The settlement centers on events in the fall of 2007, when Citigroup's reported losses started to cascade, eventually prompting the federal government to rescue the bank a year later. The case is the first to focus on whether banks adequately disclosed to their shareholders the increasingly precarious state of their finances during the crisis.
It is also the first time the Securities and Exchange Commission has brought charges against high-ranking bank executives over their involvement with subprime mortgage bonds.
The commission singled out two Citigroup executives — Gary L. Crittenden, the former chief financial officer, and Arthur Tildesley Jr., the former head of investor relations — for omitting material information in disclosures to shareholders, according to the complaint.
Mr. Crittenden agreed to pay a $100,000 fine; Mr. Tildesley will pay $80,000.
As is customary in such settlements, Citigroup did not admit or deny the commission’s accusations.
“We are pleased that we have reached agreement with the S.E.C. to put this matter concerning certain 2007 disclosures behind us,” the bank said in a statement. Citigroup praised Mr. Crittenden and Mr. Tildesley as “highly valued” employees and emphasized that the S.E.C. had not charged the bank or either of the two men with reckless or intentional misconduct. That could strengthen Citigroup’s hand in defending a wave of private shareholder lawsuits.
To restore the S.E.C.’s tarnished image, its director of enforcement, Robert S. Khuzami, has stepped up the agency’s investigations related to the financial crisis, assembling a 40-person task force to scour the industry for cases related to subprime mortgages. He has emphasized bringing highly visible cases and holding individuals accountable. His sweep of Wall Street firms has focused on a range of questionable practices involving a lack of disclosure and misleading sales practices.
“The rules of financial disclosure are simple — if you choose to speak, speak in full and not in half-truths,” Mr. Khuzami said on Thursday.
This month, Goldman Sachs agreed to pay $550 million in a settlement over the S.E.C.’s claims that the bank misled investors in a complex mortgage deal. The Citigroup settlement differs from that, because the S.E.C. is basically asserting that Citigroup misled its own shareholders, whereas it said Goldman misled its customers. And unlike Goldman Sachs, Citigroup resolved fraud accusations that it acted negligently without acknowledging it made a mistake.
Furthermore, the $75 million penalty represents a tiny fraction of the more than $40 billion of subprime mortgage bonds that regulators say the bank failed to disclose. Banking analysts were stunned when they learned the true size of Citigroup’s gaping losses, which ultimately totaled more than $30 billion.
The settlement is subject to the approval of a federal judge in the District of Columbia. In a similar disclosure case, Bank of America agreed to pay a $33 million fine, but a federal judge in New York rejected that amount. Later, the judge approved a $150 million settlement instead.
According to the S.E.C. complaint, the bank made a series of disclosures to investors during the summer of 2007 suggesting it had roughly $13 billion of exposure to subprime mortgage-related assets that were losing value. But Citigroup excluded roughly $43 billion of exposure to similar assets that bank officials deemed ultrasafe. Instead, they turned out to be among the most problematic investments on Citigroup’s books.
Citigroup did not disclose the position until early November 2007, after a downgrade of those securities by the major credit ratings agencies in mid-October. The spiraling losses prompted Citigroup’s chief executive, Charles O. Prince III, to resign.
The S.E.C complaint paints a picture of a broken disclosure process at Citigroup that entangled risk management officers and executives in its investment bank and even the bank’s top officers. But regulators singled out Mr. Crittenden, who read the misleading statements, and Mr. Tildesley, who prepared them.
The evidence in the case centers on the preparation of an unusual announcement Citigroup prepared for investors in the fall of 2007, warning of a lower earnings outlook for the quarter as markets were deteriorating.
The bank’s executives decided to record an audio announcement about the change, according to the complaint. In preparation, Mr. Tildesley and other staff members reviewed a script over e-mail. An investment bank officer then raised concerns that the script mentioned only a $13 billion position that was considered vulnerable and did not give investors a clear picture of the bank’s total subprime exposure, the complaint said.
The officer subsequently suggested removing a discussion about the highest-rated portion of the subprime assets, a $43 billion position that had not been previously disclosed to investors, to avoid investors’ questions about them, according to the complaint.
The commission said that Mr. Tildesley “took no action” on that matter, resulting in a script that only characterized the larger exposure but did not quantify it. Mr. Crittenden, who had not participated in the e-mail exchange, made a recording using that script, and it was distributed to investors on Oct. 1.
“Citigroup’s improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms’ exposure to subprime securities,” said Scott W. Friestad, associate director of the S.E.C.’s enforcement division. “Instead of providing clear and accurate information to the market, Citigroup dropped the ball and made a bad situation worse.”
The S.E.C. concluded that Mr. Crittenden, who was known internally as a straight-shooting manager who tried to rebuild a depleted finance staff and push for more transparent results, and Mr. Tildesley, Citigroup’s main liaison with shareholders during several years of management turmoil, violated rules governing the disclosure of material information to investors. But the commission stopped short of charging them with intentional fraud.
Mr. Tildesley continues to work for Citigroup overseeing certain marketing and operations functions. Mr. Crittenden left Citigroup in July 2009 and works for a private equity firm in Utah.