NEW YORK (Reuters) - Citigroup Inc (C.N) will pay $75 million to settle charges that it failed to disclose subprime exposure to investors in 2007, the U.S. Securities and Exchange Commission said on Thursday.
The SEC also charged a Citigroup executive and a former chief financial officer of misrepresenting the bank’s exposure, although not with intentional misconduct. It was one of a very few cases in which financial executives have faced any kind of charges, civil or criminal, related to the 2008 credit meltdown.
Earlier this month, Goldman Sachs Group Inc (GS.N) agreed to pay $550 million to settle civil fraud charges over how it marketed a subprime mortgage product. At the time, the SEC’s enforcement director said the agency was continuing to probe subprime deals across a wide variety of institutions.
It is unclear if he was referring specifically to the Citigroup probe, but the SEC in general has been looking at banks’ subprime misdeeds for years.
The comparatively small settlement against Citigroup came a full three years after the bank began understating its subprime exposure. To many analysts, it will prolong the financial sector’s pain.
“This is the type of stuff that erodes investor confidence,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel Inc.
It is also the type of stuff that feeds other lawsuits. Steven Singer, a plaintiffs’ attorney representing bondholders who are suing Citigroup on related charges, said the SEC’s settlement would be “very helpful” to his case.
Some analysts railed against the SEC’s actions.
“If the goal of the SEC is every two or three weeks to come out and say that there’s another financial company that’s done something wrong,” the agency will drive home the belief “that the financial system in the United States is rotten, that it’s run by crooks who create fraudulent products,” said Dick Bove, analyst at Rochdale Securities.
As investors wait for more regulatory shoes to drop, “the markets will continue to act in the volatile fashion that they are right now,” he said.
Citigroup understated its exposure by about $40 billion, the SEC said. The agency charged Citigroup with material omission of disclosure requirements.
Failing to disclose exposure is serious business to investors, who decide how much to pay for bank stocks in part by trying to figure out the real value of the company’s assets minus its liabilities.
Under the settlement, the bank did not admit or deny the allegations. The SEC has asked a federal judge to approve the agreement.
Citigroup spokesman Jon Diat said the bank was pleased that it had reached a deal with the SEC.
Former Chief Financial Officer Gary Crittenden, who left the bank in 2009, agreed to pay $100,000 under the settlement.
“This is the highest-ranking corporate officer to be yet named in the still-continuing investigation of the 2008-2009 crisis,” said John Coffee, law professor at Columbia.
Arthur Tildesley Jr, Citigroup’s former head of investor relations and current head of cross-marketing, agreed to pay $80,000.
Crittenden and Tildesley “were repeatedly provided with information about the full extent of Citigroup’s subprime exposure” during 2007, but both “helped draft and then approved” disclosures to investors that under-reported that exposure, the SEC said on Thursday.
Crittenden’s lawyer, John Carroll of Skadden Arps, said via email that the former CFO “did not admit or deny any liability” and “is pleased to have resolved this matter.”
Tildesley’s lawyer, Mark Stein at Simpson Thacher & Bartlett LLP, declined to comment and referred queries to Citigroup.
Diat called Crittenden “a highly valued senior officer” who “played a critical role in helping Citi navigate” the financial crisis. He said Tildesley is “a highly valued employee” who “is making significant contributions to the company.”
In the second and third quarters of 2007, Citigroup told investors that its subprime exposure was $13 billion or less, when in fact it was more than $50 billion, the SEC said. The $13 billion figure omitted two categories of subprime-backed assets totaling roughly $40 billion of exposure.
Citigroup did not disclose its true subprime exposure until November 2007. By the end of that year, it had posted a huge writedown on subprime assets. Its chief executive, Charles Prince, resigned, in large part because of the writedowns.
Citigroup’s bad bets on subprime and other assets eventually forced the government to provide $45 billion of capital to the bank across three rescues in 2008 and 2009. The government still owns an almost 18 percent stake in the bank.
Citigroup shares closed up 3 cents at $4.12 on the New York Stock Exchange on Thursday..
Reporting by Maria Aspan; additional reporting by Dan Wilchins in New York and Emma Ashburn in Washington; Editing by Leslie Gevirtz, Maureen Bavdek, Matthew Lewis and Bernard Orr