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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.

citigroup.JPG

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.

By Zachary Goldfarb  |  July 29, 2010; 2:11 PM ET
Categories:  SEC  
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Next: Why Citigroup may matter more than Goldman

Comments

So how will this compensate investors who actually LOST money?

Posted by: wcmillionairre | July 29, 2010 2:32 PM | Report abuse

Why is it paying money to the Government rather than the investors? Oops, I forgot. Someone must pay those inflated Government salaries.

Posted by: Anonymous | July 29, 2010 2:42 PM | Report abuse

Investors loose, crooks pay small portion of their illegal gains (?). Yep, that is the crooked government at work. I've seen small businessmen hounded into bankruptcy and jailed for a lot less. Maybe the answer is we all should steal, but steal enough we can bribe SEC and government officials. Then we will also be safe from prosecution, and get to keep the lions share of the proceeds (?). Something is terribly wrong at the SEC as with the rest of anything connected to the federal government. It is simply broke!

Posted by: Anonymous | July 29, 2010 3:00 PM | Report abuse

I would like to get some of my losses back. I am still way down in the red, lost nearly 10 years worth of gains, but I am the little man, so no help for me.

Posted by: alaskantuf_99 | July 29, 2010 3:03 PM | Report abuse

If the punishment was only 75Mil I would do it again. lol
What a Joke

Posted by: Anonymous | July 29, 2010 3:15 PM | Report abuse

... So let's see the math here ... $75 million penalty for cheating investors off $40 billion ??? ... Interesting ... looks like the incentives are setup just right for Citi to do this *again* ...

Posted by: free_np | July 29, 2010 3:17 PM | Report abuse

Wonderful ... so investors who have lost approx 85% of the value of their holdings now get to finance the 75 mil fine! And the money goes .... where???

And how much did Crittenden and Tildesley get in bonuses???

There is most certainly something very rotten about our whole system ... what this really says is "do what you like and the SEC will give you a slap on the wrist .. but not to worry ... your investors will pay for it" ...

Posted by: Anonymous | July 29, 2010 3:27 PM | Report abuse

75 mil is not even a drop in the bucket-- it's-- an atom-- it's nothing.

anyone going to jail for this? how come only poor people go to jail?

Posted by: Anonymous | July 29, 2010 3:31 PM | Report abuse

Sounds like the proverbial drop in the bucket. Nauseating.

Posted by: Anonymous | July 29, 2010 3:31 PM | Report abuse

THEY SHOULD MAKE ROBBING A BANK CARRY A $20 FINE!

Posted by: thinkingcap | July 29, 2010 3:39 PM | Report abuse

This is a *#@&ing joke.

Posted by: c_e_daniel | July 29, 2010 3:45 PM | Report abuse

$75 million? That's about 10% of the bonuses paid out to Citi executive. And they're laughing right now. Yawn.

Posted by: B-rod | July 29, 2010 3:46 PM | Report abuse

75M?!?!? jeeeez - Citigroup earns that much in 4 hours.
No pain - no reason to change.

Posted by: angie12106 | July 29, 2010 3:51 PM | Report abuse

This is small change. It's paying the price to operate, like the Mafia. And a small price at that. Rubin himself made over $150,000.000.00 (look at the zero's)
I tell my $43,000.00 a year law student.
Investment banking all the way. That or sports.

Posted by: Anonymous | July 29, 2010 3:54 PM | Report abuse

what a deal? Citi takes 45 billion to bail itself out of ill advised and fraudulent behavior and pays a 75 million dollar fine. Sounds like it was Austin Powers making the calculation and settlement for our side.

Has anyone figured out yet that the taxpayers are effectively paying the fine since it is our money Citi is now using to finance its operations?

And the two execs who copped to cooking the books paid a combined fee of $180,000. Would someone do a bit of research and report as to how large were their combined bonuses for the period in which they falsified the accounting?

Just another example of how money trumps justice in our system. Only this time it is our money!

Posted by: bobfbell | July 29, 2010 4:27 PM | Report abuse

Crony capitalism at it's best. I've reached the point that I no longer care if we have a complete financial collapse. The fraud that has been perpetrated against the American taxpayer is absolutely criminal. Tar and feathers folks, that's the only way we can stop these banksters. If not, they will take EVERYTHING.

Posted by: Anonymous | July 29, 2010 4:43 PM | Report abuse

$75Mil is NOT enough, SEC!

Now go back and get some more. At least $500Mil to $750Mil.

Posted by: lcarter0311 | July 29, 2010 5:00 PM | Report abuse

ARE YOU KIDDING ME!!!!!!

Where are the 25 year hard time JAIL TERMS and the confiscation of bonus and options for the last DECADE while they LOOTED the company and left we US taxpayers on the hook for it!

Take it out of the CEO and senior exec's assets.

Posted by: WillSeattle | July 29, 2010 5:05 PM | Report abuse

And what good will this do?

Until corporate executives face some consequences for their actions, there will be no change in behavior.

Did anyone get fired? Did anyone go to jail for fraud?

All those bankers are laughing on the way to, well, the bank.

Posted by: Anonymous | July 29, 2010 5:08 PM | Report abuse

Years ago Citi or its predecessor advertised a credit card without annual fee--then an innovation. I fell for it. When the first statement came, I discovered they were charging a monthly fee. I haven't trusted them since nor should anyone else.

Posted by: Anonymous | July 29, 2010 6:02 PM | Report abuse

Wonder if they will be able to pay it from TARP funds??

Posted by: Anonymous | July 29, 2010 6:22 PM | Report abuse

Zeitgeistmovie.com, watch and form your own opinion

The Federal Reserve at it's best

Posted by: Anonymous | July 29, 2010 6:48 PM | Report abuse

Does this qualify as a RICO offense ? It's been a while but I seem to remember RICO is a three strikes and you are in deal.

Maybe somebody should ask ex-mayor Rudy how that worked. As I remember, in his previous job as DA he used RICO in a big way.

Now I know why it (currently) costs your car 8 bucks to get out of NYC. Some things never change.

Posted by: gannon_dick | July 29, 2010 6:54 PM | Report abuse

Does this qualify as a RICO offense ? It's been a while but I seem to remember RICO is a three strikes and you are in deal.

Maybe somebody should ask ex-mayor Rudy how that worked. As I remember, in his previous job as DA he used RICO in a big way.

Now I know why it (currently) costs your car 8 bucks to get out of NYC. Some things never change.

Posted by: gannon_dick | July 29, 2010 6:56 PM | Report abuse

They stole billions of dollars and pay $75 dollars in 'fines'. That's what it really comes to in comparison with the crime. $75 bucks. The crook paying the other crook. And life goes on as if nothing had happened here.

Posted by: Anonymous | July 29, 2010 7:04 PM | Report abuse

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Posted by: netetrader84 | July 29, 2010 8:42 PM | Report abuse

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Posted by: Anonymous | July 30, 2010 3:41 PM | Report abuse

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