U.S. Securities and Exchange Commission
Litigation Release No. 21605 / July 29, 2010
Securities and Exchange Commission v. Citigroup Inc., Civil Action No. 1:10-CV-01277 (ESH) (D.D.C. July 29, 2010)
SEC Charges Citigroup Inc. in Connection with Misleading Disclosures Regarding Its Exposure to Sub-Prime Assets
Company Consents to Injunction and Payment of a $75 Million Penalty
The Securities and Exchange Commission today charged Citigroup Inc. with misleading investors about the extent of the company's exposure to sub-prime mortgage-related assets during 2007.
The SEC alleges in its complaint against Citigroup that between July 20, 2007 and November 4, 2007, in response to intense investor interest in the topic, Citigroup repeatedly made misleading statements about the extent of its holdings of assets backed by sub-prime mortgages in earnings calls and public filings. Throughout the period in question, Citigroup represented that its sub-prime exposure in Citigroup's investment banking unit, Citi Markets & Banking, was $13 billion or less, when in fact, at all times during that period, the investment bank's sub-prime exposure was over $50 billion.
Citigroup, a global financial services company based in New York City, agreed to pay a $75 million penalty to settle the SEC's charges.
The SEC alleges that, beginning in July 2007, Citigroup made a series of statements in earnings calls and public filings in which it represented that its investment bank had approximately $13 billion of sub-prime exposure, and that the investment bank's sub-prime exposure declined over the course of 2007. In fact, 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," through which Citigroup had approximately $43 billion of additional sub-prime exposure. Citigroup only disclosed the extent of its holdings of the super senior tranches of CDOs and the liquidity puts in November 2007, after a sharp decline in their value. According to the SEC's complaint, the misleading disclosures were made at a time of heightened investor and analyst interest in public company exposure to sub-prime mortgages.
According to the SEC's complaint, as early as April 2007, Citigroup's senior management began to gather information on the investment bank's sub-prime exposure for purposes of possible public disclosure. From the outset of these efforts, internal documents describing the investment bank's exposures included the super senior CDO tranches and the liquidity puts, while noting that they bore little risk of default. Nevertheless, on four occasions — a July 20, 2007 earnings call; a July 27, 2007 Fixed Income investors call; an October 1, 2007 earnings pre-announcement; and an October 15, 2007 earnings call — Citigroup stated that its investment bank's sub-prime exposure was $13 billion or slightly less, and had been managed down from $24 billion at the end of 2006. The statements made in the October 1, 2007 earnings pre-announcement were included in a Form 8-K that Citigroup filed with the Commission. Citigroup did not disclose in any of these communications that it was excluding the amount of its sub-prime exposure from super senior tranches of CDOs or liquidity puts.
Without admitting or denying the SEC's allegations, Citigroup Inc. 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 pay penalty and disgorgement of $75,000,001.
Separately, the SEC also instituted settled cease-and-desist proceedings against Gary Crittenden, Citigroup's former chief financial officer, and Arthur Tildesley, Jr., Citigroup's former head of Investor Relations, for their roles in causing Citigroup to make certain of the misleading statements.
See Also: SEC Complaint