Banking titan Citigroup Inc. is paying $75 million to settle civil charges that it misled investors about its potential losses from subprime mortgages as the housing bust hit in 2007.
The Securities and Exchange Commission announced the settlement with Citigroup on Thursday. It said the company repeatedly made misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high risk mortgages. As borrowers defaulted, Citigroup's losses reached tens of billions of dollars on complex instruments linked to mortgages, pushing the bank to a financial precipice.
Citigroup had said the exposure was $13 billion or less. The SEC said it exceeded $50 billion.
Citigroup earned $2.7 billion in the second quarter of this year. So the penalty represents less than 3% of its net income from April through June.
The settlement marked the second time in weeks that the agency reached an agreement on punitive action against a major Wall Street firm in connection with the financial crisis. Earlier this month, Goldman Sachs & Co. agreed to pay $550 million to settle civil fraud charges that it sold mortgage investments without telling buyers that the securities had been crafted with input from a client that was betting on them to fail.
Citigroup was one of the hardest hit banks during the financial crisis. It received $45 billion from the $700 billion financial bailout among the largest of the government rescues. A current and a former Citi executive also settled charges with the SEC. Former Chief Financial Officer Gary Crittenden agreed to pay a $100,000 civil penalty. The former head of investor relations, Arthur Tildesley Jr, agreed to pay $80,000. Tildesley now is the head of cross marketing at the company.
New York based Citigroup, Crittenden and Tildesley neither admitted nor denied the SEC's allegations. But they did agree to refrain from future violations of the securities laws. "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," the company said in a statement. SEC Enforcement Director Robert Khuzami said in a statement that Citigroup boasted of its superior ability to reduce its subprime exposure, even in the fall of 2007 as the subprime mortgage market quickly weakened.
"In fact, billions more in subprime exposure sat on its books undisclosed to investors," he said. "The rules of financial disclosure are simple if you choose to speak, speak in full and not in half truths."
The SEC charged Citigroup with unintentional civil fraud. Of the $45 billion that Citigroup received from the government bailout, $25 billion was converted to a government ownership stake in the company last summer. The bank repaid the other $20 billion in December. The government has said it will sell the $25 billion in stock by the end of 2010.
The SEC said in its lawsuit that Citigroup left out two categories of assets tied to subprime mortgages when it reported its exposure of $13 billion. The company didn't disclose until November 2007 that it had more than $40 billion of additional exposure from those categories, the SEC said. By then, the value of those assets had declined.
Citigroup posted a $10 billion loss for the fourth quarter of 2007, the biggest in its 196 yr history. Then CEO Charles Prince was replaced by Vikram Pandit in December of that year. The SEC also said that Crittenden and Tildesley were repeatedly given information about the full extent of Citigroup's potential losses from subprime mortgage securities.
"Mr. Crittenden is pleased to have resolved this matter," his attorney, John Carroll said in a statement.