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

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

ProPublica has been investigating the practices of the investment banks in the lead-up to the financial crisis for three years.

Our research found a number of Citi CDOs similar to the deal featured in the SEC’s Class V complaint, and more information on Citi’s CDO business has emerged in lawsuits and subsequent investigations.

Responsibility for these practices did not begin or end with Mr. Stoker. Among the questions still unanswered: How much did Stoker’s immediate bosses know? What did the heads of Citigroup’s CDO business, fixed income business and trading businesses know about Citi’s CDO dealings?

In the settlement announced this week [October 2011], the SEC charged Citigroup with misleading its clients in the $1 billion Class V Funding III. The regulator said that the bank failed to disclose that it, rather than a supposedly independent collateral manager, had played a key role in choosing the assets in the deal when the bank marketed it to clients.

Citigroup also failed to tell its clients that it retained a short position, or bet against, the CDO it created and sold. In addition to the $285 million fine, the SEC also charged Credit Suisse Alternative Capital, which was supposed to choose the assets that went into the CDO, and a low-level executive at that firm, with securities law violations.

Stokerbecomes only the second investment banker after Goldman Sachs’ Fabrice “Fabulous Fab” Tourre to be charged by the SEC in conjunction with the business of creating CDOs, which were at the heart of the financial collapse in the fall of 2008. According to the SEC, Stoker played a leading role in structuring Class V Funding III.

Stoker declined to comment. His lawyer has said he is fighting the charges.

The SEC complaint shows that Stoker was regularly communicating with other Citi executives about his actions. One top Citi executive coaches employees in an email that Credit Suisse should tell potential buyers of Class V about how it decided to purchase the assets, even though Citi, not Credit Suisse, was making the calls.

In October 2006, people from Citi’s trading desk approached Stoker about shorting deals that Citi arranged.

Later, in 3 Nov. 2006, Stoker’s immediate boss inquired about Class V Funding III. Stoker told his boss that he hoped the deal would go through. He wrote that the Citi trading group had taken a position in the deal.

Citi’s trading desk was shorting Class V Funding III, betting that its value would fall. Stoker noted that Citi shouldn’t tell Credit Suisse officials what was going on, and that Credit Suisse had agreed to be the manager of the CDO “even though they don’t get to pick the assets.’’ Less than two weeks later, this executive pressed Stoker to make sure that their group at Citi got “credit” for the profits on the short.

This Citi official, unnamed in the complaint, was not charged by the SEC.

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