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Updated to include additional information about Wall Street litigation.



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shareholders' $590 million settlement with the bank regarding its poor disclosure of subprime debts represents one of the biggest payouts since the housing bust, but it also highlights that Wall Street watchdogs are willing to let bankers skate harder charges in favor of settlements that cost pennies on the dollar.

In Citigroup's Wednesday's settlement, the bank is resolving shareholder claims that it intentionally committed fraud by concealing more than $40 billion of exposure to collateralized debt obligations

CDO's on its financial statements between Feb. 26, 2007 and April 18, 2008, while maintaining its innocence. In 2010, the bank paid the

Securities and Exchange Commission

$75 million to settle charges of negligence on those disclosures, also without admitting wrongdoing.

If the SEC tried its Citigroup allegations on the grounds of intentional fraud or concealment -- called 'scienter' in legalese -- rather than 'negligence' charges, it could have recommended a criminal enforcement with the

Department of Justice

that could have landed top executives behind bars.

It hard to understand why the SEC sued Citigroup on grounds on negligence and why it was so quick to settle, given the harsher allegations and settlements made by shareholders. That is, unless you believe Citigroup is blameless despite the SEC's allegations that the bank "repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages."

In the SEC's 2010 settlement, Citigroup's former chief financial officer Gary Crittenden and former head of investor relations Arthur Tildesley, Jr also paid the SEC penalties of $100,000 and $80,000 respectively, as part of the alleged misstatements.

For shareholders who lost most of their Citigroup investment it's easy to see why they would take a guaranteed cash payment. It's harder to understand why the SEC would be so interested in a quick settlement given its suit did nothing to answer whether Citigroup's omissions were a fraud or even wrong, for that matter.

In crucial 2007 and 2008 financial statements at the onset of the housing bust, Citigroup reported toxic debts of $13 billion instead of $50 billion, misleading investors according to the SEC. Only after rating agency downgrades forced most of the $50 billion in securities onto Citigroup's balance sheet did the bank disclose the true extent of its exposure, which ultimately led to nearly $30 billion in asset writedowns.

The SEC found that as early as April 2007, Citigroup's senior management gathered inventory on the bank's then highly rated super senior CDO and liquidity put exposures to the subprime market, worth in excess of $40 billion. Still, on four occasions in 2007, Citigroup executives like Crittenden and Tildesley decided not to disclose those subprime holdings, in moves the SEC called, "misleading to investors."

The decisions came at a time when subprime market was at the forefront of investor inquiry, as the SEC noted in its settlement. "Citigroup's improper disclosures came at a critical time when investors were clamoring for details about Wall Street firms' exposure to subprime securities," noted Scott W. Friestad, associate director of the S.E.C.'s enforcement division, in the settlement.

Friestad added that Citigroup "dropped the ball" on its disclosure. The SEC chose to pursue allegations of negligence and impose operational fixes on Citigroup, over fraud charges. Now that the case is effectively closed, it's the SEC that may have fumbled and Citigroup that's side-stepped criminal litigation.

Since Citigroup already settled with the SEC on non-fraud civil charges, the agency would likely be hamstrung to use any new findings on shareholder fraud charges to pursue criminal charges, which it would work with federal prosecutors to try.

Consider the SEC's biggest post-crisis win: the conviction of former Goldman Sachs and Procter & Gamble board member Rajat Gupta on criminal insider trading charges.

In that case, the SEC first moved forward with a civil administrative action in March 2011, but pulled its case that August when Gupta countersued asking for a federal trial. In Oct. 2011, the SEC, with the U.S. attorney then charged Gupta for criminal insider trading in federal court, a case they won this June.

In contrast, on Wednesday, Citigroup highlights that some of the worst allegations made against it have been put to rest - and it didn't even need to publicly acknowledge any malfeasance.

Citigroup declined to comment on the record outside of press statements and the SEC did not respond to an email seeking comment.

"Citigroup denies the allegations and is entering into this settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation," said Citigroup, in a Wednesday statement. "This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis," the bank added.

The unanswered question of whether Citigroup's concealment of CDO securities was fraud indicates the SEC went about litigation poorly.

Had the SEC waited for the outcome of the shareholder fraud suit - more likely to end in a settlement - it would have a better sense of what to try and how. Instead, it, investors and financial sector watchers are left in double jeopardy were Citigroup's statements ever to be found fraudulent by proxy of other court cases.

And that is exactly what is happening.

Fed up with a string of post-crisis settlements that do little to answer or even try what is fraud on Wall Street, the SEC and Citigroup are being challenged by Judge Jed Rakoff of the Southern District Court on a separate $285 million settlement regarding disclosures on bank's issuance of toxic CDO securities. Rakoff is challenging whether the SEC can settle the case on grounds of negligence instead of willful fraud.

Rakoff was the presiding Judge in the SEC's initial administrative insider trading charge against Rajat Gupta. In allowing Gupta to countersue, Rakoff criticized the SEC for its avoidance of a federal lawsuit, potentially forcing the agency to take a harder stance on insider trading charges.

Were the SEC to have to try a bank for intentional fraud in disclosures like earnings statements or securities offerings, it might have to be more bold in prosecutions, potentially bringing in the DoJ to define what is criminal on Wall Street.

After an initial July 2011 settlement related to disclosure on Citigroup's issuance of $1 billion in near-worthless CDO's that the bank shorted and earned $160 million in fees for underwriting, Rakoff rejected the settlement, in a bench challenge that was overturned by an appellate court this March. The second circuit court of appeals is scheduled to hear the case in September.

Both Wednesday's shareholder suit and the upcoming appeal to Citigroup's $285 million SEC settlement may yet fall in the bank's favor. In both instances, however, the SEC is likely to come out bruised.

In dollars and cents, shareholders won a far larger settlement than the SEC in trying Citigroup's poor disclosures on grounds of fraud. Meanwhile, the SEC has answered few questions about crisis-time disclosures and done little to repay investors. Shareholders lost over $100 billion in Citigroup's near collapse. They will get less than $1 billion by way of settlements.

If there is any consolation for those looking for justice or at least a definition of justice on Wall Street, in the case of Citigroup, the SEC,

Department of Justice

and other regulators have other chances to try fraud and criminal charges.

In Citigroup's most recent quarterly filings with the SEC, the bank states it has set aside $4 billion for litigation ranging from mortgage security sales to a global probe on the manipulation of interest rates, which has Barclays facing a criminal probe by the DoJ.

For more on Wall Street litigation, see why Goldman Sachs faces a

Bayou battle

with a Louisiana pension fund.

-- Written by Antoine Gara in New York