SEC Loses Jury Trial Securities Fraud Lawsuit Against Citigroup Director For Shorting Against Mortgages Sold To Investors

From Bloomberg, "SEC Loses Lawsuit Against Ex-Citigroup Official Stoker" by Bob Van Voris and Emily Grannis:

The Securities and Exchange Commission lost a jury verdict in its lawsuit against former Citigroup Inc. official Brian Stoker over a deal at the center of the bank’s proposed $285 million settlement with regulators over subprime residential mortgage securities.

The jury reached its verdict today in Manhattan federal court. The SEC had accused Stoker, the former director of Citigroup’s collateralized debt obligation structuring group, of violating securities law in putting together the assets underlying a $1 billion CDO.

The SEC claimed New York-based Citigroup structured and sold the CDO without telling investors that it helped pick about half the underlying assets and was betting they would decline in value by taking a short position.

The SEC complaint, US SEC v Brian H Stoker, basis for the allegation of securities fraud stated:

Undisclosed in the marketing materials and unbeknownst to investors, Citigroup exercised significant influence over the asset selection process for the purpose of creating a tailored, proprietary bet against the collateral of Class V III. Through its influence on the selection of the investment portfolio, Citigroup was able to short a set of assets it hand-picked by entering into CDS to buy protection on those assets from Class V III. The CDS assets on which Citigroup bought protection had a notional value of approximately $500 million, representing half of Class V III’s investment portfolio. The marketing materials Citigroup prepared and distributed to investors did not disclose Citigroup’s role in selecting assets for Class V III and did not accurately disclose to investors Citigroup’s short position on those assets.

Selling sophisticated investors a portfolio of mortgages, while simultaneously shorting against those mortgages without disclosing the short, is not fraud according to a jury.

If Goldman Sachs had gone to trial over similar SEC allegations instead of settling, it likely would have also won.

The SEC complaint against Stoker is available here.