Iron-rich smectite is commonly described in the diagenetic fraction of deep-sea sediment, as millimeter to centimeter aggregates dispersed in the sediment, or as a coating on sedimentary particles or nodules. This study examines several factors to elucidate formation mechanisms of a particular iron-rich smectite and its potential transformation to glauconite. The study combines a detailed mineralogical investigation on natural samples and a chemical modeling approach to assess mineralogical reactions and pathways. Transmission electron microscopy (TEM) observations and analytical electron microscopy (TEM-AEM) analyses were conducted on microtomed samples of millimeter- to centimeter-long green grains. These grains are widespread in pelagic calcareous sediment from the Costa Rica margin. They are composed of pyrites that are partially dissolved and are surrounded by amorphous or very poorly crystallized iron-rich particles. Iron-rich montmorillonite grows from an amorphous precursor and its formation requires the input of Si, O, Mg, K, Na and Ca; our results suggest that these inputs are supported by the dissolution of sedimentary phases such as volcanic glasses, siliceous fossils and silicates. Thermodynamic modeling of fluid-sediment interactions was conducted with the geochemical computer code PhreeqC, using mineralogical and pore fluid compositions from sediment samples and calculated estimates for thermodynamic constants of smectites that are not maintained by the computer code. Simulations confirm the possibility that the green grains are the product of pyrite alteration by seawater under oxidizing conditions. The extent of smectite production is controlled by the kinetics of pyrite dissolution and fluid migration. The absence of aluminum in the Costa Rica margin system explains the formation of an iron-rich montmorillonite instead of glauconite, whereas the presence of calcite that buffers the system explains the formation of an iron-rich montmorillonite instead of iron oxides.