Citigroup has agreed to pay $285 million to settle civil fraud charges that it misled buyers of complex mortgage investments just the housing market was starting to collapse.
The Securities and Exchange Commission said Wednesday that the big Wall Street bank bet against the investors in 2007 and made $160 million in fees and profits. Investors lost millions.
The payment includes the fees and profit Citigroup earned, $30 million in interest and a $95 million penalty. The money will be returned to investors in the deal, the SEC said.
Citigroup neither admitted nor denied the SEC's allegations in the settlement.
"We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly," Citigroup said in a statement.
The penalty is the biggest targeting Wall Street firms that mislead investors ahead of the 2008 financial crisis since Goldman Sachs & Co. paid $550 million to settle similar charges last year. JPMorgan Chase & Co. also settled similar charges in June and paid $153.6 million.
All of the cases have involved so-called collateralized debt obligations. Those are securities backed by pools of other assets.
In a civil lawsuit filed Wednesday, the SEC said Citigroup traders discussed in late 2006 the possibility of buying financial instruments to essentially bet on the failure of the mortgage assets being put together in the deal.
Rating agencies downgraded most of the investments that Citigroup had bundled together just as many homeowners stopped paying their mortgages in late 2007. That pushed the investment into default and cost its buyers — hedge funds and investment managers — several hundred million dollars in losses.
Among the biggest losers were Ambac, a bond insurer, and BNP Paribas, a European bank. Ambac had sold Citigroup protection against losses on the investment, allowing Citigroup to bet against it.
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