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.
Citigroup to refund investors $285 million for mortgage-related CDO
Most Popular Articles
Latest Articles
Better taps Chad Smith as new president and COO
Holding company Better Home & Finance hired Chad Smith to be the president and chief operating officer of its mortgage business.
-
Assumable mortgage platform Roam partners with national lender on down payment assistance
-
Rental properties can help agents build a sphere of influence
-
The month in reverse mortgage rates: May 2024
-
DeSantis stamps changes to reverse mortgage tax requirements in Florida
-
NAR board votes to leave dues unchanged in 2025