Citigroup was in a bind.

Two years ago, the Securities and Exchange Commission was considering charging the firm’s former chief financial officer with misleading investors by understating Citigroup’s exposure to subprime mortgages.

To help defuse the situation, Citigroup added to its legal team a criminal defense lawyer named Mark Pomerantz, who had some special qualifications. As Pomerantz later told the SEC’s inspector general, he had supervised SEC enforcement director Robert Khuzami when the two worked for the Justice Department, and he had helped get Khuzami a promotion.

On behalf of Citigroup, Pomerantz wrote to Khuzami in 2010 asking for a meeting. According to a newly released report by the inspector general, Pomerantz said he wanted to reinforce the point that charging the former executive with fraud “would have very large implications for Citigroup.”

Asked why he sent the e-mail instead of another defense lawyer more involved in the case, Pomerantz told the inspector general: “I guess because I knew him, I was the one who sent the e-mail.”

In a long-awaited report released this week, SEC Inspector General H. David Kotz exonerated Khuzami of accusations that he acted improperly in the case and that Citigroup executives avoided fraud charges as a result of “special access and preferential treatment.”

Instead, the inspector general’s office “found that the settlements were part of a negotiation process that involved several members of the Enforcement staff,” the report said.

But the report shows just how close the enforcers at the SEC can be to their adversaries, the lawyers who defend Wall Street professionals and firms in agency probes.

The inspector general’s investigation was requested by Sen. Charles E. Grassley (R-Iowa) based on an unsigned letter alleging improprieties. Grassley said in a statement that he was disappointed that the SEC had blacked out entire pages of the inspector general’s report before making it public.

Still, the remaining text offers a rare inside view of the interplay between the investigators and the investigated.

Pomerantz wasn’t the only former Khuzami colleague enlisted to defend Citigroup and its personnel against allegations of investor fraud. One company executive was represented by lawyer Mark Stein, who worked with Khuzami on two money-laundering cases when they were both at the U.S. attorney’s office in Manhattan, the inspector general said.

Another was represented by John Carroll, who “briefly overlapped” with Khuzami at the U.S. attorney’s office.

And, after Khuzami left the U.S. attorney’s office to take a high-level job at Deutsche Bank, he retained Pomerantz to do legal work for Deutsche Bank, the inspector general reported.

The exact nature of Khuzami’s working relationship with Pomerantz during their days at Justice was the subject of some confusion. Khuzami told the inspector general’s office that he was unsure of whether he reported to Pomerantz because the reporting hierarchy was “pretty flat,” but he recalled that they had interacted on more than a weekly basis, the report said.

Pomerantz, however, said that Khuzami reported directly to him, and that “it was a joint decision by Pomerantz and the U.S. Attorney, Mary Jo White, to promote Khuzami to Chief of the Securities Unit,” according to the report.

The SEC is under fire for its handling of a more recent case involving Citigroup, in which it accuses the company of misleading investors. In that case, the firm allegedly sold investors a complex financial instrument that it was using to bet against them. The SEC has agreed to settle that case without charging any senior executives and for much less money than investors lost. A federal judge held a hearing last week on whether to approve the settlement.

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.