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Citigroup Settlement on Subprime Holdings Disclosures Approved

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

Citigroup Inc.’s $75 million settlement over claims it failed to disclose $40 billion in subprime-related holdings was approved by a federal judge in a lawsuit brought by the U.S. Securities and Exchange Commission.

U.S. District Judge Ellen Huvelle in Washington said yesterday she would sign the settlement after both sides agreed Citigroup must continue the disclosure plan it began during the financial crisis to ensure future SEC oversight. She told the attorneys in court to submit new language for the settlement within two weeks.

The judge said that she wanted to make sure there are “procedures in place that both satisfy me and the SEC.”

Huvelle last month held off approving the settlement, saying she was dissatisfied with the proposal and wanted more information before making a decision. Both the bank and the SEC filed additional papers with the court urging acceptance of their accord.

The penalty “takes into account the seriousness of the misconduct,” the SEC wrote in a Sept. 8 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.”

The company made misstatements on earnings calls and in filings regarding assets tied to subprime loans as the housing crisis unfolded in 2007, the SEC said in its July 29 complaint. Some disclosures omitted more than $40 billion in investments, regulators said.

Aware of Losses

Responding to Huvelle’s request, 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 a Sept. 13 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.

Reduced Exposure

“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.

While noting changes in Citigroup’s practices, Huvelle was concerned the agreement hadn’t required more transparency. The initial accord only barred the bank from violating SEC rules.

“You may have the best practices there are, but I wouldn’t know that sitting here,” she said yesterday.

Citigroup executives repeatedly stated in 2007 that the New York-based bank had reduced its liabilities connected 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 the 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.

Huvelle said Crittenden’s $100,000 fine is “not a deterrent to corporate crime,” though she left that to the SEC’s discretion.

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

Taxpayer Bailout

The bank, once the world’s biggest by assets, got a $45 billion taxpayer bailout in 2008 after losses on subprime mortgages and collateralized debt obligations 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.”

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

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