Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011

Related Blog Resources:
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Contact our securities fraud attorneys today.