Citigroup to pay $75 million to settle SEC charges it misled investors over subprime investments
Citigroup, one of the nation's largest banks, agreed Thursday to pay $75 million to settle a Securities and Exchange Commission complaint that it misled investors about $40 billion of its holdings in sub-prime mortgage investments that sent the bank to the edge of collapse.
After its $550 million settlement with Goldman Sachs, the SEC's resolution of the case with Citigroup represents a third major Wall Street institution this year agreeing to regulatory sanctions for behavior that was at the core of the financial crisis. Citigroup received one of the largest taxpayer bailouts.
Notably, the SEC complaint names two senior Citigroup executives -- former chief financial officer Gary L. Crittenden and former investor relations head Arthur Tildesley -- and alleges that they concealed important information from investors in regulatory disclosures in the second and third quarters of 2007. Crittenden agreed to pay $100,000 and Tildesley agreed to pay $80,000. Previous complaints against major financial firms have not charged high-level executives.
"Even as late as fall 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk management skills in reducing its subprime exposure to approximately $13 billion. In fact, billions more in ... subprime exposure sat on its books undisclosed to investors," said SEC Enforcement Director Robert Khuzami in a statement. "The rules of financial disclosure are simple -- if you choose to speak, speak in full and not in half-truths."
The SEC settlement marks the first time a major Wall Street bank has faced regulatory punishment for hiding from investors its exposure to the subprime mortgage market.
But the charges facing Citigroup are less serious than those Goldman faced. Goldman was accused of fraud, of deliberately misleading clients about a sub-prime mortgage investment the bank was trying to sell them. By contrast, the SEC is alleging that Citigroup was negligent in not providing important information about its sub-prime mortgage holding to investors, but did not deliberately intend to mislead its shareholders.
By a more general measure, though, the charges against Citigroup are just as significant. Goldman was accused of defrauding two large financial firms that were playing in a highly speculative mortgage market linked to sub-prime loans. Citigroup is accused of misleading its many shareholders about its exposure to a dangerous part of the housing market. Many of those shareholders represented retirees, parents saving for their children's education and other retail investors.
The design of the Citigroup settlement mirrors a case brought against Bank of America last year and settled earlier this year for $150 million. Bank of America was accused of concealing from investors details of mounting losses at Merrill Lynch, the investment bank it acquired in fall 2008, and billions of dollars in bonuses paid to Merrill Lynch employees.
Goldman, in its settlement, was forced to say that it had made a "mistake" by providing "incomplete information" to its clients. Citigroup does not have to make any such acknowledgement, nor did Bank of America.
And like Goldman and Bank of America, Citigroup can abstain under its settlement from admitting or deny wrongdoing, which may largely insulate it from private lawsuits filed as a result of the SEC complaint.
In 2007 and 2008, Citigroup suddenly reported billions of dollars of losses tied to its investments in sub-prime mortgage-backed securities.
According to the SEC, Citigroup responded in summer and fall 2007 to clamoring by investors for information about its exposure to the sub-prime mortgage market. The agency said that Citigroup told investors on at least four occasions that its exposure in its investment banking unit was $13 billion or less, when it was actually $50 billion, including in earnings calls and periodic financial filings overseen by Crittenden and Tildesley.
The $13 billion figure¸ the agency claims, omitted the super senior tranches of collateralized debt obligations and liquidity puts, both investments whose value rose and fell with that of the housing market. This was despite the fact that internal documents describing the investment bank's subprime exposure explicitly included these investments. Citigroup ultimately disclosed that these investments were losing value in November 2007.
Scott W. Friestad, associate director of the SEC's Division of Enforcement, said in a statement: "Citigroup's improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms' exposure to subprime securities. Instead of providing clear and accurate information to the market, Citigroup dropped the ball and made a bad situation worse."
Citigroup was one of the first banks to receive bailouts in fall 2008 and then, as the true depth of its money hole was revealed, it had to come back for more government assistance.
Recently, the bank has been on more solid ground, paying back taxpayers. The bank also didn't fight the White House's regulatory reform agenda, winning its chief executive, Vikram Pandit, an invitation to the signing ceremony of the financial reform bill, when other top bank executives who did oppose the new law were not invited.
A lawyer for Crittenden said he was pleased to resolve the matter.
UPDATE: Citigroup responded later today.
July 29, 2010; 2:11 PM ET
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