SEC Levies $285M Fine Against Citigroup Over CDO Deal

Citigroup will pay $285 million as part of a deal with the Securities and Exchange Commission (SEC) to settle civil fraud charges that it misled buyers about a collateralized debt obligation investment tied to the U.S. housing market.

According to the SEC, Citigroup bet against investors and the CDO in 2007 just as the housing market began showing signs of distress. In doing so, Citigroup made $160 million in fees and profits, while investors lost millions of dollars.

In agreeing to the settlement, Citigroup neither admitted nor denied the SEC’s allegations.

The SEC alleges that 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 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.

The $285 million penalty against Citigroup is the biggest to date involving a Wall Street firm accused of misleading investors before the financial crisis. Last year, Goldman Sachs paid $550 million to settle similar charges, with JPMorgan Chase & Co. resolving similar charges in June after paying $152 million.

CDOs are securities backed by pools of other assets, such as mortgages.

The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction.

For more information about other SEC enforcement actions related to the financial crisis, visit the SEC Web site at: http://www.sec.gov/spotlight/enf-actions-fc.shtml.