WASHINGTON — The internal watchdog of the Securities and Exchange Commission is investigating an allegation that the agency’s enforcement chief gave a break to two Citigroup executives when the bank settled charges of misleading investors.
Inspector General David Kotz confirmed Tuesday that his office recently began a review at the request of Sen. Charles Grassley, R-Iowa. Grassley passed the anonymous written allegation to Kotz. It said that the SEC enforcement director, Robert Khuzami, directed his staff to drop planned civil fraud charges against the executives after having a “secret conversation” with an attorney representing Citigroup who is “a good friend” of Khuzami.
An SEC spokesman says the Citigroup settlement followed a careful review of evidence and held the executives accountable.
Citigroup agreed in July to pay $75 million to settle the SEC’s charges it misled investors on about $50 billion in potential losses from securities linked to subprime mortgages. The agency also settled charges with former Chief Financial Officer Gary Crittenden, who agreed to pay a $100,000 civil penalty, and the former head of investor relations, Arthur Tildesley Jr., who agreed to pay $80,000.
The charges against Crittenden and Tildesley involved negligence rather than fraud. They neither admitted nor denied the allegations under terms of the settlement.
SEC spokesman John Nester said Tuesday 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 inspector general’s review, Nester said in a statement.
Jon Diat, a spokesman for New York-based Citigroup, declined to comment.
Grassley said that if the allegation is true, it is “exactly” the sort of conduct that he and another senior members of the Senate Judiciary Committee urged the SEC to stop in their report on the agency’s handling of an insider trading case.
A federal judge initially declined in August to approve the settlement, asking SEC attorneys why the bank’s shareholders should be punished for the alleged misdeeds of Citigroup executives. She approved it in October after Citigroup pledged to maintain new policies it adopted to avoid similar violations in the future.