Citigroup agreed on Thursday to pay $75 million to settle federal claims that it failed to disclose vast holdings of subprime mortgage investments that were deteriorating during the financial crisis and ultimately crippled the bank.
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.
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.
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 rules of financial disclosure are simple — if you choose to speak, speak in full and not in half-truths.