Citigroup Settles with SEC over Collateralized Debt Obligation
By: Krista Franks Brock
Citigroup has agreed to a $285 million settlement with the Securities and Exchange Commission (SEC) after accusations that it misled investors about a collateralized debt obligation (CDO) that defaulted after the housing market began showing signs of distress.
The SECalleges that Citigroup Global Markets (CGMI) selected $500 million of the $1 billion CDO portfolio and then took a proprietary short position against the mortgage investments.
Furthermore, “Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select,” the SEC states.
The SEC also brought charges against Brian Stoker, the Citi employee who structured the CDO.
“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, director of the SEC’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.”
“As the collateral manager, Credit Suisse also was responsible for the disclosure failures and breached its fiduciary duty to investors when it allowed Citigroup to significantly influence the portfolio selection process,” states Kenneth R. Lench, chief of the structured and new products unit in the SEC division of enforcement.
Therefore, the SEC is also bringing separate charges against Samir H. Bhatt, the Credit Suisse portfolio manager responsible for the transaction.
The transaction closed at the end of February 2007 and defaulted in November of the same year.
According to the SEC, the 15 CDO investors lost “virtually their entire investments” while Citigroup incurred about $126 million and received about $34 million in fees for the deal.
Citigroup has neither admitted nor denied the SEC’s allegations, but nonetheless, it has agreed to pay $285 million to the affected investors. The settlement is subject to approval from a New York District Court.
However, in an announcement on its website, Citigroup said, “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.”
The SEC’s litigation against Stokes is not yet resolved.
“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” Citigroup stated.
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