On Wednesday, October 19, 2011, the SEC announced a settlement with Citigroup’s principal U.S. broker-dealer, Citigroup Global Markets, Inc., who had been charged with misleading investors about a $1 billion collateralized debt obligation ("CDO") tied to the housing market. The Commission’s charges stem from failure to advise investors that at the same time it was selling the CDO, Citigroup "took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value." Citigroup agreed to pay $285 million, which, according to the SEC, made it the third largest recovery for the Commission in enforcement actions against companies whose misconduct occurred leading up to or during the financial crisis.

The Commission filed its Complaint against Citigroup Global Markets on October 19, 2011 in federal court in New York, where it alleged that "[t]he marketing materials Citigroup prepared and distributed to investors did not disclose Citigroup’s role in selecting assets for [the CDO] and did not accurately disclose to investors Citigroup’s short position on those assets." The Commission further alleged that the materials were misleading in that they "suggested that Citigroup was acting in the traditional role of an arranging bank," instead of disclosing its actual role and short position. The SEC claimed that after the CDO defaulted within months, investors were saddled with losses, but Citigroup Global Markets made $160 million in fees and trading profits. The company was charged with violations of Sections 17(a)(2) and (3) of the Securities Act.

The $285 million which Citigroup Global Markets agreed to pay in settlement (consisting of $160 million in disgorgement, $30 million in prejudgment interest and a $95 million civil penalty) "will be returned to investors," according to the SEC. The settlement is the latest case for the SEC stemming from the 2008 market crisis (such as the ones discussed here and here). According to the Commission, the cases include charges against over 80 companies and individuals and has resulted in $1.97 billion in financial penalties and monetary recovery.

In the Citigroup Global Markets case, while the parties have agreed to a settlement it has not yet been approved by the Court. The Commission has submitted a Memorandum in Support of the Proposed Settlement (which is not yet available on PACER). It is important to note that the case has been assigned to Judge Jed Rakoff, who, in recent years has rejected a proposed settlement submitted by the SEC (briefly described here) and rejected arguments by the Commission in another case (here).

The SEC has also filed a separate complaint against Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. Mr. Stoker was also charged with violating sections 17(a)(2) and (3) of the Securities Act, and the case against him remains in litigation. The SEC also announced a settled administrative proceeding against Credit Suisse Asset Management, its predecessor (Credit Suisse Alternative Capital) and its portfolio manager, Samir Bhatt (resulting in a cease-and-desist order against all three and an agreement by the companies to pay a total of $2.5 million in disgorgement, interest and penalties).


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