Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion

Citigroup (C) has reached a $7 billion settlement with the U.S. Department of Justice over allegations it misled investors about mortgage-backed securities in the time leading up to the 2008 financial meltdown. The settlement includes a $4 billion penalty to be paid to DOJ, $2.5 billion in consumer relief, and $500 million to a number of states and the Federal Deposit Insurance Group.

According to the U.S. government, Citigroup knew it was selling mortgage-backed securities with loans that had “material defects” and hid this information from investors. Attorney General Holder called this misconduct “egregious.” He said the bank played a role in spurring the economic crisis.

The government released a statement of fact to which Citibank consented. In it are details about how the bank ignored its own warning signs that certain mortgages were subpar and made misrepresentations about the loans that were securitized. One U.S. attorney told The Wall Street Journal that the DOJ discovered 45 mortgage-backed security deals between 2006 and 2007 where inaccuracies about underlying loans’ and their quality were made.

More than once bank employees discovered a significant junk of mortgage loans were defective yet Citigroup packaged the loans into residential-mortgage backed securities and sold them. The bank even told due diligence firms to modify loan grades so that they went from rejected to accepted

While the settlement releases Citibank from liability for collateralized debt obligations and residential mortgage-backed securities that it issued between 2003 and 2008, criminal charges could still come from the government against both the bank and individuals who were involved. The bank also is under investigation over whether its Banamex USA did what it should have to bar suspected money laundering in transactions that occurred near the border of U.S. and Mexico.

While the Justice Department had sought $12 billion from Citigroup, the bank had wanted to pay just $363 million in cash, in addition to “consumer relief. Citigroup said it wasn’t a huge player in the mortgage-securities industry and didn’t think its penalty should be so high. The DOJ, however, believes that Citigroup’s egregious behavior warranted a substantial penalty. As for the $2.5 billion in consumer relief, this includes financing for building and preserving multifamily rentals that are affordable, forbearance and principal reduction for residential mortgages, and other direct consumer benefits.

Citigroup is the second big US bank to settle with the government over mortgage securities. J.P. Morgan (JPM) settled MBS fraud charges last year for $13 billion. The government is also engaged in mortgage-backed securities settlement talks with Bank of America.

In other recent MBS fraud news, an ex-Credit Suisse (CS) banker was told to forfeit $900,000 and sentenced to time served. David Higgs pleaded guilty in February 2012 to conspiring to falsify Credit Suisse’s records. This lead the bank to take a $265 billion write-down for 2007.

The case is related to a plan to conceal over $100 million in losses in an MBS trading book at the Swiss bank. At issues were subprime residential mortgaged-backed securities and commercial mortgage-backed securities. Co-conspirators, including Higg, were charged with artificially rising bond prices to give the impression of profitability.

The SSEK Partners Group is a mortgage-backed securities fraud law firm. We represent institutional investors and high net-worth individuals.

Ex-Credit Suisse Banker Gets Time Served in Mortgage-Backed Securities Scheme, The Wall Street Journal, June 24, 2014

Citigroup Settles Mortgage Inquiry for $7 Billion, The NY Times, July 14, 2014

More Blog Posts:
Second Circuit Overturns Judge’s Decision to Block Citigroup’s $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014

SEC Prepares Money-Fund Rules, Will Review Alternative Mutual Funds, Institutional Investor Securities Blog, July 10, 2014

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 7, 2014