The agreement calls for Citigroup to pay $285 million to investors: $34 million in fees, $126 million in profits, $30 million in pre-judgment interest and a $95 million penalty. Credit Suisse Asset Management will return $1 million in fees from the transaction, plus pay $250,000 in pre-judgment interest and a $1.25 million fine.
According to an SEC news release and SEC findings, Citigroup's principal U.S. broker-dealer subsidiary failed to disclose to investors that it had “exercised significant influence” over the selection of $500 million of housing-related assets for the CDO, and that it had bet against those investors by taking a short position as the housing market weakened. The Class V Funding III CDO, which Citigroup structured and marketed until February 2007, was declared in default in November 2007, “leaving investors with losses while Citigroup made $160 million in fees and trading profits,” according to an SEC release.
Separate charges were made against Citigroup employee Brian Stoker; his case is pending in U.S. District Court in New York.
The agency brought separate charges against Credit Suisse Alternative Capital, the CDO collateral manager and a Credit Suisse Asset Management predecessor unit, and CSAC portfolio manager Samir H. Bhatt.
Citigroup, Credit Suisse and Mr. Bhatt agreed to settle charges without admitting or denying any wrongdoing
Robert Khuzami, SEC enforcement director, said in a conference call Wednesday that the settlement is one of 22 cases involving misconduct during the financial crisis, in which investment advisers “failed to disclose a true picture of the risks to investors.” To date, the SEC has recovered $2 billion for investors from cases against State Street Bank and Trust Co., Evergreen Investment Management, Morgan Keegan and others, he said.
This case was different because Citigroup itself took the short position, while Credit Suisse “allowed Citigroup to exercise significant influence” over the asset selection and pitch materials. ‘Nothing in the disclosures put investors on notice that Citigroup had interests that were adverse to the interests of CDO investors,” the SEC release said.
Kenneth R. Lench, chief of the SEC's structured and new products unit, said Credit Suisse failed to perform its fiduciary duty to pick the best assets for the investors. “If they had done their job, this would not have happened,” Mr. Lench said in an interview.
Credit Suisse officials declined to comment. In a statement, Citigroup said: “We are pleased to put this matter behind us,” and noted that while the global markets unit did gain from the short positions, other affiliates with more than $100 million in the CDO “ultimately sustained losses on these positions.”