Citigroup to pay $285 million to settle charges in SEC CDO fraud case

NEW YORK ― Citigroup Inc. will pay $285 million to settle charges that it defrauded investors who bought toxic housing-related debt that the bank bet would fail, the U.S. Securities and Exchange Commission said on Wednesday.

The SEC said the bank’s Citigroup Global Markets unit misled investors about a $1 billion collateralized debt obligation by failing to reveal it had “significant influence” over the selection of $500 million of underlying assets, and that it took a short position against those assets.

It said one experienced CDO trader called the portfolio “possibly the best short EVER!” while an experienced collateral manager said “the portfolio is horrible.”

According to the regulator, the CDO, Class V Funding III, defaulted in November 2007, fewer than nine months after it closed, leaving investors with losses even as Citigroup made $160 million of fees and profits.

“The securities laws demand that investors receive more care and candor than Citigroup provided,” SEC enforcement chief Robert Khuzami said in a statement.

Citigroup settled with the SEC without admitting wrongdoing. The SEC also filed charges against Brian Stoker, who it said was the Citigroup employee primarily responsible for structuring the transaction.

Neither Citigroup nor a lawyer for Stoker were immediately available to comment.

The SEC said it settled separate charges against Credit Suisse Group AG’s asset management unit, which was the collateral manager for the CDO, as well as Samir Bhatt, the Credit Suisse portfolio manager mainly responsible for it.

Credit Suisse will pay $2.5 million to settle, while Bhatt agreed to a six-month suspension from associating with an investment adviser, the SEC said. Neither admitted wrongdoing.

The settlement is the third by the SEC against a major bank it accused of marketing a CDO, and then betting against it or allowing others to do so.

In June, JPMorgan Chase & Co. agreed to a $153.6 million settlement over the Squared CDO 2007-1, while Goldman Sachs Group Inc. in July 2010 accepted a $550 million accord over the Abacus 2007-AC1 CDO.

As part of the settlement, Citigroup will give up the $160 million of alleged improper fees and profits plus $30 million of interest, and pay a $95 million fine.

The settlement requires court approval. The case was assigned to U.S. District Judge Jed Rakoff in Manhattan, who chastised the SEC and ultimately rejected its proposed $33 million settlement in 2009 with Bank of America Corp over that bank’s purchase of Merrill Lynch & Co. He later grudgingly approved a revised $150 million accord.

SEC mulls charges against McGraw Hill in collateralized debt offering case

NEW YORK ― McGraw-Hill Cos. Inc. said U.S. regulators may charge its Standard & Poor’s ratings unit with violating federal securities laws with ratings on a repackaged mortgage bond in 2007.

The company said it received a Wells Notice from the U.S. Securities and Exchange Commission that commission staff may recommend a civil lawsuit against the unit for a rating on 2007 collateralized debt offering known as “Delphinus CDO 2007-1.” The staff may recommend that the SEC seek monetary penalties, the company said in a statement today.

Regulators send Wells Notices to companies or people to give them a chance to argue why government should not file an enforcement action against them.

The company said it received the notice on Sept. 22.

The SEC’s investigation comes as McGraw-Hill prepares to split into two publicly-traded companies, one holding Standard & Poor’s and market information services and another holding its textbook publishing company.

Institutional shareholders, led by Jana Partners, have pushed the company to completely separate the S&P ratings business from the information services.

S&P issued the CDO rating in question at the end of the credit boom that carried mortgage lending and house prices to unsustainable heights. S&P put triple-A credit ratings on many mortgage-related securities which later went into default when house prices collapsed.

S&P’s failures with structured finance ratings were recently cited by Washington politicians as reason to doubt the agency’s downgrade of U.S. government debt in August from triple-A.