Citigroup Defends SEC Settlement and 'There was no 'villain' in this story'

'There was no 'villain' in this story'

Give Grandpa a break!

By KARA SCANNELL
Wall Street Journal

Citigroup Inc. defended its settlement with the Securities and Exchange Commission over its disclosure of subprime mortgage exposure, setting the stage for a federal judge to decide whether to approve the deal.

In court papers filed Monday, Citigroup said the $75 million fine it agreed to pay in the settlement was appropriate because the SEC's case didn't involve allegations of mismanaging assets or misvaluing them.

The SEC sued Citigroup and two executives for failing to disclose nearly $39 billion in subprime mortgage assets during 2007. The executives separately settled the matter by paying fines of less than $100,000, without admitting or denying wrongdoing.

Last month U.S. District Judge Ellen Segal Huvelle asked both sides to explain why she should approve the deal. She questioned the penalty, noting it would come from current shareholders' pockets, and the decision to single out two individuals.

The SEC has already offered its defense of the deal, and a hearing has been set for next week.

Citigroup said it disagreed with the SEC's decision to sue and initially fought paying a penalty, but it urged the judge to give "substantial deference" to the SEC's decision and terms of settling the case.

"There was no 'villain' in this story," lawyers for Citigroup argued in court filings. In explaining why it filed charges against those two executives, the SEC said it was because they were most closely tied to the disclosures. That, the defense said, shows the "weakness" of any potential case against all of the people, including former Chief Executive Charles Prince and Robert Rubin, the former chairman of the executive committee, who knew about the bank's exposure to subprime assets.

In a filing last week, the SEC said it brought a negligence fraud charge against the two men who allegedly drafted and made the incomplete disclosure to investors after finding no evidence that they intended to deceive investors. The SEC also defended the size of the penalty, noting it fell in line with other recent settlements and would cost current shareholders less than one-third of one cent per share.

In the bank's defense, its lawyers said once it became clear in October 2007 that Citigroup "misjudged the risk" associated with securities it previously believed were safe, it disclosed the size of the portfolio to investors. That disclosure, they said, shows there was no intention to deceive shareholders.

The court filings reveal that Citigroup initially objected to paying a penalty during its settlement talks with the SEC in part because of the cost to shareholders, an issue Judge Huvelle raised. The bank's board ultimately decided to settle and pay a $75 million penalty, according to the filings, to avoid long and uncertain litigation.

Citigroup is represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP and Wachtell, Lipton, Rosen & Katz.