Citigroup Agrees To $285 Million Settlement With SEC

Harriet Davies Editor - Family Wealth Report 20 October 2011


Citigroup Global Markets, a broker-dealer subsidiary of New York-listed
Citigroup, has agreed to pay a $285 million settlement with the Securities and Exchange Commission over the marketing and sale of collateralized debt obligations.

The broker-dealer will pay a combination of disgorgement, interest and penalties, related to the marketing and sale of notes issued by Class V Funding III in late 2006 and early 2007, according to a statement from the bank.

The regulator says it has charged Citigroup Global Markets “with misleading investors about a $1 billion collateralized debt obligation tied to the US housing market.” The regulator alleges that the firm structured and marketed the CDO, exercising “significant influence over the selection of $500 million of the assets included in the CDO portfolio.” The SEC also alleges the firm then took a proprietary short position, while not disclosing to investors either its role in the asset selection process or its short position.

Because the CDO defaulted, investors were left with losses while Citigroup made $160 million on fees and trading profits, the SEC alleges.

“While CGMI did subsequently realize gains on short positions in Class V collateral, Citigroup affiliates also retained over $100 million of the notes issued by Class V and ultimately sustained losses on these positions, along with very substantial losses the company incurred on retained long positions in other CDOs,” Citigroup said in its statement.

The Commission says the $285 million will be returned to investors through a Fair Fund distribution.

The SEC has also charged Brian Stoker, who it says was “the Citigroup employee primarily responsible for structuring the CDO transaction,” and brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, and Samir Bhatt, a portfolio manager at the Swiss bank.

“The Commission has not charged CGMI or any individuals with any intentional or reckless misconduct in connection with Citigroup's CDO business activities,” the bank’s statement says.

The SEC’s litigation continues against Stoker, while Citigroup has consented to settle without admitting or denying the allegations. The settlement is subject to court approval. The settlement requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty, as well as taking “remedial action,” according to the SEC.

"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," Citigroup said.

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