With activists and the Independent Bankers Association of America threatening to sue, the fate of the Travelers Group-Citicorp merger could be left to a federal judge.

Though legal observers expect opponents to have a tough time overturning a Federal Reserve Board order approving the deal, the IBAA and activists appear to have settled upon a three-pronged legal attack.

The proposed Citigroup violates the Bank Holding Company Act, the Glass- Steagall Act's restriction on securities underwriting, and the separation of powers doctrine, they charged at a recent Federal Reserve Bank of New York hearing on the deal.

"We are laying the ground work for a possible suit," said Karen M. Thomas, the IBAA's director of regulatory affairs.

(Separately, the Bronx, N.Y.-based group Inner City Press-Community on the Move said it filed suit Tuesday against the deal, though the litigation centers only on access to merger-related documents.)

"The proposed merger is illegal because it will create an affiliation between bank, securities, and insurance firms," said Hilary Botein, associate director of the Neighborhood Economic Development Advocacy Project.

Officials at Citicorp and Travelers have consistently maintained that the deal is legal.

Opponents, however, argue that Congress passed the Bank Holding Company Act in 1956 specifically to prevent banking and insurance companies from merging. The law required 46 holding companies to divest units, including the insurance giants Transamerica and Occidental Life Insurance Co.

Because Congress intended to bar banking companies from owning insurance underwriters, the Fed is obligated to reject this deal, the opponents argue. To support their claim, they cite several federal appeals court rulings that required the Fed to bar a holding company from evading the intent of the law, even if the transaction was technically permissible.

"The law clearly prohibits the combination of banking and insurance underwriting," Ms. Thomas said. "Allowing this combination on the conditional promise that if necessary they will divest the insurance underwriting operations is an evasion of the Bank Holding Company Act."

The Glass-Steagall argument rests on the 1988 decision by the U.S. Court of Appeals for the Second Circuit that gave banking companies the right to underwrite securities.

In that case, the court said a banking company could underwrite securities provided it was not "engaged principally" in the securities underwriting business. The Fed currently interprets this decision to mean that a section 20 unit may earn up to 25% of its revenue underwriting securities, a threshold that the proposed Citigroup would clear.

Opponents, however, argue that the court also restricted the total amount of securities underwriting a banking company could perform, regardless of whether the activity falls within the 25% revenue limit.

They note that the Second Circuit specifically questioned the legality of allowing a bank to affiliate with big brokers, such as Merrill Lynch & Co., even if the deal meets the 25% revenue test.

"Travelers is one of the top securities firms in the country," Ms. Thomas said. "If you let it merge with a bank, then Glass-Steagall is meaningless."

Finally, opponents said the Fed would usurp power from Congress if it approves the deal by effectively making it impossible for lawmakers to maintain the separation between the banking and insurance industries. They argue that the Supreme Court has repeatedly ruled that each branch of government must be independent and free from the "coercive influence" from the other branches.

"The action would coerce Congress into passing legislation to ratify the deal," Ms. Thomas said.

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