The SEC's proposed $75 million deal with Citigroup "achieves a fair balance" between the interests of current shareholders and those harmed by the bank's alleged failure to fully disclose its subprime-mortgage exposure.  And so, the SEC launched into the defense of its actions before U.S. District Judge Ellen Segal Huvelle, who just last month questioned the rationale of the penalty and decision to single out two individuals - former CFO Gary Chittenden and then-head of investor relations Arthur Tildesley, Jr. 

Judge Huvelle, who has yet to sign off on the agreement, asked both sides to explain why she should approve the deal. The SEC alleged Citigroup misled investors by understating its exposure to subprime securities by nearly $40 billion from July to October 2007. 

    SEC Explanations.   The SEC said it sued the 2 men because they "caused" Citigroup to make the misleading statements, but it said there was no evidence showing they intended to deceive shareholders.  Mr. Crittenden spoke to analysts on conference calls, and Mr. Tildesley reviewed documents.  The agency said the disclosure-review process at Citigroup was "deeply flawed" and resulted in "careless and irresponsible actions."  The SEC said it selected the two men because "no other individuals were tied to the misleading disclosures more closely than Messrs. Crittenden and Tildesley."

To come up with the penalty size, economists at the SEC analyzed the effect on Citigroup bond prices the day after the bank disclosed its complete exposure to subprime assets.  The analysis found prices fell 0.65 percentage point more than similar Treasury securities.  The benefit to Citigroup from issuing bonds before it revealed the big stake, the analysis found, ranged from nothing to $123mn. 

"The proposed $75mn penalty represents less than 0.3% of Citigroup's revenue for the most recent quarter, and should not cause an undue negative financial impact on the company's business, or significant harm to current Citigroup shareholders," the SEC said. The agency estimates the impact equals less than one-third of one cent per share.

[WSJournal, 9/9]