Vittorio Hernandez

Citigroup agreed to settle a $285-million negligence lawsuit that the Securities and Exchange Commission (SEC) filed over a $1-billion investment product linked with the housing market.

The amount will be distributed to investors who were not informed that the bank was using the investment instrument to bet against them. Citigroup marketed the collateralized debt obligation (CDO) in early 2007 as investments in subprime mortgages.

Citigroup made investors believe that another company selected the assets from which the CDO was formed but in reality Citigroup took part in its selection and then placed a bet that would allow the company to profit if the value of the asset dipped, according to the SEC.

By November of the same year, CDO was in default and investors lost several million dollars while Citigroup earned at least $160 million in fees and trading profits, according to the SEC court filing.

Included in the charge is former Citigroup employee Brian Stoker, who was director in the company's CDO structuring group. Stoker, who got a $150,000 pay and guaranteed bonus of $2.25 million, is fighting the SEC lawsuit.

Lawyers for Stoker said he did not control or trade the position, did not prepare the disclosure and did not select the assets.

Among the evidence that the SEC used in including Stoker in the lawsuit is his email in 2006 to an unnamed supervisor in which he said not to tell Credit Suisse Alternative Capital, which was its collateral manger, about Citigroup's role in picking the assets.

Lawyers and legislators are sounding alarm at the pattern of SEC enforcement cases that few high executives of financial firms are prosecuted for wrongdoing in connection with the 2008 financial crisis, particularly in relation to use of complex instruments such as the CDO.

In its defense, SEC Enforcement Director Robert Khuzami pointed out that not all losses in the financial crisis were due to fraud and misconduct. Some losses were due to poor judgment, risk-management policies, procedures or investments that performed badly for which the regulatory agency can't sue people.

 

 

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Investing - Citigroup Settles $285 Million Negligence Lawsuit