Citigroup Said to Pay $75 Million to Settle SEC Subprime Case

Citigroup Inc. will pay $75 million to settle U.S. regulatory claims that it misled investors by failing to disclose billions of dollars in holdings tied to subprime mortgages while the housing crisis unfolded.

The company made misstatements on earnings calls and in financial filings in 2007 about assets tied to subprime loans, the Securities and Exchange Commission said in a federal lawsuit yesterday in Washington. Some disclosures omitted more than $40 billion in investments, it said. Citigroup’s former chief financial officer and head of investor relations agreed to pay a total of $180,000 for failing to disclose the risk.

“Even in late 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk-management skills in reducing its subprime exposure,” 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 half truths.”

Citigroup executives publicly stated four times in 2007 that the New York-based bank had reduced its exposure to subprime mortgage securities by 45 percent to $13 billion, as investors and analysts clamored for information about the deteriorating market. Regulators may investigate other firms that revised statements about potential exposures and loss estimates, said Elizabeth Nowicki, a former SEC attorney.

“We are getting a flavor of what they might go after: overly optimistic disclosures” said Nowicki, who’s now a law professor at Tulane University.

‘Highly Valued’

Former CFO Gary Crittenden, who left Citigroup last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings. Arthur Tildesley, Citigroup’s former head of investor relations, will pay $80,000 to settle claims that he helped draft disclosures that misled investors, the SEC said. Tildesley now heads cross-marketing at Citigroup, according to the agency.

Citigroup, Crittenden and Tildesley agreed to settle the case without admitting or denying the SEC’s allegations.

“Mr. Crittenden is pleased to have resolved this matter,” said John Carroll, an attorney for Crittenden at law firm Skadden, Arps, Slate, Meagher & Flom LLP in New York. “The settlement does not establish liability for purposes of any other proceeding.”

Citigroup is pleased to “put this matter concerning certain 2007 disclosures behind us,” the company said in a statement that noted it and the executives weren’t accused of intentional or reckless misconduct. “Mr. Tildesley is a highly valued employee of Citi and is making significant contributions to the company.”

Tildesley’s attorney, Mark Stein at Simpson Thacher & Bartlett LLP in New York, declined to comment.

Conference Call

On an Oct. 15, 2007, conference call with analysts and investors, Crittenden said the company’s “subprime exposure” was $13 billion at the end of second quarter and had declined during the third quarter.

The figure he cited omitted “super-senior” tranches of collateralized debt obligations and financial guarantees known as liquidity puts that allowed customers to sell debt securities back to Citigroup if credit markets froze, the SEC said. Those products added more than $40 billion of subprime risk that the bank didn’t disclose to investors, the SEC said.

“Misleading corporate disclosures are always unacceptable but are even more so in times of turmoil and crisis,” said Scott W. Friestad, associate director of the SEC’s enforcement unit. “At times like those the information can be more material to investors and has a greater potential for causing harm.”

Citigroup issued a news release on Nov. 4, 2007, that said the company had about $55 billion of “direct exposure” to the subprime market.

Bailout

The bank, once the world’s biggest by assets, got a $45 billion taxpayer bailout in 2008 after losses on subprime mortgages and CDO holdings withered confidence and nearly triggered a run on deposits. Citigroup is 18 percent owned by the U.S. government after repaying $20 billion in December.

Citigroup executives including former Chief Executive Officer Charles O. “Chuck” Prince were questioned at an April hearing by the Financial Crisis Inquiry Commission about whether the bank fully disclosed potential losses.

Estimates were in flux, because the subprime market was rapidly deteriorating, Prince told the financial crisis panel.

“At the time, the financial people were working very intensely with the fixed-income people to try to determine exposures,” Prince said during the April 8 hearing. “This was an unprecedented time in which markets were crashing.”

‘Classes of Exposure’

Robert Rubin, the onetime U.S. Treasury Secretary who led Citigroup’s executive committee, told the FCIC that the $13 billion figure represented assets that had a greater likelihood of triggering losses. The remaining assets were “super-senior” and were probably viewed within Citigroup as presenting different “classes of exposure,” Rubin said.

Other financial companies revised estimates in 2007 as markets teetered. Merrill Lynch & Co. absorbed $8.4 billion of writedowns in October of that year, almost double the firm’s forecast three weeks earlier.

The SEC’s Citigroup suit is its third in a year against a Wall Street firm as the agency pursues a sweeping investigation of misconduct stemming from the collapse of the housing market.

Goldman Sachs Group Inc. agreed this month to pay $550 million to settle allegations it sold a mortgage security in 2007 without disclosing that hedge fund Paulson & Co. helped design the asset and was betting it would fail.

Bank of America Corp. in February said it would pay $150 million for failing to tell shareholders about $5.8 billion of bonuses set aside for Merrill employees and losses the investment bank was likely to suffer. Bank of America agreed to acquire Merrill in 2008 for $33 billion.

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

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