Wednesday, October 19, 2011
The SEC and Citigroup settled charges that Citigroup’s principal U.S. broker-dealer subsidiary misled investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits. According to the SEC, Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.
Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors. The settlement is subject to court approval.
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 primarily responsible for the transaction, Samir H. Bhatt.