Citigroup failed to reveal Morgan Stanley’s part in Jackson CDOs, newspaper report claims

24 May 2010

Citigroup sold a number of mortgage securities without revealing the role of Morgan Stanley in selecting them, a newspaper report has claimed.

Unnamed sources told Bloomberg that documents surrounding collaterized debt obligations (CDOs), which were underwritten by
Citigroup in 2006, did not state who was responsible for choosing the bonds.

However, the sources said that a unit within Morgan Stanley had picked the securities for the $205 million Jackson Segregated Portfolio.

Up to six of the securities subsequently defaulted causing investors to lose millions of dollars, the report said.

James Cox, Duke University law professor, told the news provider: “Failure to identify that there was a third party participating who would take a short position would have been extremely relevant to the purchaser of this product.”

However, Danielle Romero-Apsilos, Citigroup spokeswoman, countered the claims by saying: "We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors. Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved."

According to Bloomberg, no public accusations have been made against Citigroup.

Citigroup and Morgan Stanley are among two banks being investigated by Andrew Cuomo, New York’s Attorney General.

UBS, Credit Suisse and Deutsche Bank are also among the eight financial institutions facing a probe into investments surrounding mortgage products.

Meanwhile, Goldman Sachs has been accused by the Securities and Exchange Commission of misleading investors over a similar deal.

By Jim Ottewill

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