Citigroup agrees to pay $285 million to settle SEC probe
20 October 2011
Citigroup yesterday agreed to pay $285 million to resolve a US Securities and Exchange Commission (SEC) probe on allegations of misleading investors in 2007 in mortgage-backed security that the bank had designed to fail.
By settling with the SEC, Wall Street banks have so far paid over $1 billion to the securities regulator for allegedly misleading investors on mortgage-backed security that erupted during the global financial crisis.
The highest, $550 million, was paid last year by Goldman Sachs to settle a synthetic collateralised debt obligation called Abacus. (See: Goldman evades mortgage securities fraud case with $550 million fine)
Like Goldman Sachs, Citigroup sold derivatives, known as Class V Funding III or CDO, from chosen $500 million assets to its clients, and later turned around and shorted the CDO, by placing bets that they would fail.
The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits.
The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse's asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager Samir Bhatt who was primarily responsible for the transaction.