Citigroup was charged by the Securities and Exchange Commission with misleading investors about the extent of the banking giant’s exposure to subprime mortgage-related assets during 2007 and has agreed to pay a $75 million settlement.

The SEC alleged in its complaint against Citigroup that between July 20, 2007 and Nov. 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 subprime mortgages in earnings calls and public filings.

Throughout the period in question, Citigroup represented that its subprime exposure in its 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.

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 subprime exposure, and that the investment bank's subprime exposure declined over the course of 2007.

In fact, the $13 billion figure that Citigroup disclosed omitted two categories of subprime-backed assets, "super senior" tranches of collateralized debt obligations 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 Oct. 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 subprime 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 permanently restrains and enjoins it from violation of the securities laws and orders it to pay penalty and disgorgement of $75,000,001.

Separately, the SEC also instituted settled cease-and-desist proceedings against former CFO Gary Crittenden and former head of investor relations Arthur Tildesley, Jr. for their roles in causing Citigroup to make some of the misleading statements.

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