Citigroup Global Markets Inc. has agreed to pay $285 million to settle an SEC securities fraud action related to a collateralized debt obligation (CDO) called Class V Funding III.
In the action brought on Wednesday, the SEC alleged that Citigroup structured and marketed the $1 billion "CDO-squared" Class V Funding III, the value of which was heavily tied to subprime residential mortgage-backed securities, after the U.S. housing market was already showing signs of distress.
The Commission further alleged that Citigroup released marketing materials for the Class V Funding III that "failed to disclose to investors that Citigroup had exercised significant influence over the selection of $500 million of the assets in the Class V III investment portfolio, and that Citigroup had retained a short position in those assets."
"By taking a short position with respect to the assets that it had helped select, Citigroup profited from the poor performance of those assets, while investors in Class V III suffered losses," wrote the Commission in the action.
Robert Khuzami, Director of the SEC's Division of Enforcement expressed outrage at Citigroup's actions in Wednesday's press release.
"The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors," Khuzami said. "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."
The $285 million will be returned to the Class V III investors, according to the SEC. (For more information, read the full release here.)