SEC and Citigroup in Talks to Settle Subprime Disclosure, Valuation Investigation

The big question on Wall Street during the financial crises: who knew what when, and what did they disclose to investors? Following the crash of the financial markets and the collapse of companies like Bear Stearns and Lehman Brothers, it appears at least one of those players, Citigroup, Inc., may help shed some light.

As reported May 28, 2009, by the Wall Street Journal, Citigroup is in early negotiation early negotiation talks with the Securities and Exchange Commission (SEC) to settle an investigation over whether the bank misled investors by failing to disclose the amount of troubled mortgage assets it held when the financial markets began to plummet three years ago.

The SEC initially launched its investigation into Citigroup’s valuation and disclosure methods following the bank’s third-quarter earnings report. Specifically, two weeks prior to the actual earnings release, Citigroup had predicted a 60% decline in earnings due largely to a $1.3 billion loss on the value of its subprime-related assets and other leveraged loans.

On Oct. 15, 2007, Citigroup said its third-quarter profit fell 57%, with higher losses of $1.83 billion on the same category of mortgage assets and leveraged loans. On Nov. 4, 2009 following a second mortgage-asset downgrade by Standard & Poor’s, Citigroup revealed that it faced new fourth-quarter losses of $8 billion to $11 billion on its subprime-mortgage exposure, according to the Wall Street Journal.

Citigroup further disclosed - for the first time - that it held subprime mortgage assets totaling $55 billion, including $43 billion that had never been mentioned in the company’s Oct. 15, 2009 report. The larger-than-expected losses came as a shock to investors and Citigroup executives alike, and ultimately prompted the resignation of Citigroup’s CEO Charles Prince.

Over the course of the next five quarters, Citigroup reported about $50 billion in losses, mostly related to mortgage-related assets.

Citigroup, who in October of 2008 was the recipient of $25 billion in bailout money from the federal government, got an additional $20 billion, bringing the total amount of funds received under the government’s Troubled Asset Relief Program (TARP) to $45 billion. In February 2009, the bankl agreed to convert a portion of the TARP investment from preferred stock to common stock. In addition to Citigroup, the SEC has opened inquiries into the valuation and disclosure methods at Merrill Lynch and Lehman Brothers, as well as other investment firms.

Wedbush Morgan broker Bambi Holzer's Sale of Private Placements Including Provident Royalties Comes Under Fire

A broker whose employment record is littered with customer complaints over variable annuities is now the focus of investor lawsuits over highly illiquid and risky private-placement investments.

The broker, Bambi Holzer, has 42 settled customer disputes, according to information posted by the Financial Industry Regulatory Authority Inc. Four other disputes against her are currently pending, including one $200,000 investor claim based on selling private placements.

Ms. Holzer is currently a registered rep affiliated with two firms: Wedbush Morgan Securities Inc. and Sequoia Equities Securities Corp.

Variable annuities and private placements are high-commission products. Regulators this year and last have been combing the records of broker-dealers that sold private placements.

Last summer, the Securities and Exchange Commission charged Provident with fraud. The firm allegedly sold $485 million in private securities to investors. This month Finra expelled Provident Asset Management LLC, the broker-dealer arm of the Provident operation.

Provident marketed a series of fraudulent private placements through Provident Royalties in a massive Ponzi scheme, Finra said.

SEC vs. Starr - NY Financial Advisor Charged

A New York financial adviser to the rich and the famous was charged Thursday of running a $30 million investment fraud and using the funds to enrich himself and friends, including a former New York City politician.

Kenneth I. Starr, who at one time advised actors Wesley Snipes and Sylvester Stallone, allegedly used his access to famous and powerful clients to "burnish an image of trustworthiness" and, in some cases, assume total control over his clients' financial lives, according to a criminal complaint filed by federal prosecutors in the U.S. Attorney's Office in Manhattan.

The criminal complaint didn't have details on the alleged victims, but it described them as an unnamed hedge-fund manager and well-known philanthropist, an actress, a former executive of a talent agency, an elderly heiress and a jeweler who is a convicted felon.

Both Mr. Stein, 65 years old, and Mr. Starr, 66, were expected to appear in federal court in Manhattan later Thursday. Their lawyers didn't immediately return phone calls seeking comment.

Mr. Starr isn't the Kenneth Starr who served as prosecutor in the Whitewater investigation.

