More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Citigroup agreed Wednesday to pay $285 million to settle charges brought by the Securities and Exchange Commission, which charged that Citigroup’s principal U.S. broker-dealer subsidiary mislead investors in a $1 billion collateralized debt obligation transaction tied to the U.S. housing market. The SEC says that Citigroup bet against investors as the housing market showed signs of distress.
The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits, the SEC said.
Citigroup consented to settle the SEC’s charges without admitting or denying the SEC’s allegations, the SEC said. The settlement, which is subject to court approval, requires Citigroup to pay $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty for a total of $285 million that will be returned to investors through a Fair Fund distribution.
The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup, the SEC said, "then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.”
The SEC also charged Brian Stoker, the Citigroup employee that it said was primarily responsible for structuring the CDO transaction.
The agency brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir H. Bhatt.
“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement announcing the enforcement action. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”
Kenneth R. Lench, chief of the Structured and New Products Unit in the SEC Division of Enforcement, added, “As the collateral manager, Credit Suisse also was responsible for the disclosure failures and breached its fiduciary duty to investors when it allowed Citigroup to significantly influence the portfolio selection process.”