Jonathan Weil delivers bombshell evidence this morning that Citi CEO Vikram Pandit violated Sarbanes-Oxley and other securities regulations in early 2008. Here's the gist of the case. The OCC warned Pandit on Feb. 14, 2008 that Citi's valuation models for the mortgage-backed securities it owned were severely flawed. Just over a week later, Pandit signed off on Citi's annual report, which stated that everything regarding valuation of its assets, including its mortgage-backed securities, was in proper order.

This is yet one more instance in which a few intrepid reporters and bloggers have more on the ball than the SEC, FINRA, and the Department of Justice combined.

Weil's article is posted below.

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Source - Jonathan Weil (Bloomberg)

What Vikram Pandit Knew, and When He Knew It

On Feb. 14, 2008, the Office of the Comptroller of the Currency sent a seven-page letter to Citigroup Inc.’s chief executive, Vikram Pandit, summarizing the results of a special supervisory review its bank examiners had recently concluded.



The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methods for subprime mortgage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.



Here’s where the timeline gets curious. Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.



The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Unanswered Questions



So, what did Citigroup and KPMG know, and when did they know it? Those are questions the Financial Crisis Inquiry Commission should have answered, but didn’t.



The OCC’s letter to Pandit was one of hundreds of newly released documents the FCIC posted to its website before it closed shop this month. As far as I can tell, there’s no indication the commission asked anyone at Citigroup or KPMG to explain how they justified their assurances about Citigroup’s internal controls in the face of the OCC’s criticisms. KPMG’s name doesn’t even appear anywhere in the FCIC’s 545-page report.



The key players aren’t talking now, either. Pandit, Crittenden and O’Mara didn’t return phone calls. A KPMG spokesman, George Ledwith, declined to comment, as did an OCC spokesman, Kevin Mukri. A Citigroup spokeswoman, Shannon Bell, declined to discuss the OCC’s findings, though in an e-mail she said the certifications by Pandit and Crittenden were “entirely appropriate.”

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