SEC Moves to Halt Florida Ponzi Scheme

Two Florida residents and their company were charged in Ohio with raising nearly $15 million in a Ponzi scheme.

Lakeland, Fla., residents Edward A. Allen and David L. Olson, and their company, A&O Investments LLC, were accused by the Securities and Exchange Commission of raising about $14.8 million from at least 100 investors between September 2005 and December 2008. The charges were filed in U.S. District Court for the Northern District of Ohio.

The SEC filed a civil injunctive action against the men and their company, saying they “told investors that they would use the investors' money to purchase, rehabilitate, and sell real estate” while promising annual returns of 20%.

Only $5.1 million of the money raised was used to purchase and rehabilitate real estate, the SEC alleges, with $2.2 million going toward personal expenses.

The men recruited investors from World Group Securities Inc., a broker-dealer for which they were registered representatives. Mr. Olson worked out of the Boardman, Ohio, office from April 2002 to September 2007, the SEC said, and both he and Mr. Allen allegedly “created the impression that they were still affiliated with WGS,” giving the investors more confidence in the “legitimacy of the A&O promissory note offering.”

Probe of US Banks Continues

U.S. authorities are expanding their probes of past mortgage securities deals, with New York's attorney general opening an investigation into whether eight banks misled rating agencies, a source familiar with the matter said.

New York Attorney General Andrew Cuomo's office on Wednesday served subpoenas on four U.S. banks and four European lenders, the source said.

Cuomo is targeting Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs Group Inc, Morgan Stanley, UBS and Merrill Lynch, now owned by Bank of America, the source said.

The investigation comes as Wall Street and major banks around the world are attracting scrutiny from regulators stemming from transactions that occurred in the run-up to the subprime mortgage meltdown and financial crisis.

The Wall Street Journal on Wednesday reported that U.S. federal prosecutors, working with securities regulators, were conducting a preliminary criminal probe into whether four banks misled investors about their roles in mortgage bond deals.

Moody's Faces SEC Scrutiny

The Securities and Exchange Commission told Moody's Investors Service that it may face enforcement action for misleading regulators in a license application, an escalation of the pressure on a major player in the credit crisis.

In its annual report released late Friday, Moody's Corp., the parent of the New York rating firm, disclosed that the SEC is considering a recommendation to start an administrative case against Moody's based on a 2007 application to the SEC to remain an officially recognized credit-rating firm. The firm said it had received a so-called Wells Notice in March.

The SEC, according to Moody's filing, is arguing that Moody's failed to adhere to policies it detailed in its application.

The threat of an SEC case is the latest setback for Moody's, which has been buffeted by criticisms about its failure to properly rate billions of dollars worth of mortgage-related securities and other complex debt products.

In this case, the SEC is focusing on Moody's approach to problems it discovered in its models for rating certain exotic European debt products, which weren't mortgage-related. Allegations at the time were that Moody's failed to immediately downgrade securities because it would have been embarrassing to the firm, or possibly hurt certain market participants. This contradicted Moody's stated policy that no factor other than a bond's credit worthiness should dictate its rating.

Subprime Related Subpoenas From SEC Recieved By Citi

In Friday’s quarterly filing with regulators, the New York-based megabank says for the first time that it has received subprime-related subpoenas from the SEC.

Citi’s filing said (on page 176) that it “continues to cooperate fully in response to subpoenas and requests for information from the Securities and Exchange Commission and other government agencies in connection with various formal and informal inquiries concerning Citigroup's subprime mortgage-related conduct and business activities.”

Not that this comes as a great shock. Citi has disclosed before that its actions in the subprime mess and the larger credit crisis are the subject of legal interest from all angles. The firm spent the better part of two pages (at pages 263-265) in its annual regulatory filing detailing the scrutiny it faces from regulators, federal agencies, and plaintiff's lawyers.

“Beginning in the fourth quarter of 2007, certain of Citigroup’s regulators and other state and federal government agencies commenced formal and informal investigations and inquiries, and issued subpoenas and requested information, concerning Citigroup’s subprime mortgage-related conduct and business activities,” the firm said then. “Citigroup is involved in discussions with certain of its regulators to resolve certain of these matters.”

Friday’s filing adds to the year-end filing in one way: in this one, Citi mentions the SEC by name.