Citigroup to pay $285 million to settle fraud case

Wed Oct 19, 2011 5:36pm EDT

Pedestrians walk past a Citibank branch in Washington January 19, 2010. REUTERS/Jim Young

Pedestrians walk past a Citibank branch in Washington January 19, 2010.

Credit: Reuters/Jim Young

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(Reuters) - Citigroup Inc will pay $285 million to settle charges that it defrauded investors who bought toxic housing-related debt that the bank bet would fail, the U.S. Securities and Exchange Commission said on Wednesday.

The SEC said the bank's Citigroup Global Markets unit misled investors about a $1 billion collateralized debt obligation by failing to reveal it had "significant influence" over the selection of $500 million of underlying assets, and that it took a short position against those assets.

It said one experienced CDO trader called the portfolio "possibly the best short EVER!" while an experienced collateral manager said "the portfolio is horrible."

In a statement, Citigroup said the SEC did not charge the unit with any "intentional or reckless misconduct" and that the settlement "resolves all outstanding SEC inquiries into those activities."

The settlement is the third by the SEC against a major bank it accused of marketing a CDO without disclosing it was betting against it or allowing others to do so.

The SEC has also settled cases against Goldman Sachs and JPMorgan.

The agency and criminal prosecutors are under pressure from lawmakers and the public to bring cases that hold Wall Street figures accountable for their role in the 2007-2009 financial crisis that triggered a deep recession.

According to the SEC's case against Citigroup, the CDO, Class V Funding III, defaulted in November 2007, fewer than nine months after it closed, leaving investors with losses even as Citigroup made $160 million of fees and profits.

On the other side of the deal was Ambac Credit Products, which agreed to sell insurance on the $500 million in assets Citigroup had selected.

"The securities laws demand that investors receive more care and candor than Citigroup provided," SEC enforcement chief Robert Khuzami said in a statement.

The sanctions will go to the investors who lost money on the deal, the SEC said.

Citigroup settled with the SEC without admitting wrongdoing. The SEC also filed charges against Brian Stoker, who it said was the Citigroup employee primarily responsible for structuring the transaction.

A lawyer for Stoker said there was "no basis" for the SEC's allegations against him. "He was not responsible for any alleged wrongdoing -- he did not control or trade the position, did not prepare the disclosures and did not select the assets," said Fraser Hunter, Jr., with Wilmer Hale.

In marketing materials outlining the deal, the SEC said Citigroup represented that the collateral manager of the CDO, a unit at Credit Suisse Group AG, had independently selected the assets. In reality, it said, many had been selected by Citigroup, with the intention of taking the short position.

The SEC settled separate charges against Credit Suisse's asset management unit as well as Samir Bhatt, the Credit Suisse portfolio manager mainly responsible for it.

Credit Suisse will pay $2.5 million to settle, while Bhatt agreed to a six-month suspension from associating with an investment adviser, the SEC said. Neither admitted wrongdoing.

A spokeswoman for Credit Suisse and a lawyer for Bhatt declined comment.

The SEC has been conducting a broad probe into mortgage-bond deals, with several settlements this year. "This is not the last one," an SEC official said in an interview. "I think we are likely see a couple more."

In June, JPMorgan Chase & Co agreed to a $153.6 million settlement over the Squared CDO 2007-1, while Goldman Sachs Group Inc in July 2010 accepted a $550 million accord over the Abacus 2007-AC1 CDO.

As part of the settlement, Citigroup will give up the $160 million of alleged improper fees and profits plus $30 million of interest, and pay a $95 million fine.

The settlement requires court approval. The case was assigned to U.S. District Judge Jed Rakoff in Manhattan, who chastised the SEC and ultimately rejected its proposed $33 million settlement in 2009 with Bank of America Corp over that bank's purchase of Merrill Lynch & Co. He later grudgingly approved a revised $150 million accord.

(Reporting by Karey Wutkowski and Aruna Viswanatha in Washington, D.C., Jonathan Stempel and Grant McCool in New York; and Catherine Bosley in Zurich), Editing by Tim Dobbyn, Bernard Orr)

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