Watchdog probes SEC handling of Citi settlement

The internal watchdog at the US Securities and Exchange Commission is investigating whether the SEC enforcement director's friendship with a Citigroup defense attorney led him to drop fraud charges against two of the company's executives last year.

The inquiry by SEC Inspector General David Kotz came after Republican Senator Charles Grassley forwarded him an anonymous letter from a tipster last week.

The letter alleges that SEC Enforcement Director Rob Khuzami held secret conversations with Citigroup's attorney without involving other staff and ultimately helped protect the company from private litigation. The letter did not name any of the defense attorneys.

"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," said the letter, which was also forwarded to House Oversight Chairman Darrell Issa.

Last July, the SEC reached a USD 75 million settlement with Citigroup and a separate settlement with two of its executives for misleading investors about the company's exposure to subprime mortgage assets.

The two individuals in the case were Gary Crittenden, the former head of the Citi Holdings unit, and Arthur Tildesley Jr, the bank's head of Global Cross Marketing. They collectively agreed to pay USD 180,000 to resolve administrative proceedings against them without admitting or denying wrongdoing.

The deal reached with Crittenden and Tildesley, however, makes no mention of fraud charges. Instead, the settlement alleges they were responsible for materially misleading investors about Citigroup's subprime mortgage exposure during an October 1, 2007 earnings pre-announcement.

The anonymous letter claims that SEC staff had negotiated a fraud charge settlement with one individual and was prepared to file contested fraud charges against another.

But before SEC staff could make recommendations to commissioners, Khuzami allegedly met privately with the company's lawyer, who the letter claims is his friend and former fellow colleague from the Manhattan federal district court. The attorneys representing the two individuals also were friends of Khuzami, the letter claims.

After his conversation with Citigroup's defense attorney, the letter says, he got the fraud charges dropped.

In a statement, the SEC defended the settlement.

"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 fully with the IG's (Inspector General's) review," SEC spokesman John Nester said.

A Citigroup spokeswoman declined to comment.

Grassley has taken an interest over the past few years in issues that may involve inappropriate political meddling in enforcement matters.

In 2007, Grassley and former Senator Arlen Specter released a report that investigated the SEC's handling of an insider trading probe at the now defunct hedge fund Pequot Capital Management.

The report made recommendations, including discouraging SEC supervisors from excluding lead staff attorneys from communications over cases.

In a statement, Grassley said he was concerned about the allegations in the letter.

"It isn't appropriate for senior SEC officials to secretly meet with lawyers for the other side and then make major decisions about the case without the knowledge or involvement of the career government attorneys doing the day-to-day work. The SEC supposedly implemented a policy to stop this," he said.