A 24 Year Old Student Issues The Challenge: Europe Versus Facebook
A Primer: Finding A Credit Union To Move Your Money To

Citigroup To Pay $285 Million To Settle An SEC Lawsuit About Mortgage Backed Securities

Citibank logo On Wednesday, the U.S. Securities and Exchange Commission (SEC) announced that Citigroup will pay $285 million to settle a lawsuit regarding allegations that the company misleading investors about mortgage-backed securities. The lawsuit was filed in U.S. District Court for the Southern District of New York.

The lawsuit alleged that the bank's broker-dealer subsidiary misled investors to purchase about $1 billion in collateralized debt obligations (CDOs) based on repackaged home mortgages, many of which were sub-prime. Citigroup allegedly didn't disclose the risk to investors, and then bet against its investors. When the CDOs defaulted, investors lost most or all of their money while Citigroup made about $160 million in fees and trading profits.

The SEC press release announced:

"... Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. 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 only penalty announced was the settlement payment by Citigroup, which is about 7.5% of the bank's $3.8 billion third-quarter 2011 net income. No bank executives were sent to jail, although:

"The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir H. Bhatt... 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."

The SEC's complaint alleged that Citigroup staff started discussions in 2006 about the possibility of taking a short position:

"... in a specific group of assets by using credit default swaps (CDS) to buy protection on those assets from a CDO that Citigroup would structure and market. After discussions began with Credit Suisse Alternative Capital (CSAC) about acting as the collateral manager for a proposed CDO transaction, Stoker sent an e-mail to his supervisor. He wrote that he hoped the transaction would go forward and described it as the Citigroup trading desk head’s 'prop trade (don’t tell CSAC). CSAC agreed to terms even though they don’t get to pick the assets.' ”

This blog post includes a video that explains briefly and clearly what a CDO is and how they were created. A Citigroup press release this week stated:

"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 is one of several banks with plans to end free checking accounts by charging consumers monthly fees to use their debit cards. Citibank directly notified its customers during early October about the upcoming fee, while Bank of America has not yet directly informed its customers, who learned of the new fee from news reports.

In my opinion, the settlement payment was far too light. This type of corporate behavior will only stop when executives are jailed.


Feed You can follow this conversation by subscribing to the comment feed for this post.

Куплю зерно

I suspect that this is the first fine

The comments to this entry are closed.