Correction: An earlier version of this article incorrectly said that a subsidiary and former employee of Citigroup were not charged with fraud. They were charged with negligence-based fraud. This version has been corrected.

Federal regulators charged a Citigroup unit with negligence Wednesday, saying it sold a $1 billion investment product tied to the weakening housing market in 2007 without telling investors it was using the instrument to bet against them.

Citigroup agreed to pay a settlement of $285 million, which will be distributed to investors, the Securities and Exchange Commission said. Under the settlement, which is subject to court approval, Citigroup neither admitted nor denied wrongdoing.

It was another in a series of SEC actions alleging that, as the real estate market began to tank, Wall Street firms sold deteriorating assets by misleading investors.

The Citigroup deal, known as a collateralized debt obligation (CDO), was marketed in early 2007 and was built upon investments in subprime mortgages.

Although it led investors to believe that another firm had chosen the assets from which the CDO was assembled, Citigroup participated in the selection, the SEC said. Then it placed a bet that would allow it to profit if the value of the assets declined, the SEC said.

By November 2007, the CDO was in default.

Investors “lost several hundred million dollars,” the SEC said. An agency spokesman would not be more specific. Citigroup reaped fees and trading profits of “at least $160 million,” the SEC said in a court filing.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” Robert Khuzami, the SEC’s director of enforcement, said in a statement.

Citigroup noted in a statement that the SEC did not charge it with intentional or reckless misconduct.

“We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly,” the firm said.

The SEC also charged a former Citigroup employee with negligence-based fraud. Brian H. Stoker, 40, was a director in Citigroup’s CDO structuring group and the person primarily responsible for structuring the investment at issue, the SEC said.

Stoker is fighting the SEC lawsuit. An attorney for Stoker, Fraser Hunter, said there was no basis for the agency to blame him. “He was not responsible for any alleged wrongdoing.He did not control or trade the position, did not prepare the disclosures and did not select the assets,” Hunter said.

In February 2007, Stoker negotiated a salary of $150,000 and a guaranteed bonus of $2.25 million, the SEC said.

The SEC lawsuit against Stoker said he knew or should have known that the way Citigroup used the CDO “would operate as a fraud upon the investors.”

No other individuals at Citigroup were charged. But the SEC’s court filings described the involvement of other unnamed personnel at the firm.

In late 2006, the SEC said, Stoker sent his supervisor an e-mail referring to the role of Credit Suisse Alternative Capital (CSAC), the firm that ostensibly chose the assets for the CDO. In the e-mail, Stoker said CSAC “agreed to terms even though they don’t get to pick the assets,” the SEC said. The e-mail also said “don’t tell CSAC” that the deal was a Citigroup “prop trade,” apparently meaning proprietary trade, according to the SEC.

An SEC lawsuit also said “Citigroup structurers responsible
for the marketing documents should have known” that the description of CSAC’s role “was misleading.”

The SEC said Credit Suisse shared responsibility for the disclosure failure, and in a related administrative settlement, Credit Suisse units agreed to pay $2.5 million. They neither admitted nor denied wrongdoing.

The Credit Suisse portfolio manager chiefly responsible for the Citigroup transaction, Samir H. Bhatt, settled administrative charges without admitting or denying wrongdoing, the SEC said. He agreed to pay $50,000 and to be suspended for six months from working for any investment adviser firm, the SEC said.

In settlements to similar SEC cases, Goldman Sachs agreed last year to pay $550 million, and J.P. Morgan agreed this year to pay $153.6 million.

The largest investor in the Citigroup CDO was bond insurer Ambac, the SEC said. Ambac, which was weakened by the mortgage meltdown, last year sought bankruptcy protection.

Citigroup has a history of being sanctioned by the SEC. The firm last year agreed to pay $75 million in an SEC settlement for allegedly withholding from investors information about its own exposure to subprime mortgages. In 2008, Citigroup Global Markets, the same unit involved in Wednesday’s case, settled an SEC complaint that it misled investors about instruments known as auction rate securuties.

In 2003, Citigroup Global Markets settled SEC allegations that it published false or misleading investment research reports. That settlement featured a staple of SEC enforcement: a provision that “permanently restrains and enjoins” the firm from violating particular SEC rules.

In Wednesday’s action, the SEC asked a court to enter a new judgment “Permanently restraining and enjoning Citigroup Global Markets” from violating specific rules.