Citigroup To Pay $285 Million To Settle SEC Claims Regarding CDO

Citigroup To Pay $285 Million To Settle SEC Claims Regarding CDO

WASHINGTON, D.C. - (Mealey's) Citigroup Global Markets Inc. has agreed to pay $285 million to settle claims that it misled investors about a collateralized debt obligation (CDO) "that was tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress," according to a press release issued Oct. 19 by the Securities and Exchange Commission.

According to the press release, Citigroup structured and marketed the CDO, 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" and failed to disclose "its role in the asset selection process or that it took a short position against the assets it helped select," the SEC said in the release. 

The SEC also filed a separate complaint against Citigroup employee Brian Stoker, whom the SEC alleged to have been "primarily responsible for structuring the CDO transaction"; Credit Suisse Alternative Capital (CSAC), which "served as the collateral manager for the CDO transaction"; its successor in interest, Credit Suisse Asset Management (CSAM); and Credit Suisse portfolio manager Samir H. Bhatt, who was "primarily responsible for the transaction." 

As part of the settlement, which is subject to court approval, Citigroup does not admit or deny the SEC's allegations.  The settlement requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty and requires remedial action by Citigroup "in its review and approval of offerings of certain mortgage-related securities." 

With regard to the related administrative action against CSAC, CSAM and Bhatt, the SEC found that "as a result of the roles that they played in the asset selection process and the preparation of the pitch book and the offering circular for the Class V III transaction," they violated Section 206(2) of the Investment Advisers Act and Section 17(a)(2) of the Securities Act of 1933.   

The SEC also charged Bhatt with violations of Section 17(a)(2) of the Securities Act and suspended him from "association with any investment adviser for a period of six months." 

CSAC, CSAM and Bhatt consented to cease and desist from any violations of Section 206(2) and Section 17(a)(2).  

The press release is available online at

[Editor's Note:  Full coverage will be in the October issue of the LexisNexis Financial Services Litigation Report.  For all of your legal news needs, please visit] 

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