Citigroup settlement updated to reflect that Brian Stoker is no longer an employee at the bank.NEW YORK ( TheStreet) -- Citigroup ( C) will pay the Securities and Exchange Commission $285 million to settle charges that it misled investors in a sale of securities backed by mortgages that it bet against. The regulator alleged that Citigroup Global Markets structured and marketed a collateralized debt obligation called Class V Funding III and had a significant say in the selection of the $ 500 million assets that made up the 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 SEC said. The SEC also filed charges against Brian Stoker, the Citigroup employee responsible for the transaction. Stoker is no longer an employee of Citigroup. One trader characterized the portfolio as the "possibly the best short EVER" , while another said "the portfolio is horrible," according to emails unearthed by the SEC. The transaction closed on Feb.28, 2007. In November, the entire tranche was downgraded and subsequently declared to be in default. The approximately 15 investors in transaction lost virtually their entire investments, the regulator said, while Citigroup received fees of approximately $34 million for structuring and marketing the transaction and additionally realized net profits of at least $126 million from its short position. "The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors," said Robert Khuzami, director of the SEC's Division of Enforcement. "Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost." Citigroup in settling neither admits nor denies the findings. The company said in a statement that while Citigroup Global Markets made gains on short positions from the Class V collateral, other Citi affiliates retained $100 million of the notes issued by Class V and ultimately sustained losses on these positions, along with "very substantial losses the company incurred on retained long positions in other CDOs."
"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," the Company said in a statement. The settlement requires Citigroup to pay $160 million in disgorgement, plus $30 million in prejudgment interest and a $95 million penalty. The settlement money will be returned to the investors through a fair distribution fund. Citigroup is also required to take remedial action in its review and approval of offerings of certain mortgage-related securities. The regulator also filed separate charges against the asset management unit of Credit Suisse ( CS), which acted as collateral manager of the deal. Samir Bhatt, the Credit Suisse portfolio manager responsible for the transaction was also charged. Credit Suisse will pay disgorgement of $1 million in fees that it received for the transaction, $250,000 in prejudgment interest and a penalty of $1.25 million. The unit neither admitted nor denied the findings. The SEC suspended Bhatt from association with any investment adviser for 6 months. Earlier this year, JPMorgan Chase ( JPM) paid $15.6 million to settle charges that it misled investors in a deal by failing to disclose the role played by hedge fund Magnetar in creating the deal. The bank neither admitted nor denied wrongdoing. Magnetar has not been accused of any wrong doing. Last year, Goldman Sachs ( GS) paid $550 million to settle SEC charges that it misled investors by failing to disclose the role played by hedge fund Paulson & Co in a deal called Abacus 2007-AC1. Goldman neither admitted nor denied the charges in settling the deal. --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: email@example.com.