According to an annual report filed by Citigroup on Friday, the company
is under investigation by the SEC and other regulators for activities
related to its subprime mortgage bond business and the structuring and
sale of collateralized debt obligations (“UPDATE 1-U.S. SEC investigates
Citi's subprime business,” Reuters, Feb. 25, 2011).
The SEC’s investigation into Citigroup’s CDO activities is
partially based on allegations that Citigroup had undisclosed
conflicts of interest in the structuring and sale of a CDO called Class V Funding III. According
to a ProPublica article on the investigation, though Citigroup marketed
the Class V Funding III CDO as an independently managed security it also
allegedly picked some of the security’s underlying assets (“SEC
Investigating Citigroup Mortgage Deal,” ProPublica, Nov. 18. 2010).
It also has been alleged that Citigroup collected improper fees on the deal.
In addition to the SEC investigation, a class action lawsuit has been filed
against Citigroup by numerous investors who claim that it, and certain
of its senior officers, committed securities fraud by allegedly covering
up the CDO crisis and misstating its exposure to CDO risk. (Citigroup
ended up losing almost $34 billion on mortgage CDOs.)
Citigroup says it is cooperating with the investigations. Estimates by
the company indicate that legal costs related to Citigroup’s activities
may exceed the funds already placed in reserve by about $4 billion.