OWS?

Accused of Deception, Citi Agrees to Pay $285 Million

By EDWARD WYATT

Published: October 19, 2011

WASHINGTON — Citigroup has agreed to pay $285 million to settle a civil fraud complaint that it misled investors in a $1 billion derivativesdeal tied to the United States housing market, then bet against the investors as the housing market began to show signs of distress, the Securities and Exchange Commission said Wednesday.


The S.E.C. also brought a civil action against a Citigroup employee who was responsible for structuring the transaction, and brought and settled another against the asset management unit of Credit Suisse and a Credit Suisse employee who also had responsibility for the derivative security.
The securities fraud complaint was similar to one the S.E.C. brought against Goldman Sachs last year, with one significant difference. Goldman Sachs was accused of misleading investors about who was picking the investments in a mortgage-related derivative.
It told investors that the bonds would be chosen by an independent manager, when in fact many of them were chosen by John A. Paulson, a hedge fund manager who chose assets that he believed were most likely to lose value, according to the S.E.C.’s complaint in that case. Goldman later settled the case by paying $550 million.
In the Citigroup case, however, it was the bank itself that chose assets for the portfolio that it then bet against. Investors were not told of its role or that Citigroup had an interest that was adverse to the interests of investors.
“The securities laws demand that investors receive more care and candor than Citigroup provided to these C.D.O. investors,” said Robert Khuzami, director of the S.E.C.’s division of enforcement. “Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”
The S.E.C. said the $285 million would be returned to investors in the deal, a collateralized debt obligation known as Class V Funding III. The commission said  Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.
Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.
In a statement, Citigroup said: “We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly. Since the crisis, we have bolstered our financial strength, overhauled the risk management function, significantly reduced risk on the balance sheet, and returned to the basics of banking.” The S.E.C. action named Brian Stoker, 40, a Citigroup employee who was primarily responsible for putting together the deal, and Samir H. Bhatt, 37, a Credit Suisse portfolio manager who was primarily responsible for the transaction. Credit Suisse served as the collateral manager for the C.D.O. transaction.
Mr. Stoker, who left Citigroup in 2008, is fighting the S.E.C. case, his lawyer said. Mr. Bhatt settled, agreeing to a six-month suspension from association with any investment adviser.
“There is no basis for the S.E.C. to blame Brian Stoker for these alleged disclosure violations,” said Fraser L. Hunter, a lawyer at WilmerHale representing Mr. Stoker. “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. We will vigorously defend this lawsuit.”
The derivative securities lost value remarkably fast. After the deal closed on Feb. 28, 2007, more than 80 percent of the portfolio was downgraded by credit-rating agencies in less than nine months. The security declared “an event of default” on Nov. 19, 2007, and investors eventually lost hundreds of millions of dollars, the S.E.C. said.
Citigroup received fees of $34 million for structuring and marketing the transaction and realized net profits of at least $126 million from its short position. The $285 million settlement includes $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty, all of which will be returned to investors.
The companies and individuals who settled in the case neither admitted nor denied the accusations in the complaint.
The settlement is subject to approval in the Federal District Court for the Southern District of New York, where the charges were filed.
NYT