By Marcus Leach

The Securities and Exchange Commission today charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which 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 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 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.

Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors.

“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. “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.”

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