Last week's release of an SEC report from the Office of the Inspector General that exonerated Enforcement Director Robert Khuzami of any false steps in the settlement of a Citigroup sanction, displays the inner working of SEC case negotiations - at least in the heavyweight division.

The Report, issued 9/27/11 and released 11/17/11, is entitled: "Investigation into Allegations of Improper Preferential Treatment and Special Access in Connection with the Division of Enforcement’s Investigation of Citigroup, Inc."

From the report, we learn that the SEC had considered charging at least 6 individuals in the 2010 case - though in the end, only CFO Gary Crittendon and Investor Relations head Arthur Tildesley were charged.  We know about the six because the SEC staff issued Wells notices to six individuals - that suggested the Commission would recommend some action against each of them.  And, as is now common knowledge, Citigroup paid $75 million to settle SEC charges that it misled investors about its exposure to subprime mortgage securities. It's interesting to note that U.S. District Judge Ellen Huvelle initially refused to approve the settlement, asking in part why the SEC pursued only two individuals in the case.  However, the Inspector General's Report redacts most of this section. Unusual Details Into the Negotiation Process. Particularly, with regard to the ultimate charges leveled against Mr. Crittendon and Mr. Tildesley, including some insight into Citigroup's maneuvering to protect its employees.  The drama concluded in September 2009, after extensive communication and some miscommunication between the SEC and the Citi defense team. The case against Crittenden proved much more thorny, according to Reuters, which described the encounter, as follows:

SEC staff initially sought fraud charges against him, but Citigroup argued that a fraud charge against its CFO would have "very large implications" for the bank.

One SEC witness, whose name is redacted from the report, recalled that Citigroup was "trying to use whatever leverage they had ... to get us to ... lay off the individuals," and even brought in the chairman of Citigroup's board, Richard Parsons, to talk to the SEC.

Crittenden refused to settle a fraud charge, according to one of the SEC witnesses, because "he held some position in his church" and "wouldn't be able to continue" if he took a fraud charge, the report said.

[C-I Note: One would think that, an individual who was charged with having committed fraudulent actions, and who was willing to settle the regulator's charges - i.e., accept the findings without admitting or denying their authenticity or accuracy - that person should not be able to leverage his or her personal factors, like how neighbors or fellow church members might react.  Sanctions are, after all, punishment and the person should have thought about the impact before presumably committing the act.]

A phone conversation between SEC enforcement director Robert Khuzami and Citigroup's lawyer, Mark Pomerantz, touched off a series of misunderstandings that led the bank's defense team to believe fraud charges against Crittenden had been dropped.

But as the SEC staff started to reconsider the charges, top SEC officials continued to negotiate fraud charges, confusing Citigroup's defense team, according to the report.

The report said one of the bank's lawyers asked SEC associate director Scott Friestad, "What the heck is going on?"

It quoted the lawyer as saying, "I've known you for 16 years. I don't think I've ever had a call like this in my life from you guys."

SEC staff ultimately decided to pursue a lesser charge against Crittenden. The report determined that that decision was made by enforcement staff, but the reason for it is largely redacted.

The report cleared the SEC enforcement director of allegations that he improperly intervened in the investigation.

A Citigroup spokeswoman did not immediately respond to a request for comment on the report. [For further details, go to:   [Reuters, 11/18/11] and [SEC Report of Investigation, 9/27/11]