WASHINGTON — Citigroup has agreed to pay $285 million to settle a civil fraud complaint that it misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against the investors as the housing market began to show signs of distress, the Securities and Exchange Commission said Wednesday.
As in an earlier case involving Goldman Sachs, Citigroup handpicked the assets that the derivatives would be based upon. It sold those derivatives to its own trusting clients, earning a handsome reward for the service, then turned around “shorted” its own securities, in effect placing bets that they would fail.
As the Wall Street Journal reports, one Citi trader bragged in an email at the time that the portfolio was “possibly the best short ever.” When that bet proved correct, the company netted yet another handsome profit.
As the Times reports:
The derivative securities lost value remarkably fast. After the deal closed on Feb. 28, 2007, more than 80 percent of the portfolio was downgraded by credit-rating agencies in less than nine months. The security declared “an event of default” on Nov. 19, 2007, and investors eventually lost hundreds of millions of dollars, the S.E.C. said.
Citigroup received fees of $34 million for structuring and marketing the transaction and realized net profits of at least $126 million from its short position. The $285 million settlement includes $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty, all of which will be returned to investors.
But of course, nobody’s going to jail over this, and I guess that’s only fair. After all, they only did it because Barney Frank MADE them do it.
– Jay Bookman