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By Bradley Keoun May 21 (Bloomberg) — Citigroup Inc. sold a series of mortgage-linked securities without disclosing that Morgan Stanley helped shape them while betting they would fail, two people with knowledge of the matter said. Marketing documents for the $205 million Jackson Segregated Portfolio, underwritten by Citigroup in 2006, don’t say who picked the underlying mortgage bonds. A Morgan Stanley unit helped select the bonds, the people said, speaking anonymously because the deal was private. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, data compiled by Bloomberg show. “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,” Duke University law professor James Cox said. Regulators have been scrutinizing Wall Street firms’ sales of subprime mortgage securities that later defaulted and contributed to the worst credit crisis since the Great Depression. They include some of the more than $500 billion of collateralized debt obligations, created by pooling mortgage bonds and other debt and packaging them into new securities, sold by Wall Street from 2005 through 2007. Citigroup did say in the Jackson marketing documents that its interests in the deal “may be adverse” to those of investors in the CDO’s bonds. SEC Vs. Goldman “We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors,” said Citigroup spokeswoman Danielle Romero-Apsilos . “Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved.” Morgan Stanley spokesman Mark Lake said he couldn’t comment. Both banks are based in New York. The Securities and Exchange Commission last month accused Goldman Sachs Group Inc. of misleading investors by failing to disclose hedge fund Paulson & Co.’s role in picking collateral it bet against. Goldman Sachs calls the claims unfounded. Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals. In a quarterly filing this month, Citigroup said it’s cooperating with “various formal and informal inquiries” into subprime-mortgage-related activities and is in talks to resolve some of them. $60 Billion of CDOs Citigroup sold $59.3 billion of CDOs from 2005 to 2007, according to a November 2008 report by Sanford C. Bernstein analyst Brad Hintz . In late 2008, the bank had to get a $45 billion bailout, partly because of losses on mortgage-backed securities that it kept for itself. Citigroup lost almost $30 billion in 2008 and 2009 before reporting a $4.43 billion profit in the first quarter. Citigroup sold the Jackson CDOs in August and September of 2006, data compiled by Bloomberg show, just as delinquency rates on U.S. subprime mortgages began to climb . The Jackson deal was a synthetic CDO, in which derivatives linked to mortgage bonds were pooled together and packaged into new bonds that could be sold to investors. On the other end of the derivatives was a “short” investor who would get paid if the underlying bonds soured. To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed, the people said. Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities, they said. 80 Bonds There were 80 mortgage-backed bonds that in turn were underwritten by firms including Citigroup, Morgan Stanley, Lehman Brothers Holdings Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., according to the marketing documents. Citigroup’s Citibank NA banking subsidiary was the initial short counterparty to the Jackson derivatives, according to the documents. The Jackson marketing documents said Citigroup might have information about the bonds or business relationships “that may or may not be publicly available or known to the other parties to the transaction,” and that the lender had no obligation to disclose “any such relationship or information.” The documents go on to say, “In no event will Citibank or any of its affiliates be deemed to have any fiduciary obligations to the holders of the notes.” Slashed to Junk Morgan Stanley was named in the Jackson marketing documents only as a currency-hedge provider for $35 million of euro- denominated securities. In April 2007, all seven series of the Jackson bonds were cut to junk grade by Moody’s Investors Service. Six of the seven later defaulted, wiping out 76 percent of investors’ principal, according to Bloomberg data. There’s no public data on the buyers of the securities, or on the performance of the Morgan Stanley unit that shorted the Jackson deals. In its suit against Goldman Sachs, the SEC said the bank’s disclosures for the Abacus 2007-AC1 CDO were misleading because they omitted Paulson’s role in selecting the underlying bonds. Goldman Sachs told investors that an independent manager, ACA Management LLC, picked the bonds. Goldman Sachs “misled investors by representing that ACA selected the portfolio without disclosing Paulson’s significant role in determining the portfolio and its adverse economic interests,” according to the SEC suit. Paulson wasn’t accused of wrongdoing. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .