The Securities and Exchange Commission on Thursday charged financial giant Citigroup (C) with misleading investors over the bank's failure to disclose its massive exposure to subprime mortgage-related securities during the height of the financial crisis.

The bank settled with the agency,  agreeing to pay $75 million in fines and charges. Two Citi executives - former CFO Gary Crittenden and former head of investor relations Arthur Tildesley Jr. - have also agreed to pay fines of $100,000 each.

According to the SEC, Citi allegedly represented its exposure to subprime mortgage-related investments at $13 billion or less when the bank's exposure was more than $50 billion. The $13 billion reported by Citi didn't include the bank's exposure to collateralized debt obligations, a classification of investments that eventually became some of the most toxic, and what's known as "liquidity puts."

“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 CDO and other subprime exposure sat on its books undisclosed to investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement. 

As part of the agreement, Citi is not admitting or denying any of the SEC's allegations. Crittenden and Tildesley also are agreeing without admitting or denying any wrongdoing.

"We are pleased that we have reached agreement with the SEC to put this matter concerning certain 2007 disclosures behind us, and that the SEC is not charging Citi or any individual with intentional or reckless misconduct," Citi said in a statement.

Citigroup stock was hammered during the subprime mortgage crisis because the bank was found to be heavily exposed to bad mortgages and illiquid assets tied to mortgages.

The bank’s bad balance sheet eventually led to then-CEO Chuck Prince to resign in late 2007 and later to the eventual takeover of Citi by the U.S. government.

The difference between material omission and a more serious charge of fraud, according to an earlier Wall Street Journal report, is because Citi executives in 2007 didn’t believe the subprime mortgage securities were so dangerous because they often carried “AAA” ratings.

Shares of Citi were up 0.4% to $4.11 on Thursday. They are down more than 90% from their 2007 highs.

 

 

 

 

 

SEC Complaint Against Citigroup 07-29-10