Citigroup pays $285M for selling, and betting against, iffy mortgage package

Citigroup has agreed to pay $285 million to settle charges it stocked an investment vehicle with shoddy mortgages, sold it to investors and then bet against it without disclosing those moves to purchasers.

The Securities and Exchange Commission (SEC) announced Tuesday that the bank designed a collateralized debt obligation (CDO) with $1 billion of risky mortgages as the housing market began to show signs of trouble. The bank did not tell investors it “exercised significant influence” over which mortgages should go in the CDO, which defaulted “within months.” In the meantime, the bank took a short position against the CDO, betting on its failure, while collecting fees on the original transaction, reaping $160 million overall.

The hefty fine will be used to pay off investors burned by the move.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, director of the SEC’s Division 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.”

The SEC also charged a particular Citigroup employee, Brian Stoker, who was primarily responsible for structuring the CDO. French bank Credit Suisse, which served as collateral manager on the deal, and the employee there in charge of the transaction, settled separate charges.

The announcement comes as dissatisfaction with Wall Street has re-entered the public consciousness, driven by the visible protests cropping up across the world tied to the Occupy Wall Street movement. The Obama administration has looked to harness some of that public anger, taking a tougher tone with the financial world while looking to tie potential Republican foe Mitt Romney to Wall Street.

The enforcement action also came two days after Citigroup announced its third-quarter profits, which rose 74 percent to $1.9 billion.

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