Citigroup Settlement Puts SEC in Double Jeopardy: Street Whispers

Updated to include additional information about Wall Street litigation.

NEW YORK (TheStreet) -- Citigroup(C) shareholders' $590 million settlement with the bank regarding its poor disclosure of subprime debts represents one of the biggest payouts since the housing bust, but it also highlights that Wall Street watchdogs are willing to let bankers skate harder charges in favor of settlements that cost pennies on the dollar.

In Citigroup's Wednesday's settlement, the bank is resolving shareholder claims that it intentionally committed fraud by concealing more than $40 billion of exposure to collateralized debt obligations CDO's on its financial statements between Feb. 26, 2007 and April 18, 2008, while maintaining its innocence. In 2010, the bank paid the Securities and Exchange Commission $75 million to settle charges of negligence on those disclosures, also without admitting wrongdoing.

If the SEC tried its Citigroup allegations on the grounds of intentional fraud or concealment -- called 'scienter' in legalese -- rather than 'negligence' charges, it could have recommended a criminal enforcement with the Department of Justice that could have landed top executives behind bars.

It hard to understand why the SEC sued Citigroup on grounds on negligence and why it was so quick to settle, given the harsher allegations and settlements made by shareholders. That is, unless you believe Citigroup is blameless despite the SEC's allegations that the bank "repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages."

In the SEC's 2010 settlement, Citigroup's former chief financial officer Gary Crittenden and former head of investor relations Arthur Tildesley, Jr also paid the SEC penalties of $100,000 and $80,000 respectively, as part of the alleged misstatements.

For shareholders who lost most of their Citigroup investment it's easy to see why they would take a guaranteed cash payment. It's harder to understand why the SEC would be so interested in a quick settlement given its suit did nothing to answer whether Citigroup's omissions were a fraud or even wrong, for that matter.