Citigroup Said to Pay $75 Million to Settle SEC Subprime Case

Citigroup Inc. will pay $75 million to settle U.S. regulatory claims that it misled investors by understating holdings linked to subprime mortgages by billions of dollars as the housing crisis unfolded in 2007.

New York-based Citigroup made misstatements on earnings calls and in financial filings about assets it held that were tied to subprime loans, the Securities and Exchange Commission said in a complaint at federal court in Washington today. Some disclosures omitted more than $40 billion in investments, it said. Former Chief Financial Officer Gary Crittenden agreed to pay $100,000 to settle allegations that he didn’t disclose the bank’s exposure despite receiving internal briefings.

“Even in late 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk-management skills in reducing its subprime exposure,” SEC Enforcement Director Robert Khuzami said in the statement. “The rules of financial disclosure are simple. If you choose to speak, speak in full and not half truths.”

Citigroup executives including former Chief Executive Officer Charles Prince were questioned at an April hearing by the Financial Crisis Inquiry Commission about whether the bank fully disclosed potential losses tied to subprime loans. The congressionally appointed panel released documents showing Citigroup publicly told investors in October 2007 that its exposure was $13 billion. At the same time, board members were briefed on an additional $43 billion of risk.

‘Highly Valued Employee’

Arthur Tildesley, Citigroup’s former head of investor relations, will pay $80,000 to settle claims he helped draft disclosures that misled investors, the SEC said. He now heads cross-marketing, according to the agency.

The bank, Crittenden and Tildesley didn’t admit or deny the allegations in settling.

“Mr. Crittenden is pleased to have resolved this matter,” said John Carroll, an attorney for Crittenden at law firm Skadden, Arps, Slate, Meagher & Flom LLP in New York. “The settlement does not establish liability for purposes of any other proceeding.”

The bank is also pleased to “put this matter concerning certain 2007 disclosures behind us,” spokeswoman Shannon Bell said in a statement. “Neither Citi nor Mr. Tildesley was charged with intentional or reckless misconduct. Mr. Tildesley is a highly valued employee of Citi and is making significant contributions to the company.”

Tildesley’s attorney, Mark Stein at Simpson Thacher & Bartlett LLP in New York, said he couldn’t immediately comment.

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.

Additional $43 Billion

Citigroup executives made a presentation to the board’s audit and risk management committee that same day that said “total subprime exposure” was $13 billion with an additional $16 billion in “direct super senior” and $27 billion in “liquidity and par puts,” according to an excerpt of an internal bank document released by the FCIC.

Citigroup then issued a press release on Nov. 4, 2007, that said the company had about $55 billion of “direct exposure” to the subprime market.

Estimates were in flux, because the 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.”

Robert Rubin, the former head of Citigroup’s executive committee, told the FCIC that the $13 billion figure represented assets that had a greater likelihood of triggering losses. The remaining assets were “super-senior” and were probably viewed within Citigroup as presenting different “classes of exposure,” Rubin said.

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.