SEC’s Enforcement Chief Soft on Ruling Vs Citigroup Inc. – Sen. Grassley

Jack Humphrey, Regulatory journalist
January 12, 2011 /

Iowa Republican senator Charles Grassley has requested the Securities and Exchange Commission internal watchdog to probe its enforcement chief Robert Khuzami after an anonymous letter forwarded by Grassley to House Oversight Chairman Darrell Issa alleged that Khuzami secretly ordered to drop rulings against two executives of Citigroup Inc.

The letter alleged that Khuzami blocked the SEC staff from filing the charges against the two Citigroup executives and ordered them to drop the claims following a clandestine meeting with a “good friend” who happened to be the legal counsel of Citigroup.

“To protect investors and the public’s faith and confidence that the justice system is fair to all, especially about matters that are at the heart of the financial crisis, you should get to the bottom of this,” the letter said.

Inspector General H. David Kotz heads the investigating team to question Khuzami.

In July 2010, Citigroup Inc. settled SEC’s charges of understating investments to subprime mortgages amid crisis in the housing sector, seeking the bank to pay $75 million. In addition, Citigroup’s then-financial department head Gary Crittenden agreed to pay $100,000 and Citigroup’s former investor relations chief Arthur Tildesley conceded to the $80,000 financial penalties to settle charges against them.

The two executives had allegedly stated many times in 2007 that Citigroup was able to reduce by 45 percent to $13 billion its exposure to subprime mortgage securities, according to the SEC’s related lawsuit.

The SEC further said that at least $40 billion has been added to the subprime risk exposure of investors as a consequence of Crittenden’s calculation that did not actually take into account “super-senior” tranches of collateralized debt obligations and financial guarantees known as liquidity. Investors who were not informed about this subsequently became confident to sell debt securities back to Citigroup should the credit markets freeze.

U.S. District Judge Ellen Huvelle initially questioned SEC’s charges in August 2010, raising the issue of whether the $75 million settlement with Citigroup was enough to send a chilling effect to others who would attempt to do the same. She eventually approved SEC’s lawsuit on October 2010.

“The settlement appropriately held the company and individuals accountable. It was the product of a thorough investigation and a careful evaluation of the evidence and the applicable law. We stand ready to assist and cooperate with the IG’s review,” SEC spokesman John Nester said on defense of SEC.


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