Citigroup Settlement Puts SEC in Double Jeopardy: Street Whispers

In crucial 2007 and 2008 financial statements at the onset of the housing bust, Citigroup reported toxic debts of $13 billion instead of $50 billion, misleading investors according to the SEC. Only after rating agency downgrades forced most of the $50 billion in securities onto Citigroup's balance sheet did the bank disclose the true extent of its exposure, which ultimately led to nearly $30 billion in asset writedowns.

The SEC found that as early as April 2007, Citigroup's senior management gathered inventory on the bank's then highly rated super senior CDO and liquidity put exposures to the subprime market, worth in excess of $40 billion. Still, on four occasions in 2007, Citigroup executives like Crittenden and Tildesley decided not to disclose those subprime holdings, in moves the SEC called, "misleading to investors."

The decisions came at a time when subprime market was at the forefront of investor inquiry, as the SEC noted in its settlement. "Citigroup's improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms' exposure to subprime securities," noted Scott W. Friestad, associate director of the S.E.C.'s enforcement division, in the settlement.

Friestad added that Citigroup "dropped the ball" on its disclosure. The SEC chose to pursue allegations of negligence and impose operational fixes on Citigroup, over fraud charges. Now that the case is effectively closed, it's the SEC that may have fumbled and Citigroup that's side-stepped criminal litigation.

Since Citigroup already settled with the SEC on non-fraud civil charges, the agency would likely be hamstrung to use any new findings on shareholder fraud charges to pursue criminal charges, which it would work with federal prosecutors to try.

Consider the SEC's biggest post-crisis win: the conviction of former Goldman Sachs and Procter & Gamble board member Rajat Gupta on criminal insider trading charges.

In that case, the SEC first moved forward with a civil administrative action in March 2011, but pulled its case that August when Gupta countersued asking for a federal trial. In Oct. 2011, the SEC, with the U.S. attorney then charged Gupta for criminal insider trading in federal court, a case they won this June.

In contrast, on Wednesday, Citigroup highlights that some of the worst allegations made against it have been put to rest - and it didn't even need to publicly acknowledge any malfeasance.

Citigroup declined to comment on the record outside of press statements and the SEC did not respond to an email seeking comment.