Citigroup agrees to $75 million SEC settlement on subprime mortgage investments
Friday, July 30, 2010
Citigroup, one of the nation's largest banks, agreed Thursday to pay $75 million to settle a Securities and Exchange Commission complaint that it misled investors about $40 billion of its holdings in subprime mortgage investments.
The SEC's resolution of the case with Citigroup, following a $550 million settlement with Goldman Sachs this month, represents the third time this year that a major bank has agreed to regulatory sanctions for behavior that fueled the financial crisis. The other was a $150 million settlement with Bank of America.
In an unusual move, the SEC also sanctioned two senior former Citigroup executives suspected of being involved in the wrongdoing.
The SEC, which has been criticized for failing to charge high-level executives at financial firms, said that former chief financial officer Gary L. Crittenden and former investor relations head Arthur Tildesley concealed important information from investors in regulatory disclosures in the second and third quarters of 2007.
Crittenden agreed to pay $100,000, and Tildesley agreed to pay $80,000 to settle the charges.
The SEC settlement marks the first time a major Wall Street bank has faced regulatory punishment for hiding from investors its exposure to the subprime mortgage market. It is significant because investors might have made a different choice about where to put their money if they had known the extent of Citigroup's exposure to subprime mortgages.
Citigroup's shares have lost more than 90 percent of their value since 2007, and the bank was among the firms to receive the most taxpayer aid to stay afloat.
"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 . . . subprime exposure sat on its books undisclosed to investors," SEC enforcement director Robert Khuzami said in a statement. "The rules of financial disclosure are simple -- if you choose to speak, speak in full and not in half-truths."
The charges against Citigroup are technically less serious than those Goldman faced. The SEC is alleging that Citigroup was negligent in not providing important information about its subprime mortgage holdings to investors, but the agency is not suggesting Citigroup deliberately intended to mislead its shareholders.
"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.
By a more general measure, though, the charges against Citigroup are just as significant. Goldman was accused of defrauding two large financial firms that were playing in a highly speculative mortgage market linked to subprime loans.
By contrast, Citigroup is accused of misleading its many shareholders about its exposure to a dangerous part of the housing market. Many of those shareholders were individuals, including retirees and parents saving for their children's education.