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Citigroup's Menezes May Face SEC Lawsuit Over 2002 Stock Sale March 18 (Bloomberg) -- Victor Menezes, Citigroup Inc.'s former head of emerging markets, may face a federal insider- trading lawsuit over a $29.8 million stock sale 18 days before the world's largest bank announced a $2.2 billion loss in Argentina. The NASD released documents last week saying Menezes, 55, received a so-called Wells notice in August from the U.S. Securities and Exchange Commission about the share sale. Citigroup's Leah Johnson, speaking for Menezes, said the notice was about a March 28, 2002, sale of Citigroup shares. Menezes sold 597,000 Citigroup shares that day, an SEC filing shows. A Wells notice is a formal warning that the agency's staff has determined sufficient wrongdoing to bring a lawsuit. ``These facts create at least enough circumstantial evidence to explain why the SEC might be investigating whether he traded on non-public information related to Argentina and its problems for Citigroup,'' said John Coffee, a professor who specializes in securities law at the Columbia University School of Law in New York. Only two Citigroup executives in the past decade sold more shares on one day while still employed by the bank, according to SEC data analyzed by the Washington Service, which compiles information on insider buying and selling from SEC filings. Citigroup Chief Executive Charles Prince, who was chief operating officer when Menezes ran emerging markets, last month mandated ethics classes for all 300,000 Citigroup employees after regulatory and legal settlements cut at least $5.5 billion from profit since 2003. The Federal Reserve told Citigroup on March 16 to defer new takeovers until the company tightens ``compliance and interal controls.'' SEC spokeswoman Carol Patterson declined to comment on Menezes's Wells notice or a separate investigation into Citigroup's accounting for Argentina. `Under a Cloud' ``Citigroup remains under a cloud,'' said Marshall Front, who helps manage $1.2 billion as chairman of Chicago-based Front Barnett Associates, which holds 900,000 Citigroup shares. ``We hope they get the culture right.'' Menezes retired in January, according to Johnson. He didn't respond to an e-mail seeking comment. A message left with his secretary at Citigroup, where he still maintains an office, was returned by Johnson. She said, speaking on Menezes' behalf, that his lawyer plans to respond to the SEC notice. Targets of SEC Wells notices aren't usually successful in dissuading the agency from proceeding with a case, according to David Gourevitch, a former SEC enforcement lawyer now in private practice in New York. NASD, a self-regulatory organization for securities brokers and dealers, received word of the Wells notice from Citigroup on Sept. 9, according to an entry in the NASD database and entries maintained by state securities regulators in Florida and Alabama. The NASD reference doesn't say why the sale prompted the Wells notice. Twice as Big The sale involved more than twice as much stock as any other sale by Menezes. In the past decade, the only executives who sold more shares in a single day while at the bank were Chairman Sanford Weill and former co-Chairman John Reed. Robert Lipp, now chairman of St. Paul Travelers Cos., sold 2.5 million shares on Jan. 22, 2001, a month after he retired as Citigroup's vice chairman. Menezes sold Citigroup stock or surrendered some after exercising options on 12 occasions from April 1999 to March 2004, according to the Washington Service. Menezes sold 597,000 shares in two transactions on March 28, 2002, at a price of $49.99 for a total of $29.8 million, according to a ``4'' form that Citigroup filed with the SEC on his behalf. He also exercised options on the same day on 850,000 Citigroup shares in five batches, the filing says, paying an average of $22.81 per share, or a total of $19.4 million. Profit The transactions left him with a profit of $27.18 a share sold, or $16.2 million in all, and a total of 1.9 million Citigroup shares. ``Although this exercise involved a stock sale, Mr. Menezes actually increased his ownership of Citigroup stock by 234,004 shares,'' Johnson said. On April 15, 2002, Citigroup said first-quarter losses at its Argentine unit, then overseen by Menezes, cut pretax profit by $858 million and reduced equity by $512 million. The bank boosted loan-loss provisions and wrote down loans and investments after Argentina, South America's second-largest economy, defaulted on $95 billion in debt and devalued its currency. It was the largest sovereign bond default in history. Weill told investors in a conference call on the same day, April 15, that two quarters of losses in pretax income and equity in Argentina amounted to $2.2 billion. The bank had recorded a pretax loss of $470 million stemming from Argentina in the fourth quarter. Citigroup shares that day fell $1.18 to a six-week low of $45.92 once the losses were made public. Once Potential Successor Menezes, who had once appeared on analysts' lists of candidates to succeed Weill, was stripped of operational responsibilities in June 2002, becoming a senior vice chairman in charge of corporate acquisitions and executive recruitment outside the U.S. Weill blamed Menezes for underestimating Argentine losses by $2 billion, according to ``Tearing Down the Walls,'' a biography of the Citigroup chairman by Monica Langley, published by Simon & Schuster in 2003. Menezes met filing deadlines when notifying regulators through a public filing about his trades, according to the entry in the NASD database. The entry about the notice also says Menezes's sale was ``pre-approved,'' without saying by whom. `Green Light' The form recording Menezes's sale was filed by Citigroup's legal department and signed by a staff attorney. At the time, Prince had oversight of legal issues as chief operating officer. Any case against Menezes may hinge on what he told Citigroup legal officials, said Christopher Bebel, a Houston-based lawyer and former SEC enforcement attorney. ``The fact that the sales were extraordinarily large, in comparison to his prior trading and Citigroup executives in general, will play a crucial role in the analysis,'' said Bebel, who's also a former federal prosecutor and specializes in securities fraud. ``If he received a green light after he distorted information or withheld information or failed to provide full disclosure to their attorney, he won't be entitled to a safe harbor based on the permission he obtained from the general counsel's office,'' Bebel said. Citigroup lawyers and their supervisors may draw the attention of regulators if Menezes did fully inform the legal staff about the extent of Argentine losses, Bebel said. `Off the Hook' ``That may let him off the hook but it could expose the company itself and the person who was supposed to supervise the insider trading area,'' he said. Gourevitch, the former SEC lawyer, said the options Menezes exercised may complicate the agency's case. ``It's a very strange insider-trading case where the seller ends up with more stock than he started with, and where the trade was pre-approved by the company's legal department,'' he said. No other Citigroup executives sold shares in the last half of March or the first half of April 2002, according to SEC filings. Deryck Maughan, then head of international business for Citigroup, sold 23,989 shares on March 5, a filing shows. Maughan was ousted in October 2004 after Japanese regulators ordered Citigroup to shut its Japanese private bank for failing to follow anti-money-laundering practices and attempting to conceal lapses. None of the NASD entries for the other executives indicates an investigation into stock sales. Citigroup's accounting for investments and loan-loss allowances in Argentina from 2001 through 2004 is also the subject of an SEC investigation, the bank disclosed in a regulatory filing on Feb. 28. To contact the reporter on this story: George Stein in New York at [EMAIL PROTECTED] To contact the editor for this story: Alec D.B. McCabe in New York [EMAIL PROTECTED] Last Updated: March 18, 2005 00:05 EST Comment: Could be a long stretch if convicted, if not Citibank itself will be in the sh** Cheers, Gabe Menezes. London, England
