Citigroup has agreed to pay $285 million to settle civil fraud charges by the federal government that it misled buyers of complex mortgage investments just as the housing market was starting to collapse. According to the Securities and Exchange Commission, Citigroup, the big Wall Street bank, bet against the investments in 2007 and in so doing made $160 million in fees and profits. Sadly, investors who become victims lost millions.
The penalty is the biggest involving a Wall Street firm accused of misleading investors before the financial crisis since Goldman Sachs & Co. paid $550 million to settle similar charges last year. As you may recall, JPMorgan Chase & Co. also settled similar charges in June and paid $153.6 million. All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages. Citigroup’s payment includes the fees and profit it earned, plus $30 million in interest and a $95 million penalty. The SEC says the money will be returned to the investors.
Interestingly, in the July-September quarter, Citigroup earned $3.8 billion. It’s also most revealing that CEO Vikram Pandit was awarded a multi-year bonus package this year that could be worth nearly $23.4 million if performance goals are met. At the height of the financial crisis in 2008, regulators were greatly concerned that Citigroup was on the brink of failure. The big bank received $45 billion as part of the $700 billion government bailout. There is something wrong when a huge corporation cheats, its customers suffer huge losses, and the cheating company and its CEO rake into tremendous profits and bonuses, and on top of that the government bails out the cheater and nobody goes to jail.
In the civil lawsuit filed against Citigroup, the SEC said the bank’s traders discussed in late 2006 the possibility of buying financial instruments in order to essentially bet on the failure of the mortgage assets being assembled in the deal. Rating agencies downgraded most of the investments that Citigroup had bundled together just as many troubled homeowners stopped paying their mortgages in late 2007. That pushed the investment into default and cost its buyers’ – hedge funds and investment managers – several hundred million dollars in losses.
Citigroup bet that the investments would fail, but never told investors it had done so. Even though Citigroup designed the investment to fail, it told investors it had been designed by an independent manager, according to the SEC. Citigroup’s marketing materials said the investments were picked by Credit Suisse. In an email about the deal, one Citigroup banker asked another not to tell Credit Suisse that it was designed for Citigroup to profit.
Credit Suisse also reached a settlement with the SEC. Two divisions of the bank agreed to pay a $1.25 million civil fine. It will also return $1 million in fees and pay $250,000 in interest.
Contact us today for a free legal consultation with an experienced attorney.
Fields marked *may be required for submission.
If you would like to subscribe to the Jere Beasley Report digital edition, simply visit our Subscriptions page and provide the necessary information or call us at 800-898-2034.
Attorney Advertising - Prior results do not guarantee a similar outcome.