SEC Loses Lawsuit Against Ex-Citigroup Official Stoker

Former Citigroup Inc. (C) official Brian Stoker defeated the U.S. Securities and Exchange Commission in a trial involving 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 yesterday in Manhattan federal court. The SEC 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-squared, or a CDO made up of CDOs.

The SEC claimed New York-based Citigroup structured and sold the CDO in 2007 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.

“This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jury said in rendering its decision that Stoker wasn’t liable.

Stoker’s trial featured testimony from several people who worked on the CDO-squared investment, which was named “Class V Funding III.” His lawyers argued that the purchasers were sophisticated investors that weren’t misled about Citigroup’s interest in the security.

The SEC was seeking to have Stoker disgorge profits from the deal and pay a fine.

‘Financial Crisis’

“We respect the jury’s verdict and will continue to aggressively pursue misconduct arising out of the financial crisis,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement.

U.S. District Judge Jed Rakoff, who oversaw the trial, last year rejected Citigroup’s $285 million settlement with the SEC, in which the bank wasn’t required to admit any liability. That ruling is on appeal.

“We agree with the jury’s verdict, and hope to secure final judicial approval of our settlement with the SEC and put this matter behind us,” Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in a statement.

Jurors began deliberating July 30 at the end of a trial that started July 16.

Rakoff announced the verdict in the Stoker case yesterday during a break in the trial of Whitman Capital LLC founder Doug Whitman on insider trading charges.

The case is U.S. Securities and Exchange Commission v. Stoker, 11-cv-7388, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net; Emily Grannis in Manhattan federal court.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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