Citigroup Inc. has agreed to pay a US$75 million-penalty for misleading the market about its exposure to the subprime real estate market back in 2007.

The U.S. Securities and Exchange Commission alleges that between July 20, 2007 and November 4, 2007, 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 was US$13 billion or less, when in fact, at all times during that period, the investment bank’s sub-prime exposure was over US$50 billion.

The SEC says that the US$13 billion number omitted two categories of sub-prime-backed assets: “super senior” tranches of collateralized debt obligations and “liquidity puts,” through which Citigroup had approximately US$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, it says.

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. And, internal documents describing the exposures included the super senior CDO tranches and the liquidity puts, while noting that they bore little risk of default. Nevertheless, when it made public disclosures it excluded those assets, and did not disclose that it was excluding those assets.

Without admitting or denying the SEC’s allegations, Citigroup consented to the entry of a final judgment that permanently restrains and enjoins it from violating securities rules, and orders it to pay a penalty and disgorgement of US$75 million.

Separately, the SEC also instituted settled cease-and-desist proceedings against Gary Crittenden, Citigroup’s former chief financial officer, and Arthur Tildesley, Jr., the former head of Investor Relations, for their roles in causing the firm to make the misleading statements.

IE