A Citigroup (C) broker-dealer subsidiary sold investors on a $1 billion collateralized debt obligation tied to the housing market, while betting the CDO would default, according to the Securities and Exchange Commission. Citigroup will return $285 million to investors of the CDO called Class V Funding III. According to the SEC, Citi neither admits nor denies wrongdoing, in misleading investors on the $1 billion structured finance platform. The SEC said Citigroup Global Markets used its discretion when selecting the mortgages to be placed in the CDO and, thus, potentially knew the quality of the underlying collateral was subpar. "Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value," the SEC alleges. "The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits." The SEC then believes Citigroup purchased credit default swaps from Credit Suisse which would pay out in the event the CDO defaulted. According to emails reviewed by the regulator, one experienced CDO trader characterized the Class V III portfolio as "dogsh!t” and "possibly the best short EVER!" in an internal message. 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, SEC director 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." Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.