UPDATE 2-RBS to pay $44 mln to settle U.S. charges it defrauded customers

(Adds U.S. Attorney comments, traders’ guilty pleas, details of alleged misconduct, byline)

Oct 26 (Reuters) - Royal Bank of Scotland Group Plc agreed to pay more than $44 million and enter a non-prosecution agreement to settle a U.S. Department of Justice criminal probe of traders accused of defrauding customers on bond prices.

The settlement with RBS Securities Inc was announced on Thursday by U.S. Attorney Deirdre Daly in Connecticut.

RBS will pay a $35 million fine, plus at least $9.09 million to more than 30 customers, including Pacific Investment Management Co, Soros Fund Management and affiliates of Bank of America, Barclays, Citigroup, Goldman Sachs and Morgan Stanley.

Prosecutors said that from 2008 to 2013, RBS cheated customers by lying about bond prices, charging commissions it did not earn and concealing the fraud in an effort to boost profit at the customers’ expense. Some victims had received federal bailout money through the Troubled Relief Asset Program.

“For years, RBS fostered a culture of securities fraud,” Daly said in a statement. “By entering into this agreement, RBS has admitted the seriousness of its past criminal conduct and made a clean break.”

The settlement arose from a five-year federal crackdown on deceptive bond trading in which eight traders, including two from RBS, have been criminally charged.

According to settlement papers, RBS admitted and accepted responsibility for its misconduct. Daly said RBS’ “voluntary self-reporting and extraordinary cooperative efforts” were the reason it avoided criminal charges.

U.S. authorities sometimes use non-prosecution agreements to encourage cooperation. The criminal probe of individuals associated with RBS’ trading will continue.

“RBS has zero tolerance for market misconduct,” the bank said in a statement. “We are pleased to be able to resolve this issue as we continue to build a simpler, stronger bank that is fully focused on serving our customers well.”

RBS’ improper activity was conducted mainly in Stamford, Connecticut, through the bank’s U.S. asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities trading group, which was shut down in 2015.

Adam Siegel, RBS’ former co-head of U.S. ABS, MBS and CMBS trading, and Matthew Katke, a former RBS trader, both pleaded guilty in 2015 to conspiracy to commit securities fraud and have been cooperating with the government.

Of the eight traders who were criminally charged, two were convicted, two were acquitted of various charges, three pleaded guilty and one pleaded not guilty. Two other traders were also hit with civil charges. (Reporting by Jonathan Stempel in New York; Editing by Steve Orlofsky and Dan Grebler)