Citigroup agrees to $75 million SEC settlement on subprime mortgage investments

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, July 30, 2010; A12

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.

Shares devalued

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.

Refunding taxpayers

The design of the Citigroup settlement mirrors a case brought against Bank of America last year for concealing from investors key information about financial losses and compensation. It was settled this year for $150 million.

Goldman, in its settlement, was forced to say that it had made a "mistake" by providing "incomplete information" to its clients. Citigroup does not have to make any such acknowledgment, nor did Bank of America.

And like Goldman and Bank of America, Citigroup can abstain under its settlement from admitting or denying wrongdoing, which could largely insulate it from private lawsuits filed as a result of the SEC complaint.

The agency said that Citigroup told investors on at least four occasions in that summer and fall of 2007 that its investment banking unit's exposure to subprime mortgages was $13 billion or less, when executives knew it was $50 billion. The allegedly false statements were made in earnings calls and periodic financial filings overseen by Crittenden and Tildesley.

The $13 billion figure, the agency says, omitted the super-senior tranches of collateralized debt obligations and liquidity puts, investments whose value rose and fell with the housing market.

This was despite the fact that internal documents describing the investment bank's subprime exposure explicitly included these investments. Citigroup ultimately disclosed that these investments were losing value in November 2007. From there on, quarter after quarter, the bank reported growing losses.

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."

Citigroup was one of the first banks to receive bailouts in fall 2008. As the depth of its financial hole was revealed, it had to go back for more government assistance.

Recently, the bank has been on more solid ground, paying back taxpayers.

The bank also didn't fight the White House's regulatory reform agenda, winning its chief executive, Vikram Pandit, an invitation to the signing ceremony of the financial reform bill, when other top bank executives who did oppose the new law were not invited.

Under "Pandit's leadership, we have bolstered our financial strength, overhauled our risk management, reduced our risk exposures, and made Citi a more focused enterprise by returning to banking as the core of our business," Citigroup's statement said.

A lawyer for Crittenden said he was pleased to resolve the matter. Tildesley's attorney did not respond to a request for comment. Citigroup said Tildesley and Crittenden were highly valued employees who made significant contributions to the company.

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