Bloomberg News

Ex-Citigroup CDO Creator Stoker Who Beat SEC Joins StormHarbour

November 20, 2012

Ex-Citigroup CDO Creator Stoker Who Beat SEC Joins StormHarbour

Buildings are reflected in a Citigroup Inc. branch in New York. Photograph: Victor J. Blue/Bloomberg

Brian Stoker, who fended off regulators’ claims that he helped Citigroup Inc. (C:US) mislead investors in a $1 billion deal, has joined StormHarbour Securities LP in a sales position.

Stoker, 41, will focus on the sale of structured products such as collateralized debt obligations, or CDOs, and mortgage- backed securities, according to Sohail Khan, a StormHarbour managing principal and former Citigroup executive. Stoker started yesterday as a managing director and will have more responsibilities “over time,” Khan said.

The hire comes three months after a jury cleared Stoker of any wrongdoing in a $1 billion CDO offering Citigroup sold in 2007. The U.S. Securities and Exchanges Commission alleged that the New York-based bank failed to tell investors that it had picked about half of the CDO’s underlying assets and was betting they’d decline. Stoker, who helped to structure the deal, argued that he wasn’t responsible for the way the deal was pitched to investors.

“Was I concerned? Did I think about it before we offered him a job? Yes I did,” Khan, 40, said in a telephone interview. “This is a guy who took the road less traveled and came out clean. I’ve known him and I’ve a lot of faith in him personally and as a firm we’re going to stand by people who do the right thing.”

The SEC sued Stoker and Citigroup separately. The Washington-based regulator said that Stoker knew or should have known that Citigroup was creating the CDO deal so it could bet against the assets, which he failed to tell investors. His lawyers argued that the clients who bought into the offering were sophisticated investors who knew what they were doing.

Citigroup Settles

“He said, ‘Look, I didn’t do anything wrong, I want my name cleared,’” Khan said. “That tells you a lot about personal character. I have tremendous respect for that.”

The 15 or so clients lost almost their entire investments while Citigroup, the third-biggest U.S. lender, reaped at least $160 million in fees and profits from its wager against the CDO assets, the SEC alleged.

While Stoker fought the SEC, Citigroup agreed last year to pay $285 million to settle the allegations. U.S. District Judge Jed Rakoff rejected the settlement, in which the bank wasn’t required to admit any liability. That ruling is on appeal.

Stoker has been “ostracized” by Wall Street firms because of the publicity surrounding the case, Khan said.

“I’ve got four boys and the one thing I always tell them is fight for what you believe in,” Khan said. “I can’t say that to my kids and at the same time ostracize somebody because he did that.”

Khan’s Role

Stoker declined to comment when reached by e-mail, referring questions to Khan.

The two men previously worked together at Citigroup. Stoker, who left the bank in 2008 for a hedge fund, helped to structure deals involving CDOs, securities that are backed by a pool of bonds, loans or other assets. Khan was the lender’s top seller of fixed-income products, according to a profile on New York-based StormHarbour’s website.

Khan played a role in the CDO deal and was called by the SEC to testify in Stoker’s trial, according to court filings. Citigroup told potential investors that the CDO’s assets were independently selected by Credit Suisse Group AG. (CSGN) In fact, Citigroup selected about half of the assets and was betting they’d decline, the SEC alleged. Khan acted as a go-between as the two banks hashed out which assets would end up in the CDO, the SEC said.

The SEC, which fined Credit Suisse $2.5 million for its role, didn’t charge Khan with any wrongdoing. In 2009, he was among a group of Citigroup executives including Fredrick Chapey and Antonio Cacorino who left to form StormHarbour.

‘Product Savvy’

StormHarbour is expanding into selling complex products such as mortgage-backed securities and collateralized loan obligations, or CLOs, Khan said. CLOs are a type of CDO that bundle loans and slice them into securities of varying risk and return. Investors are attracted to the higher yields such products can offer, Khan said.

“It’s still an area where there’s a lot of opportunity,” he said. “There’s a lot of people who are searching for yield, who are willing to look at some things that are a little less liquid but offer compelling risk reward.”

Selling these opaque products requires “product-savvy” executives with contacts in the industry, Khan said. StormHarbour said in May it made 13 senior hires for its London office, including former executives at Deutsche Bank AG, UBS AG (UBSN) and Goldman Sachs Group Inc. (GS:US)

Stoker, who has worked for Merrill Lynch & Co. and Dallas- based hedge fund Carlson Capital LP, has “the right DNA,” Khan said.

“It’s a combination of having somebody who understands the product, has the right character, and can really explain something,” Khan said. “It’s something that you don’t find often and with Brian we have that.”

To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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Companies Mentioned

  • C
    (Citigroup Inc)
    • $53.66 USD
    • 1.27
    • 2.37%
  • GS
    (Goldman Sachs Group Inc/The)
    • $187.89 USD
    • 3.07
    • 1.63%
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