(Corrects value in second sub-head to $40 bln, not $40 mln)
NEW YORK - Citigroup Inc will pay $75 million to settle charges that it failed to disclose subprime exposure to investors in 2007, the U.S. Securities and Exchange Commission said on Thursday.
The SEC also charged a Citigroup executive and a former chief financial officer, making the officials among the few to face charges in the financial crisis. The pair agreed to pay a total of $180,000 to settle charges of contributing to misleading statements about the bank's subprime exposure. The bank understated its exposure by about $40 billion, the SEC said.
The settlement is part of a larger regulatory probe into subprime mortgages. Earlier this month, Goldman Sachs Group Inc agreed to pay $550 million to settle civil fraud charges over how it marketed a subprime mortgage product.
The rules of financial disclosure are simple -- if you choose to speak, speak in full and not in half-truths, Robert Khuzami, director of the SEC's division of enforcement, said in a statement on Thursday.
The SEC charged Citigroup with material omission of disclosure requirements. Failing to disclose exposure is serious business to investors, who decide how much to pay for bank stocks in part by trying to figure out the real value of the company's assets minus its liabilities.
This is the type of stuff that erodes investor confidence, said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel Inc in Cincinnati, which manages about $2.7 billion of assets.
Under the settlement, the bank did not admit or deny the allegations. The SEC has asked a federal judge to approve the settlement.
Citigroup spokesman Jon Diat said the bank was pleased that it had reached an agreement with the SEC and that the SEC is not charging Citi or any individual with intentional or reckless misconduct.
Former Chief Financial Officer Gary Crittenden, who left the bank in 2009, agreed to pay $100,000 under the settlement.
This is the highest-ranking corporate officer to be yet named in the still-continuing investigation of the 2008-2009 crisis, said John Coffee, law professor at Columbia.
Arthur Tildesley Jr, Citigroup's former head of investor relations and current head of cross-marketing, agreed to pay $80,000.
Crittenden and Tildesley were repeatedly provided with information about the full extent of Citigroup's subprime exposure during 2007, but both helped draft and then approved disclosures to investors that under-reported that exposure, the SEC said in a statement on Thursday.
Crittenden's lawyer, John Carroll of Skadden Arps, said via email that the former CFO did not admit or deny any liability and is pleased to have resolved this matter.
Crittenden was a highly valued senior officer who played a critical role in helping Citi navigate the difficult challenges presented by the financial crisis, Diat said via e-mail.
Tildesley's lawyer, Mark Stein at Simpson Thacher & Bartlett LLP, declined to comment and referred queries to Citigroup. Diat said Tildesley is a highly valued employee who is making significant contributions to the company.
MISSING $40 BILLION
In the second and third quarters of 2007, Citigroup told investors that its subprime exposure was $13 billion or less, when in fact it was more than $50 billion, according to the SEC. The $13 billion figure omitted two categories of subprime-backed assets totaling roughly $40 billion of exposure, the agency said.
Citigroup's investment bank initially believed that this exposure was relatively safe, and therefore declined to describe it to investors in April and July of 2007, according to the SEC's complaint.
Citigroup did not disclose its true subprime exposure until November 2007. By the end of that year, it had posted a huge writedown on subprime assets. Its chief executive, Charles Prince, resigned, in large part because of the writedowns.
Citigroup's bad bets on repackaged debt securities and consumer loans eventually forced the government to provide $45 billion of capital to the bank across three rescues in 2008 and 2009.
The government has been slowly extricating itself from Citigroup but still owns an almost 18 percent stake in the bank.
Citigroup shares closed up 3 cents at $4.12 on the New York Stock Exchange on Thursday.
(Reporting by Maria Aspan; additional reporting by Dan Wilchins in New York and Emma Ashburn in Washington; Editing by Leslie Gevirtz, Maureen Bavdek and Matthew Lewis)