(Bloomberg News) Citigroup Inc., the third-biggest U.S. lender, agreed to pay $285 million to settle U.S. regulatory claims it misled investors about a $1 billion financial product linked to risky mortgages that defaulted within months of its sale.

Citigroup structured and sold the collateralized debt obligation in 2007 without telling investors that it helped pick about half the underlying assets and was betting they'd decline in value, the Securities and Exchange Commission said in a statement today. Credit Suisse Group AG agreed to pay $2.5 million for its role in selecting the assets, the SEC said.

Citigroup's settlement, the third-biggest penalty paid for conduct related to the credit crisis, is the latest SEC action against banks that bundled and sold securities linked to the housing market. Goldman Sachs Group Inc. paid a record $550 million in 2010 for failing to tell investors that a hedge fund that helped select a CDO's assets was betting it would decline. JPMorgan Chase & Co. paid $153.6 million in a similar matter in June, and SEC officials have said more cases are on the horizon.

"Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost," Robert Khuzami, the SEC's enforcement director, said in a statement.

The approximately 15 clients in the deal known as Class V Funding III lost virtually their entire investments. Citigroup received about $34 million in fees and reaped about $126 million in profits from the short position, according to the complaint.

The SEC also sued Brian Stoker, a former Citigroup employee who the agency said was responsible for structuring the deal, according to a complaint filed today at U.S. District Court in New York. Stoker's attorney, Fraser Hunter, said his client will "defend this lawsuit vigorously."

Samir Bhatt, a former Credit Suisse portfolio manager, agreed to pay $50,000 and a serve a six-month suspension from association with any investment adviser for his role in the transaction, the SEC said.

Around October 2006, Citigroup's CDO desks had discussions about the possibility of using credit default swaps to establish a short position on assets from a CDO that Citigroup would structure and market, the SEC said. After discussions began with Credit Suisse to act as the collateral manager for a proposed transaction, Stoker sent an e-mail to his supervisor describing the short position as a proprietary trade that shouldn't be disclosed to Credit Suisse, according to the complaint.

Deals such as Class V Funding III, which referenced other CDOs, were designed to provide leveraged exposure to the housing market and therefore magnified the severity of losses during the crisis, the SEC said.

Credit Suisse allowed Citigroup to exercise significant influence over the selection of assets, and nothing in the disclosures put investors on notice that Citigroup had interests that were adverse to the interests of CDO investors, the SEC said in its complaint.