Moral Low Ground


Citigroup Gets $285 Million Slap on the Wrist for Defrauding Investors

Citigroup has agreed to pay $285 million to settle a Securities and Exchange Commission (SEC) civil complaint alleging the mega-bank defrauded clients who invested in high-risk mortgage-related investments that the company was betting against.

According to the New York Times, the settlement, although the third-largest related to the current financial crisis, represents a “pittance” to Citigroup, which just this week announced that it had made a $3.8 billion profit for the third quarter (on revenues of $20.8 billion). Importantly, the SEC did not charge the bank with “intentional or reckless misconduct,” but rather with mere negligence and misleading investors. Neither the SEC or Justice Department would say whether or not Citigroup was involved in any criminal conduct.

What exactly did Citigroup do wrong? As the housing market began to unravel and collapse in 2007, the company sold high-risk mortgage-related investments to unwitting clients who had no idea that Citigroup was betting against those very same investments. A billion dollars worth of collateralized debt obligation, known as Class V Funding III, was sold in a portfolio; at no point did investors realize that Citigroup was betting that its value would drop.

Following the sale, which was concluded on February 28, 2007, more than 80% of the portfolio was downgraded by credit ratings agencies. That November, the security defaulted; investors incurred hundreds of millions of dollars of losses. Citigroup made a $126 million profit, plus $34 million in fees, from Class V Funding III. Those gains, plus a $95 million fine, will be returned to investors.

The SEC also targeted Credit Suisse, which was involved in the transaction, and fined the company $2.5 million. One mid-level employee from each company was also charged.

“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” a statement from Citigroup read. “Since the crisis, we have bolstered our financial strength, overhauled the risk management function, significantly reduced risk on the balance sheet and returned to the basics of banking.”

This is Citigroup’s second case regarding its role in the financial crisis. Last year, the company agreed to pay $75 million to settle federal claims that it failed to disclose its substantial holdings of subprime mortgage investments that were plummeting in value, losses that eventually led to a massive government bailout.

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