Citigroup, one of the nation’s largest banks, has agreed 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 settlement 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. As you may recall, Citigroup received one of the largest taxpayer bailouts. On August 16th, the trial judge in the case told Citigroup’s lawyers more justification was needed before the settlement would be approved. That may pose a problem for this settlement.
The settlement also marks the first time a major Wall Street bank has faced regulatory punishment from the SEC for hiding from investors its exposure to the subprime mortgage market. The SEC complaint named two senior Citigroup executives – former chief financial officer Gary L. Crittenden and former investor relations head Arthur Tildesley – and alleged that the two officers 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. As a matter of interest, previous complaints against major financial firms had failed to charge high-level executives. This may be a significant development. If so, it could have a good effect.
The design of the Citigroup settlement is very much like the case brought against Bank of America last year. It was settled earlier this year for $150 million. In that case, Bank of America was accused of concealing from investors details of mounting losses at Merrill Lynch, the investment bank it acquired in the fall of 2008, and billions of dollars in bonuses paid to Merrill Lynch employees.
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 requests by investors for information about its exposure to the sub-prime mortgage market. The SEC 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 earnings calls and periodic financial filings overseen by Crittenden and Tildesley.
The SEC says that $13 billion figure 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.
It’s apparent that companies such as Citigroup, Goldman, and Bank of America played fast and loose with the SEC and investors. Hopefully, those days are over – but we will see! For now, it will be interesting to see what the judge does with Citigroup’s proposed settlement. I won’t be surprised if it fails to be approved.
Source: Washington Post
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