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

CitigroupCitigroup (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.

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Agreed to pay? Didn't know it was an option. Gee if I get in trouble with the law can I choose my own sentence? What happens if I don't agree to the sentence I am given? Hmm beleive the Judge would laugh at me and increase it.

July 30 2010 at 9:19 AM Report abuse rate up rate down Reply

one way or another, the customer, will eventually help to recoup this minor loss. these banks are constantly inventing new ways to make money, which is understandable in our greedy world. the more the fed puts the crunch on banks, the more restrictions they put on them to control what gets done to their customers, the more these companies work at getting around the rules or adapting new procedures for procuring even more money from the consumer. catch 22 at it's best.

July 30 2010 at 7:28 AM Report abuse rate up rate down Reply

the bigger the crime,the less you suffer.thats how it is in this society.also the little scum -bags have there little crimes.every one is screwing one another.its hard to be an honest individual,some one is always trying to take what ever you have-----ROBIN HOOD WHERE ARE YOU WHEN WE NEED YOU---LOL

July 30 2010 at 7:06 AM Report abuse +2 rate up rate down Reply

I wonder if they will get TARP money so they can pay the fine ?

July 30 2010 at 6:54 AM Report abuse +2 rate up rate down Reply

this is capitalism at its best,screw the investor,he dosent get a penny out of that 75 million.every state needs an ethical committee,and every ethical committee needs a watch--dog

July 30 2010 at 6:51 AM Report abuse +2 rate up rate down Reply

.....and the investors got what for their losses? and exactly which crook went to jail?

July 30 2010 at 6:20 AM Report abuse +1 rate up rate down Reply

Another example of justice in America. Commit massive fraud and face no criminal charges. Pay a small fine without having to admit any wrongdoing, and get to keep your job making millions of dollars a year.

July 30 2010 at 2:46 AM Report abuse +4 rate up rate down Reply

Fines won't do any good. What is needed is jail terms not fines. Put their butts in jail for 45 months and not fine them 45 mill and you will not see a reoccurrence of what happened.

July 30 2010 at 2:09 AM Report abuse +4 rate up rate down Reply

Everything Citi Group touches is tainted. They suck. Enough said.

July 29 2010 at 11:07 PM Report abuse +4 rate up rate down Reply

Those executives got fine 100k and 80k for making millions? You think they going to fight the fine? Please. Scoundrels!!

July 29 2010 at 11:03 PM Report abuse +4 rate up rate down Reply