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.