Citigroup defends $75 million settlement over mortgage disclosure as fair, adequate

Citi defends $75M mortgage disclosure settlement

WASHINGTON — Citigroup Inc. on Monday defended as fair and in the public interest its $75 million civil settlement with the government over charges it misled investors about billions in potential losses from subprime mortgages.

The third-largest U.S. bank made its arguments Monday in a filing to a federal judge in Washington. The judge said last month she was “baffled” by the proposed settlement with the Securities and Exchange Commission and wasn’t ready to approve it without more information. New York-based Citigroup said the $75 million penalty is “fair, reasonable, adequate and in the public interest.”

The SEC defended the settlement on the same grounds in its own filing last week. The agency had accused Citigroup of repeatedly making misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages. Citigroup had said the exposure was $13 billion or less; the SEC said it exceeded $50 billion.

The SEC announced the settlement of unintentional civil fraud charges on July 29.

“The SEC’s case is exclusively one of negligent disclosure,” Citigroup said in its brief. The SEC “does not allege any willful, intentional or reckless misconduct by Citigroup or any of its officers, directors or employees.”

Citigroup was one of the hardest-hit banks during the financial crisis and received $45 billion from the $700 billion financial bailout — among the largest of the government rescues. The bank repaid $20 billion of the bailout in December. The other $25 billion was converted to a government ownership stake in the company, which the government has said it will sell by the end of this year.

When the housing bust hit in 2007 and borrowers defaulted, Citigroup’s losses reached tens of billions of dollars on complex instruments linked to mortgages, pushing the bank to the financial brink.

In a hearing last month, U.S. District Court Judge Ellen Segal Huvelle asked SEC attorneys why the bank’s shareholders should be punished for the alleged misdeeds of Citigroup executives. The agency also settled charges with former Chief Financial Officer Gary Crittenden, who agreed to pay a $100,000 civil penalty, and the former head of investor relations, Arthur Tildesley Jr., who agreed to pay $80,000. Tildesley now is the head of cross marketing at Citigroup.

Citigroup noted in its filing that it originally argued to the SEC against any penalty being imposed, maintaining that current shareholders would bear the expense. However, the bank said, its board eventually approved the $75 million deal, largely because the alternative of a public and costly trial was undesirable.

Citigroup said the disclosures in question were “entirely voluntary” and that bank employees “believed in good faith” that the securities linked to subprime mortgages were safe investments that wouldn’t suffer substantial losses. “It is important to bear in mind how widely held that belief was at the time,” prior to October 2007, the bank said in the filing.

Citigroup said in its filing it has taken “significant efforts” to improve its procedures for making disclosures and controlling risk.

Huvelle’s questioning of the Citigroup settlement was the second major legal challenge to the SEC recently. Last year, a federal judge in New York rejected a proposed $33 million settlement between the SEC and Bank of America Corp. to resolve civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch in early 2009. The judge reluctantly approved an amended $150 million settlement in February, shortly before the case had been scheduled to go to trial.