Sweet Deal? Citi Bank Claims One SEC Settlement Clears All Charges

Filed under: Features,Legal,Management,Management Ethics |

By Jesse Eisinger and Jake BernsteinProPublica

In the run-up to the global financial collapse, Citigroup’s bankers worked feverishly to create complex securities. In just one year, 2007, Citi marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations turned up evidence that the bank knew that some of the products were low quality and, in some instances, had even bet they would fail.

The bank says it has settled all of its potential liability to a key regulator– the Securities and Exchange Commission — with a $285 million payment that covers a single transaction, Class V Funding III. ProPublica first raised questions about the deal [1] in August 2010.  In announcing a case, the SEC said it had identified one low-level employee, BrianStoker, as responsible for the bank’s misconduct.

It made no mention of the dozens of similar collateralized debt obligations, orCDOs, Citi sold to investors before the crash.

A bank spokesman said the SEC would not be examining any of those deals. “This means that the SEC has completed its CDO investigation(s) of Citi,’’ the spokesman asserted in an email.

“The $285 million settlement resolves only the Class V Funding III CDO, and we will not hesitate to bring further charges where we determine that there has been unlawful conduct,” an SEC spokesman said.

Did Citi get a sweet deal? Some observers think so.

“Citibank arranged countless CDOs that were built to fail, but the SEC apparently limited its case to a single CDO where they had particularly vivid and powerful proof,” says Stephen Ascher, a securities litigator at Jenner & Block, which has sued Citibank on various structured finance transactions.

“This represents extreme caution, at best — and a failure to grapple with the magnitude and harmfulness of the misconduct, at worst.”

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