Yesterday, the Securities and Exchange Commission ("SEC") charged Citigroup with misleading investors concerning the company’s exposure to subprime mortgage-related assets. The SEC also charged one current and one former executive for their participation in causing Citigroup to make the misleading statements in an SEC filing. Without admitting or denying the SEC’s allegations, Citigroup agreed to settle the SEC’s charges, and consented to the entry of a final judgment that (1) permanently restrains and enjoins it from violation of Section 17(a)(2) of the Securities Act of 1933, Section 13(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 12b-20 and 13a-11 and (2) orders it to pay a penalty and disgorgement of $75,000,001. Separately, also without admitting or denying the SEC’s findings, Gary Crittenden, Citigroup’s former chief financial officer, and Arthur Tildesley, Jr., Citigroup’s former head of Investor Relations and Citigroup’s current head of Global Cross Marketing, consented to the issuance of an administrative order requiring them to cease-and-desist from causing any violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-11, and also agreed to pay $180,000 cumulatively to the SEC.
In its complaint against Citigroup, the SEC alleges that Citigroup made a “series of material misstatements” between July 20, 2007 and November 4, 2007 regarding its investment bank’s exposure to sub-prime mortgages “at a time of heightened investor and analyst interest in public company exposure to sub-prime mortgages.” As alleged, Citigroup represented that its subprime exposure had been reduced to $16 billion by the end of 2006, but that it failed to disclose more than $39 billion of “super senior” tranches of sub-prime col1ateralized debt obligations and related instruments called “liquidity puts” as part of its subprime exposure. The SEC’s complaint further alleges that as early as April 2007, Citigroup’s senior management began to gather information about the investment bank’s subprime exposure for purposes of possible public disclosure, and only disclosed the full extent of the subprime exposure in November 2007.
In its cease-and-desist order [http://www.sec.gov/litigation/admin/2010/34-62593.pdf] against Crittenden and Tildesley, the SEC alleges that they had both assisted in drafting and then approved misstatements about the exposure to sub-prime mortgages of Citigroup’s investment bank on Form 8-K. According to the SEC’s order, both individuals were repeatedly provided information regarding the full extent of the company’s subprime exposure, and therefore misled investors by making misleading statements on earnings calls and on Form 8-K.