Citigroup Faces Hearing on Proposed SEC Subprime Settlement

Former Citigroup Inc. Charles O.
Charles O. "Chuck" Prince, former chief executive officer of Citigroup Inc. Photographer: Joshua Roberts/Bloomberg

Citigroup Inc. faces a Sept. 24 court hearing on a proposed $75 million settlement with the U.S. Securities and Exchange Commission over claims the bank misled investors by failing to disclose $40 billion in subprime-related holdings.

U.S. District Judge Ellen Huvelle in Washington was initially dissatisfied with the written proposal and had sought more information before approving the accord. She set a second hearing for Sept. 24.

“Citigroup believes the SEC’s proposed resolution of this matter is entitled to substantial deference and joins the commission in urging the court to approve the proposed settlement as fair, adequate, reasonable and appropriate,” the bank said in a filing yesterday.

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 SEC said July 29 in its complaint. Some disclosures omitted more than $40 billion in investments, the SEC said.

Shannon Bell, a Citigroup spokeswoman, declined to comment on yesterday’s filing.

The SEC filed papers with the judge on Sept. 8 encouraging approval for the settlement.

The penalty “takes into account the seriousness of the misconduct,” the SEC wrote it its filing. “It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed.”

Prince, Rubin

The SEC identified Citigroup officials -- including former Chief Executive Officer Charles O. “Chuck” Prince and former Chairman Robert Rubin -- who were aware that losses were mounting in October 2007 on the highest-rated segments of mortgage-based assets, which the agency claims hadn’t been fully disclosed. The SEC didn’t accuse those officials of wrongdoing.

The fact that so many executives were aware of the disclosure and valuation process and “nonetheless did not note the central issue identified by the commission in its complaint, only underscores the weakness of any possible case against additional parties,” Citigroup wrote in yesterday’s filing.

Citigroup was under “no obligation to say anything about its ‘subprime exposure’” in the second and third quarters of 2007, the bank wrote. It voluntarily decided shareholders would benefit from “a more concrete understanding” and made some statements, it said.

“In making these July and October disclosures, Citigroup was among the first of its financial institution peers to provide information of this type to the investing public,” the bank said.

Settlement Delays

U.S. judges have sought more information or delayed approval of at least two bank settlements by regulators since August 2009.

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. Last month, a U.S. judge in Washington questioned a “sweetheart deal” between the U.S. and Barclays Plc, which was accused of violating U.S. financial sanctions against Cuba, Iran, Libya, Sudan, and Burma.

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.

Subprime Exposure

On an Oct. 15, 2007, conference call with analysts and investors, Gary Crittenden, then Citigroup’s chief financial officer, 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.

Crittenden, who left the bank 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.

Taxpayer Bailout

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

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 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.”

‘Reluctantly’ Approved

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.

In the Barclays case, U.S. Judge Emmet Sullivan in Washington was critical of the deferred prosecution deal, pointing out that people caught robbing a bank don’t get deferred prosecution and the option to return ill-gotten gains.

“Why isn’t the government getting tough with the banks?” Sullivan asked, before approving the accord the following day.

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

Before it's here, it's on the Bloomberg Terminal. LEARN MORE