Citigroup has consented to charges by the Securities and Exchange Commission that it misled public investors about the extent of its exposure to sub-prime mortgage-related assets during 2007. Citigroup will pay $75 million to settle the charges, as widely reported in the financial press.
Between July 20, 2007 and November 4, 2007, in earnings calls and public filings, Citigroup repeatedly made misleading statements about the extent of its sub-prime mortgage-backed holdings. Citigroup represented that its investment banking unit, Citi Markets & Banking, held $13 billion or less of such assets, when in fact, at all times during that period, its sub-prime exposure was over $50 billion.
The $13 billion figure that Citigroup disclosed omitted two categories of sub-prime-backed assets, “super senior” tranches of collateralized debt obligations (CDOs) and “liquidity puts,” as a result of which Citigroup had approximately $43 billion of additional sub-prime exposure. Citigroup did not disclose the extent of its holdings of the super senior tranches of CDOs and the liquidity puts until November 2007, after a sharp decline in their value. These misrepresentations and omissions were made amidst heightened investor and analyst concern about public companies’ exposure to sub-prime mortgages.
Citigroup consented to the entry of a final judgment (1) permanently restraining and enjoining 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) ordering it pay penalty and disgorgement of $75,000,001.
The penalty represents less than three per cent of Citigroup’s net income in the second quarter this year, which was $2.7 billion, according to a USA Today article (“Citigroup pays $75M to settle SEC charges, July 30, 2010). Citigroup received $45 billion in bailout money.
SEC Enforcement chief Robert Khuzami noted that “Citigroup boasted of superior risk management skills in reducing its subprime exposure to approximately $13 billion. In fact, billions more in CDO and other subprime exposure sat on its books undisclosed to investors.”
Citigroup released a statement claiming that the SEC did not charge it with intentional or reckless misconduct. Just to be clear, it is true that the a violation of Section 17(a)(2) of the Securities Act, one of the federal statutes the SEC charged Citigroup with violating, may be established by a showing of negligence, but it does not necessarily follow that Citigroup was merely negligent and did not intentionally mislead the public. Does anyone really believe that Citigroup officers did not have actual knowledge of its true subprime exposure when they boasted about reducing it to $13 billion? Why don’t we apply the same zero tolerance of untrue and misleading statements to financial institutions like Citigroup as we do to BP?
In his CNBC article (“Citigroup Settlement Shows Low Cost of Lying to Markets,” July 30, 2010), Senior Editor John Carney writes that, despite financial reform, very little has been done to address the core problems of lack of transparency and trustworthiness in our major financial institutions. Pointing to the misrepresentations by Citigroup, he says that Citigroup decided not to tell investors about so-called “super senior” tranches of CDOs and “liquidity puts”?promises to buy commercial paper of its CDOs, supposedly because Citigroup believed were too safe to worry about.
“This kind of high-handed sleight-of-hand on the part of bankers helped deepen the credit crisis that led to our economic downturn,” writes Carney. “In many ways our banking crisis was a crisis of trust. We resolved the banking crisis not by restoring trust so much as giving investors and creditors confidence that the biggest financial institutions would be bailed out by the government should the need arise. In short, we recapitalized the trust deficit with the value of the government put.”
Carney warns: “The paltry fines paid by Citi and two of its executives should be a reminder to investors and creditors: the potential rewards for financial shenanigans are great, while the likely costs are minor.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in representing clients against Citigroup and its affiliates. For further information, please contact us.