Citigroup Fined $75 Million to Settle Allegations That It Misled Investors


Citigroup (C) got hit with a $75 million fine to settle SEC allegations that it mislead its investors about its subprime mortgage asset exposure, the Securities and Exchange Commission announced Thursday. Citigroup's former chief financial officer Gary Crittenden and its former investor relations chief Arthur Tildesley Jr. also agreed to SEC settlements.

In its combo lawsuit-settlement filing, the SEC alleged that Citigroup (C) assured investors between July and mid-October 2007 that subprime mortgages accounted for $13 billion or less of its investment banking exposure, when in actuality it was more than $50 billion, the SEC claimed.

Crittenden agreed to pay a $100,000 fine and Tildesley a $80,000 fine. Both former finance executives and Citigroup agreed to settle without admitting or denying the SEC allegations.

"We are pleased that we have reached agreement with the SEC to put this matter concerning certain 2007 disclosures behind us, and that the SEC is not charging Citi or any individual with intentional or reckless misconduct," Citigroup said in a statement.

Keeping Quiet About $40 Billion in Subprime Assets

Robert Khuzami, director of the SEC's Division of Enforcement, said in a statement:

Even as late as fall 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk management skills in reducing its subprime exposure to approximately $13 billion. In fact, billions more in CDO and other subprime exposure sat on its books undisclosed to investors. The rules of financial disclosure are simple -- if you choose to speak, speak in full and not in half-truths.

Back in April 2007, Citigroup's senior executives were gathering information on the bank's exposure to subprime loans for possible inclusion in public documents. In doing so, the SEC alleges, Citi's internal documents lumped subprime mortgages in with its "super senior" collateralized debt obligations tranches and its "liquidity puts," which are, essentially, agreements to buy assets if nobody else will.

But when it was time to make public disclosures to investors, Citi allegedly trotted out only the subprime mortgages, noting the toxic assets were reduced to $13 billion from $24 billion at the end of 2006. Citi made no mention of the "super senior" bad stuff, nor the liquidity puts that amounted to another $40 billion in subprime assets, according to the SEC.

On a July 20, 2007, earnings call and a July 27, 2007, fixed income call, nothing was said about the other two categories of subprime assets, the SEC alleges.

Then, in early September 2007, Citi's former head bean-counter Crittenden received a detailed briefing about the valuation issues connected to the "super senior" CDO tranches. At about the same time, Tildesley received the same information and raised the issue that Citi's disclosures could be construed as misleading since it hadn't included the other two categories of subprime assets, according to the SEC lawsuit.

Apparently, Tildesley's raising the issue was about as far as it went, and October's disclosures to investors mirrored July's. During Citi's Oct. 1, 2007, pre-earnings announcement and again on an Oct. 15 earnings call, no mention was made of the banks exposure to those other two categories of subprime assets, claims the SEC.

Bank Came Clean in November 2007

It wasn't until Nov. 4, 2007, that the company disclosed that it was sitting on roughly $55 billion in sub-prime assets, the SEC alleges.

On that fateful day, Citi's chairman and CEO Charles Prince announced that he would retire, citing the subprime debacle. Said Prince:

We have made strong progress in our strategy for building for the future, evidenced in the momentum we have achieved in most of our businesses. Nevertheless, it is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down. This is what I advised the Board.

They accepted. A director from the company was installed as an interim CEO while a search was under way.

Scott W. Friestad, associate director of the SEC's Division of Enforcement, said in a statement, "Citigroup's improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms' exposure to subprime securities. Instead of providing clear and accurate information to the market, Citigroup dropped the ball and made a bad situation worse."

Regarding Tildesley, who continues to work at Citigroup as the head of cross marketing, and Crittenden, a statement released by the company noted that neither had been charged with intentional or reckless misconduct, and described both men as "highly valued" to the institution.