Citigroup Inc. (C) agreed on Thursday to pay $75 million to settle a lawsuit brought by the Securities and Exchange Commission that the bank failed to disclose $40 billion in subprime exposure to investors.
For the last year, the SEC has conducted a broad investigation into a variety of banking practices before and during the financial crisis. However, this case is the first to focus on whether banks adequately disclosed the increasingly precarious state of their finances.
The Citigroup settlement follows the SEC’s $550 million settlement with Goldman Sachs over claims that Goldman misled investors in a complex mortgage investment.
In an unusual move, the SEC also singled out two Citigroup executives — Gary L. Crittenden, the former chief financial officer, and Arthur Tildesley, the former head of investor relations — for omitting material information in disclosures to shareholders, according to the two people briefed on the deal.
Mr. Crittenden has agreed to pay a $100,000 fine; Mr. Tildesley will pay $80,000.
Mr. Crittenden left Citigroup in July 2009 and works for a private equity firm. Mr. Tildesley continues to work for Citigroup in another corporate function.
According to the SEC’s order, Crittenden and Tildesley were “repeatedly” provided with information about the full extent of Citigroup’s subprime exposure.
“The rules of financial disclosure are simple — if you choose to speak, speak in full and not in half-truths,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
According to the SEC’s complaint, Citigroup made a series of disclosures to investors suggesting it had roughly $13 billion of exposure to subprime mortgage-related assets. But the bank excluded roughly $43 billion of exposure to certain collateralized debt obligations, or CDO.’s, that turned out to be among the most problematic investments ever devised.
The gaping losses reported by Citigroup in 2007 and 2008 perplexed even banking analysts, many of whom were stunned to learn the true extent of Citigroup’s problems.
As the financial crisis expanded, Citigroup received a $45 billion bailout in two installments late in 2008 under the Troubled Asset Relief Program.
In July 2009, the Treasury Department converted $25 billion of its preferred shares into about 30% of the company’s common equity share stake. In December, 2009, Citigroup paid Treasury back $20 billion it had received as part of the TARP program. In 2010, the Treasury has been selling some of its Citigroup shares.
