Without admitting any wrongdoing, Citigroup has settled a major lawsuit. The Securities and Exchange Commission claimed that Citi misled investors, and to settle the claims, the financial behemoth was ordered to pay $285 million to customers.
The issue focuses on collateralized debt obligations (CDOs) in 2007. The bank packaged subprime mortgages, loans with a good chance of defaulting particularly as the real estate market was not in a good position, into investments for sophisticated clients. According to the SEC, Citi didn’t disclose the real risk in these investments, so by selling the mortgages, Citi shifted the risk of default away from the company.
Furthermore, to appear unbiased, Citi claimed to investors that a third party selected the loans packaged into the CDO, but the bank did have a role in this selection, making it possible for the selection to be limited to loans most likely to default. While Citi earned $160 million in trading fees, the investors lost several hundred million dollars by November 2007. The biggest investor in Citi’s CDO has declared bankruptcy.
The investors affected most by Citi’s misleading claims are not individual investors or even most institutional investors. Individuals wouldn’t have had access to these investments at the bank. The $285 million in this settlement won’t be distributed to everyday Citibank customers, so unlike the Bank of America overdraft fee lawsuit, customers should not be looking for refunds from the bank. The Citi settlement funds will be distributed to the sophisticated companies who lost money investing funds through the bank’s Citigroup Global Markets division.
In the third quarter of 2011, Citi has reported a profit of $3.77 billion, at least on paper, helped in part by an accounting trick that allowed the bank to change the value of its debt. The financial industry took a hit with the recession, received government assistance, and is now profiting significantly while other sectors in the economy are still recovering. This settlement reflects 7.56% of this quarterly profit, which might seem significant, but is a slap on the wrist for the bank as Citi can easily handle this payment and has likely set aside funds for this outcome.
Washington Post, Wall Street Journal
Updated February 6, 2012 and originally published October 20, 2011.