Citigroup Pays US$285 Million To Settle Fraud Charges

By: EW News Desk Team   Date: 20 October 2011

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20 October 2011

Citigroup has agreed to fork out $285 million in order to settle a civil complaint by the Securities and Exchange Commission that it had misled investors into buying a toxic housing-related debt that the bank had betted against.

The transaction involved a $1 billion portfolio of mortgage-related investments – many of which were handpicked for the portfolio by Citigroup themselves – that the bank subsequently bet against and made nearly $160 million in fees and profits while investors lost millions.

Citibank also failed to inform their investors that the company had “significant influence” over the selection of $500 million of underlying assets, said the SEC as quoted by Reuters.

One experienced CDO trader described the portfolio "possibly the best short EVER!" while another experienced collateral manager called the portfolio “horrible."

Citigroup itself though has refused to either admit or deny the SEC’s allegations in the settlement.

In a statement, Citigroup noted that the SEC did not charge it with “intentional or reckless misconduct.” Rather, it settled charges that its actions were negligent and misleading to investors.

“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 said. “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 $285 million penalty is the largest involving a Wall Street firm accused of misleading investors before the financial crisis since Goldman Sachs & Co. paid $550 million last year. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.

Citigroup’s payment will includes the fees and profit it earned, plus $30 million in interest and a $95 million penalty. This money will then be split among the investors who lost money as a result of the portfolio.

In the civil lawsuit filed Wednesday, the SEC said Citigroup traders in late 2006 discussed buying financial instruments to essentially bet on the failure of the mortgage assets being assembled in the deal.

Rating agencies downgraded most of the investments that Citigroup had bundled together, which eventually pushed the investment into default.


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