By Grant McCool
NEW YORK, July 31 (Reuters) - A former Citigroup Inc manager was found not liable on Tuesday of civil charges of misleading investors, a blow to regulators in one of the few fraud cases brought against a Wall Street executive over the collapse of subprime mortgage investments.
Brian Stoker, who worked on the bank's mortgage investments desk, was charged by the U.S. Securities and Exchange Commission as part of a broader civil lawsuit against the bank in U.S. District Court in Manhattan.
The verdict underlined the difficultly of such cases for securities regulators, who historically have worked to reach settlements with corporations and individuals. The SEC's $285 million settlement with Citigroup itself last year is under appeal following an unusual rejection by Judge Jed Rakoff. The outspoken Rakoff also presided over the two-week-long Stoker trial.
"It does make you realize why perhaps the SEC is a little reluctant to squeeze the trigger," said James Cox, a law professor at Duke University in Durham, North Carolina, who has written about securities regulations cases.
Stoker was one of four individuals the SEC has charged with misleading buyers of pools of mortgages, called collateralized debt obligations, that contributed to the financial crisis. He was the first to go to trial.
One note of encouragement for the SEC came from the eight jurors who heard the evidence at Stoker's trial. The panel gave the judge a statement to accompany the verdict, a rarity in both civil and criminal trials.
"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.
The commission argued that Stoker failed to tell the buyers of a $1 billion Citigroup collateralized debt obligation transaction in 2007 that the bank had made a $500 million "short" bet that the mortgage pool would fail.
Stoker and his lawyer argued that he followed the bank's best practices and was singled out for blame.
Stoker left the court smiling. The jury delivered its verdict on its second day of deliberations.
"We are very grateful that justice was done," Stoker's lawyer, John Keker, said outside the courtroom.
Robert Khuzami, director of the SEC's enforcement division, said: "We respect the jury's verdict and will continue to aggressively pursue misconduct arising out of the financial crisis."
The other individuals charged by the SEC with misleading buyers of collateralized debt obligations include Goldman Sachs Group Inc executive Fabrice Tourre, and Edward Steffelin of now-bankrupt GSC Capital Corp, which helped put a CDO together for JPMorgan Chase & Co. They are awaiting trial.
Another executive, Samir Bhatt of Credit Suisse Alternative Capital, settled with the SEC in a case related to the Citigroup deal.
Rakoff had rejected late last year a $285 million settlement between Citigroup and the SEC over the mortgage investment, saying he had no way to know whether the pact was fair because the bank was not required to admit or deny the agency's charges. The bank and the commission are appealing that decision.
On its website, the SEC summarizes more than 100 cases related to the financial crisis that led to total penalties of more than $2.1 billion to help investors harmed by fraud
Citigroup, which is one of those cases, said in a statement on Tuesday that it agreed with the verdict in the Stoker case "and hope to secure final judicial approval of our settlement with the SEC and put this matter behind us."
The case is SEC v. Stoker, U.S. District Court, Southern District of New York, No. 11-cv-7387.
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