WASHINGTON — As the housing market began its collapse, Wall Street firms and sophisticated investors searched for ways to profit. Some of them found an easy method: Stuff a portfolio with risky mortgage-related investments, sell it to unsuspecting customers and bet against it.

Citigroup on Wednesday agreed to pay $285 million to settle a civil complaint by the Securities and Exchange Commission that it had defrauded investors who bought just such a deal. The transaction involved a $1 billion portfolio of mortgage-related investments, many of which were handpicked for the portfolio by Citigroup without telling investors of its role or that it had made bets that the investments would fall in value.

In the four years since the housing market began its steady descent, securities regulators have settled only two cases related to the financial crisis for a larger sum of money. This is also the third case brought by the S.E.C. accusing a major Wall Street institution of misleading customers about who was putting together a security and about their motive. Goldman Sachs and JPMorgan Chase & Company both settled similar cases last year.

The settlement will refund investors with interest and include a $95 million fine — a relative pittance for a giant like Citigroup. On Monday, the company reported that in the third quarter alone it earned profits of $3.8 billion on revenue of $20.8 billion. The settlement may also have trouble getting approval from Jed S. Rakoff, the federal district judge in New York who must ultimately sign off on the fine and who has taken a hard line on S.E.C. settlements.