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Citigroup-SEC $75 Million Subprime Accord Held Up by U.S. Judge's Doubts

A U.S. judge said she wasn’t ready to approve Citigroup Inc.’s $75 million settlement with federal securities regulators over claims the bank misled investors by failing to disclose $40 billion in subprime-related holdings.

U.S. Judge Ellen Huvelle wasn’t satisfied with the written proposal and wants more information, said Matthew Miller, an attorney for a Citigroup shareholder. Attorneys are to submit a new round of court filings starting Sept. 8.

The company made misstatements on earnings calls and in financial filings about assets tied to subprime loans as the housing crisis unfolded in 2007, the Securities and Exchange Commission said July 29 in a complaint filed in federal court in Washington. Some disclosures omitted more than $40 billion in investments, the SEC said.

SEC spokesman Kevin Callahan and Shannon Bell, a Citigroup spokeswoman, both said the judge’s questions will be answered.

A U.S. judge in New York in February approved a $150 million Bank of America Corp. settlement with the SEC over alleged misstatements about the purchase of Merrill Lynch & Co. after he had initially rejected a $33 million accord.

Former Chief Financial Officer 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.

Reduced Exposure

Citigroup executives repeatedly stated 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, SEC attorneys said in court filings.

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.

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 almost triggered a run on deposits.

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.”

Miller, representing a Citigroup shareholder, is arguing that the company as a whole, and its shareholders, shouldn’t be punished because of the actions of its top executives. Shareholders shouldn’t be held accountable, he claims.

‘A Victim’

“It’s not fair to have the corporation penalized because of the conduct of the executives,” he said. “The company is as much of a victim as anybody.”

In the SEC versus Bank of America case, U.S. District Judge Jed S. Rakoff in New York said he “reluctantly” approved the settlement of two suits in which the agency accused the Charlotte, North Carolina-based bank of misleading investors following the announcement that it would acquire Merrill Lynch.

He criticized the accord as “half-baked justice at Best” and “inadequate and misguided,” though said it was an improvement over the prior accord.

The case is Securities and Exchange Commission v. Citigroup Inc., 10cv1277, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: William McQuillen in Washington at bmcquillen@bloomberg.net.

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