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SEC Says Prince, Rubin Knew of Losses at Suit’s Focus

Charles O. “Chuck” Prince and Robert Rubin were among Citigroup Inc. officials who knew 2007 losses were mounting on mortgage assets that U.S. regulators have faulted the bank for not disclosing, a court filing shows.

Prince, the bank’s chief executive officer at the time, and Rubin, who was then chairman, knew the highest-rated segments of subprime mortgage-backed securities were the source of about $200 million in new losses in October 2007, the Securities and Exchange Commission said yesterday in a filing at federal court in Washington. In July, the agency accused the bank and two other executives of failing to disclose $40 billion in subprime assets before losses surged. It didn’t target Prince and Rubin.

U.S. District Judge Ellen Huvelle asked the agency last month to explain what senior executives knew as she considers approving Citigroup’s $75 million settlement with the regulator. The agency’s identification of Prince and Rubin may trigger questions from the judge about why the agency didn’t bring claims against more people, said Peter Henning, a professor at Wayne State University Law School in Detroit.

“How aware were they is always an open question in these kinds of cases,” said Henning, a former SEC lawyer. “The SEC should have provided investors a little more assurance that senior management will be held accountable in these cases.”

Photographer: Joshua Roberts/Bloomberg

Charles O. "Chuck" Prince, former chief executive officer of Citigroup, testifies at a hearing of the Financial Crisis Inquiry Commission in Washington. Close

Charles O. "Chuck" Prince, former chief executive officer of Citigroup, testifies at a... Read More

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Photographer: Joshua Roberts/Bloomberg

Charles O. "Chuck" Prince, former chief executive officer of Citigroup, testifies at a hearing of the Financial Crisis Inquiry Commission in Washington.

In a filing, the SEC said two executives it targeted -- former Chief Financial Officer Gary Crittenden, 57, and former investor relations chief Arthur Tildesley -- were “more closely” tied to misleading disclosures than anyone else.

Assuring ‘Pain’

“There has been nothing here that is being done to assure anyone that senior management who’s responsible, whatever level of culpability you’re talking about, is going to have any pain here,” Huvelle told the SEC at an Aug. 16 hearing on the proposed settlement.

SEC spokesman John Nester and Citigroup spokeswoman Shannon Bell declined to comment. Adam Miller, a spokesman for Rubin, 72, also declined to comment. Prince, 60, didn’t respond to e- mails and a message at his office.

Former Chief Risk Officer David Bushnell, 56, and former Chief Operating Officer Robert Druskin, 63, were among other executives who knew the source of the mounting losses, according to the agency’s filing. Bushnell couldn’t be reached by phone at home, and an attempt to reach Druskin at E*Trade Financial Group, where he is chairman, was unsuccessful.

Photographer: Joshua Roberts/Bloomberg

Robert Rubin, former chairman of Citigroup's executive committee, testifies at a hearing of the Financial Crisis Inquiry Commission in Washington. Close

Robert Rubin, former chairman of Citigroup's executive committee, testifies at a... Read More

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Photographer: Joshua Roberts/Bloomberg

Robert Rubin, former chairman of Citigroup's executive committee, testifies at a hearing of the Financial Crisis Inquiry Commission in Washington.

Current Citigroup executives, including Vice Chairman Lewis Kaden, 68, General Counsel Michael Helfer, 65, and CFO John Gerspach, were also aware of the losses, the SEC said. Citigroup’s Bell declined to comment on their behalf.

‘Unprecedented Time’

Prince, questioned by the Financial Crisis Inquiry Commission in April about whether the bank fully disclosed potential losses, said estimates were in flux, because the subprime market was rapidly deteriorating.

“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.”

Rubin whose job was to meet with clients and advise on “strategic and managerial issues,” told the panel that warning signs of a crisis “were not obvious” and that he didn’t remember learning of the bank’s mortgage-linked collateralized debt obligations until the fall of 2007.

“I feel confident that the relevant personnel believed in good faith that more senior level consideration of these particular positions was unnecessary because the positions were AAA-rated and appeared to bear de minimis risk of default,” he said.

Questioning Watchdogs

Federal judges have sought more information or delayed at least two bank settlements with the government since August 2009, questioning whether watchdogs had been aggressive enough.

In February, U.S. District Judge Jed S. Rakoff in Manhattan said he would “reluctantly” sign off on a $150 million SEC settlement with Bank of America Corp., which he criticized as “inadequate and misguided.” The regulator had accused the Charlotte, North Carolina-based lender of misleading investors during its acquisition of Merrill Lynch & Co.

Last month, U.S. District Judge Emmet Sullivan in Washington questioned what he called a “sweetheart deal” between the U.S. and Barclays Plc, which was accused of violating financial sanctions against Cuba, Iran, Libya, Sudan, and Burma. Sullivan later signed off.

The SEC yesterday urged the court to approve the Citigroup accord. The penalty “takes into account the seriousness of the misconduct,” the agency wrote. “It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed.”

‘Subprime Exposure’

The New York-based bank’s executives repeatedly stated in 2007 that it had reduced exposure to subprime mortgage securities by 45 percent to $13 billion, as investors and analysts clamored for information about the deteriorating market, according to the agency’s July complaint.

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, the SEC said.

Claims Settled

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.

Crittenden who left the company last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings. Tildesley agreed to pay $80,000 to resolve claims that he helped draft disclosures that misled investors, the SEC said. They and the firm didn’t admit or deny wrongdoing in their settlement agreements.

Huvelle gave Citigroup until Sept. 13 to submit a filing, and scheduled a Sept. 24 hearing.

The case is Securities and Exchange Commission v. Citigroup Inc., 10-cv-01277, U.S. District Court, District of Columbia Washington).

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; William McQuillen in Washington at bmcquillen@bloomberg.net.

To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; David E. Rovella at drovella@bloomberg.net.

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