SEC Investigating Citigroup Mortgage Deal

SEC Investigating Citigroup Mortgage Deal

by Jake Bernstein and Jesse Eisinger ProPublica, Nov. 18, 2010, 9 a.m.

The Securities and Exchange Commission is investigating Citigroup’s role in a $1 billion deal that the bank created in the run-up to the financial crisis. The agency is looking at whether Citi improperly pushed an independent manager to put specific assets into the deal, according to people familiar with the probe.

The deal was a collateralized debt obligation named Class V Funding III, which was completed in late February 2007. The CDO was made up of pieces of other CDOs that were themselves backed by risky slices of subprime mortgages. The deal was managed by Credit Suisse Alternative Capital, a division of the Swiss banking giant. Independent managers such as Credit Suisse were charged with picking the best assets for the CDO. Citigroup arranged and marketed the deal to investors.

Details on the investigation are sparse. The SEC declined to comment on the probe. But the SEC has been conducting a wide-ranging investigation into Wall Street’s CDO business, including whether investment banks created deals in order to dump assets of declining value onto unsuspecting buyers.

Citigroup declined to discuss specifics of the deal or the investigation and repeated a statement it had previously issued: “It has been widely reported that there are ongoing industry-wide investigations into CDO-related matters, and we do not comment on pending investigations.”

Among the assets purchased by Class V Funding III were portions of, or sidebets involving, at least 15 CDOs that the Illinois-based hedge fund Magnetar helped to create. Four of those CDOs were also underwritten by Citigroup. In April, ProPublica, together with Chicago Public Radio’s “This American Life” and NPR’s “Planet Money,” detailed how Magnetar had helped create more than $40 billion worth of CDOs as part of its strategy to bet against the housing market.

Class V Funding III was cited in another ProPublica-NPR collaboration published in August. Class V bought a piece of, or had a side bet involving, two other Citi CDOs: Octonion and 888 Tactical. Those CDOs in turn purchased exposure to Class V. All three CDOs closed within about two weeks of each other. Such transactions could have helped investment banks to complete CDOs and earn deal-completion fees.

Citi hedged its exposure to the Class V CDO, persuading bond insurance company Ambac to insure $500 million of it. Eight months after Class V was completed, rating agencies downgraded the deal. Earlier this month, Ambac filed for bankruptcy, largely due to its exposure to CDOs like Class V Funding III.

It’s unclear whether Citi made other trades that would pay off in the event of a drop in Class V’s value. Ultimately, the bank failed to protect itself against losses from most of the CDOs it invested in; Citigroup lost almost $34 billion on its mortgage CDO business.

One hurdle for any SEC action is that banks’ CDO marketing materials often included warnings about generic risks involving conflict of interests. The prospectus for Class V Funding III has such language.

A shareholder class-action lawsuit filed against Citigroup in federal court in Manhattan accused the company of using CDOs, including Class V Funding III, as a way to “clean out its warehouse” even as it downplayed the risk of its exposure to CDOs.

Last week, District Judge Sidney Stein dismissed several of the claims but allowed the case to go forward on a number of the allegations, including that Citi misstated its exposure to CDOs.

In a statement to ProPublica in response to the suit, Citi said it has “strong defenses, including the absence of any intentional or reckless misconduct, and we will continue to defend the balance of this case vigorously.”


3 Responses to “SEC Investigating Citigroup Mortgage Deal”
  1. bryan says:

    re citimortgage;
    i have recent absolute proof of intentional and reckless misconduct names ,places, dates, & ha a/v recordings
    i have proof of intent to commit fraud on their letterhead plus a/v recording
    have massive amt of evidence showing conspiracy/intent purposful training sinq. diisinfo all recorded or in writing
    hit me up will gladly provide all to right law agency or law firm take them down DOWN!!!!

    • Phillip Harris IV says:

      Dear sir

      I am in danger of loosing my home to Citimortgage taking advantage of my financial misfortune. I am aware of the banks illegal and fraudulent actions. My home has already been foreclosed on and sold. I am currently in court fighting eviction. Any and all imformation that you can forward to me to assist me in this matter will be greatly appreciated.

    • Homeowner in Nightmare says:

      Perhaps you can simply send the evidence directly to the FBI Mortgage Fraud Task Force, the SEC, US Department of Justice, US Department of Banking/Fanancial, etc.

      Thats what I did after performing my own loan audit through research on the internet, reviewing regulations, finding investigations leading to evidence that the Mortgage Brokerage I dealt with lost licenses in so many states for fraud, etc.

      If you have it, show it, put a stop to this madness. I hope you are not offering evidence at an inflated rate or to “the highest bidder” A true concerned American would just send information of evidence to the appropriate governing agencies

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