The focus of the new report had its roots in 2007, when Citigroup had more than $50 billion of exposure to risky subprime loans but stated publicly that the total was only $13 billion, according to the SEC.
Citigroup withheld full disclosure as the mortgage market was crumbling and investors were clamoring for details about firms’ exposure to subprime securities, the agency said last year.
In the end, Citigroup negotiated a deal with the SEC in which it agreed to pay $75 million, neither admitted nor denied wrongdoing, and was charged with misleading investors — but not with intentional fraud.
Arthur H. Tildesley Jr., who had been the firm’s director of investor relations, and Gary L. Crittenden, who had been its chief financial officer, settled lesser administrative charges and agreed to pay $80,000 and $100,000 in fines, respectively. They neither admitted nor denied the SEC’s allegations.
The SEC enforcement staff had notified other individuals that it planned to recommend charges against them, the report said. Their identities were blacked out, and the visible text of the report does not explain why those charges were not pursued.
Citigroup sought “to dissuade the Enforcement staff from charging individuals,” the report said.
Citigroup was “trying to use whatever leverage they had . . . to get us to . . . lay off the individuals,” an unidentified SEC official testified.
During the Citigroup case, Khuzami and Pomerantz “attempted to meet socially” in New York but did not get together, the report said, citing e-mails. Khuzami told the inspector general’s office that if he had met Pomerantz for lunch or drinks, he would not have discussed the Citigroup case. Khuzami conceded, however, that it was “possible” that “someone would look at that and suggest that there was something improper going on,” the report said.
By the end of April 2010, the enforcement staff was prepared to seek fraud charges against Crittenden and Tildesley. The staff reached a settlement with Tildesley under which he would be accused of violating a section of federal securities law titled “Fraudulent Interstate Transactions,” according to the report, but Crittenden refused to settle.
In the summer of 2010, Pomerantz arranged for Citigroup Chairman Dick Parsons to meet with Khuzami and members of his staff to explain why Crittenden should not be charged with fraud, the report said.
“Parsons said he could well appreciate that the staff would have to charge Crittenden with something, but it shouldn’t be securities fraud,” Pomerantz told the inspector general’s office, according to the report.
An SEC official working on the case, Scott Friestad, testified that days later he was blindsided by surprising information from another Citigroup lawyer: In a telephone conversation with Pomerantz, Khuzami had agreed to support a settlement with Crittenden “that would not include any fraud charges at all,” the report said.
Khuzami gave the inspector general’s office (OIG) a different account. He testified “that he did not agree to anything” in his conversation with Pomerantz,” the report said.
Pomerantz testified that Khuzami indicated that the SEC staff might support “a non-fraud approach,” but Pomerantz said he and Khuzami made no agreement during the call, the report said.
The OIG found that Khuzami and Pomerantz had not made any “secret” deal over the phone and that “the conversation was, at most, merely the beginning of further negotiations and discussions that continued for several days,” the report said.
The OIG also said that it “did not find any evidence that Khuzami had an unusually close relationship with Pomerantz or that he made any decision based upon any friendship with Pomerantz.”
The OIG then delivered some mild criticism: “with hindsight, it may have been advisable, given Khuzami’s prior relationship with Pomerantz and the substance of what they discussed, for Khuzami to have included another staff member in his June 28, 2010, call with Pomerantz,” the report said.
The SEC ultimately reached a settlement with Crittenden that included no fraud charge.
Then, the report said, the agency revised its settlement with Tildesley “to reflect the same basic terms,” nixing the more serious charge.
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