Filing: Citigroup execs knew of asset losses not reported to SEC

WASHINGTON — Charles Prince and Robert Rubin were among Citigroup officials who knew 2007 losses were mounting on mortgage assets that federal regulators have faulted the bank for not disclosing, a court filing shows.

Prince, the bank's chief executive officer at the time, and Rubin, then-chairman, knew the highest-rated segments of subprime mortgage-backed securities were the source of about $200 million in new losses in October 2007, the Securities and Exchange Commission (SEC) said in a filing at federal court in Washington, D.C.

In July, the agency accused the bank and two other executives of failing to disclose $40 billion in subprime assets before losses surged. It didn't target Prince and Rubin.

U.S. District Judge Ellen Huvelle asked the agency last month to explain what senior executives knew as she considers approving Citigroup's $75 million settlement with the regulator. The agency's identification of Prince and Rubin may trigger questions from the judge about why the agency didn't bring claims against more people, said Peter Henning, a professor at Wayne State University Law School in Detroit.

"How aware were they is always an open question in these kinds of cases," said Henning, a former SEC lawyer. "The SEC should have provided investors a little more assurance that senior management will be held accountable in these cases."

In a filing, the SEC said two executives it targeted — former Chief Financial Officer Gary Crittenden, 57, and former investor-relations chief Arthur Tildesley — were "more closely" tied to misleading disclosures than anyone else.

SEC spokesman John Nester and Citigroup spokeswoman Shannon Bell declined to comment. Adam Miller, a spokesman for Rubin, 72, didn't return messages. Prince, 60, didn't respond to e-mails and a message at his office after business hours.

Former Chief Risk Officer David Bushnell, 56, and General Counsel Michael Helfer, 65, were among other executives who knew the source of the mounting losses, according to the agency's filing. Bushnell couldn't be reached by phone at home.

Prince, questioned by the Financial Crisis Inquiry Commission in April about whether the bank fully disclosed potential losses, said estimates were in flux, because the subprime market was rapidly deteriorating.

"At the time, the financial people were working very intensely with the fixed-income people to try to determine exposures," Prince said during the April 8 hearing. "This was an unprecedented time in which markets were crashing."

Rubin whose job was to meet with clients and advise on "strategic and managerial issues," told the panel that warning signs of a crisis "were not obvious" and that he didn't remember learning of the bank's mortgage-linked collateralized debt obligations until the fall of 2007.

"I feel confident that the relevant personnel believed in good faith that more senior-level consideration of these particular positions was unnecessary because the positions were AAA-rated and appeared to bear de minimis risk of default," he said.

Federal judges have sought more information or delayed at least two bank settlements with the government since August 2009, questioning whether watchdogs had been aggressive enough.

In February, U.S. District Judge Jed Rakoff in Manhattan said he would "reluctantly" sign off on a $150 million SEC settlement with Bank of America, which he criticized as "inadequate and misguided." The regulator had accused the bank of misleading investors during its acquisition of Merrill Lynch.

Last month, U.S. District Judge Emmet Sullivan in Washington questioned what he called a "sweetheart deal" between the federal government and Barclays, which was accused of violating financial sanctions against Cuba, Iran, Libya, Sudan, and Myanmar. Sullivan later signed off.

The SEC Wednesday urged the court to approve the Citigroup accord. The penalty "takes into account the seriousness of the misconduct," the agency wrote. "It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed."

The bank's executives repeatedly stated in 2007 that it had reduced exposure to subprime mortgage securities by 45 percent to $13 billion, as investors and analysts clamored for information about the deteriorating market, according to the agency's July complaint.

On an Oct. 15, 2007, conference call with analysts and investors, Crittenden said the company's "subprime exposure" was $13 billion at the end of second quarter and had declined during the third quarter.

The figure he cited omitted "super-senior" tranches of collateralized debt obligations and financial guarantees known as liquidity puts that allowed customers to sell debt securities back to Citigroup if credit markets froze, the SEC said, more than $40 billion of subprime risk that the bank didn't disclose.

The bank, once the world's biggest by assets, got a $45 billion taxpayer bailout in 2008 after losses on subprime mortgages and CDO holdings withered confidence and almost triggered a run on deposits.

Judge Huvelle gave Citigroup until Monday to submit a filing, and scheduled a Sept. 24 hearing.