is without merit."

Loreley Financing is a group of special-purpose entities formed to invest in CD0s. The entities are organized under the laws of Jersey in the Channel Islands.

The entities, whose claims include fraud and unjust enrichment, are seeking at least $965 million paid for the notes and buybacks.

The case is Loreley Financing v. Citigroup Global Markets, 650212/2012, New York State Supreme Court.

(Reporting By Karen Freifeld; Editing by Bernard Orr)