Citi's giant write-downs: What did it know, and when did it know it?

Citigroup sat on material information related to its billions of dollars in write-downs for more than a week.

(Fortune) -- Facts coming out in the media, including those in the Fortune article, "Robert Rubin on the job he never wanted," make it clear that Citigroup delayed for more than a week - from Saturday, October 27th until Sunday, November 4th - in announcing material information about the multi-billion-dollar write-downs it expects to record in this quarter. In the more than a week that passed, there were five trading days - October 29th through November 2nd - in which investors buying and selling Citigroup (Charts, Fortune 500) stock did not know that the write-downs were coming.

Withholding material facts from the investing public makes a company vulnerable to shareholder lawsuits. Securities laws specify that material information must be released on a "rapid and current basis," which is defined as four business days.

On Saturday, November 10th, Fortune sent an email to Citi, asking for a response to the magazine's intention to publish this online article, whose point would be that Citi's delay in announcing its impending write-downs did not conform to the rules concerning material information. The e-mail laid out the chronology and facts that led Fortune to believe that was true.

Citi, speaking through Leah Johnson, senior vice president for global corporate affairs, replied on the same day by saying, "We complied with all applicable legal requirements." And Johnson made this summation about Citi's estimate that it would record huge write-downs of $8 billion to $11 billion on subprime-related securities in this quarter: "We felt it would be irresponsible to make a public statement about the problem until we had a sufficient level of confidence about the range. As soon as we had that level of confidence, we released the range. Both internal and outside counsel were involved in every step of the process." (See correction)

It is interesting that even when Citi finally released its range on Sunday, November 4th, it was so wide that it did not suggest a high level of confidence. Speaking to analysts the next day, Gary Crittenden, Citi's chief financial officer, stressed that even the $8 billion to $11 billion range is uncertain because market events could change valuations.

The after-tax effect of the amounts Citi announced would be $5 billion to $7 billion. The lower amount would probably wipe out most of Citi's earnings for this quarter. The higher amount would probably push Citi to a loss.

The controversy here concerns what happened - and didn't - in the 11 days leading up to that Sunday, November 4th bombshell, whose power was magnified by the concurrent news that CEO Charles "Chuck" Prince was resigning. Fortune is aware of what happened on the first few days because of information given it by Citi CFO Crittenden in an interview for the Rubin magazine article mentioned above.

Crittenden says that he and other Citi executives met late on Thursday, October 25th to consider downgrades that had recently been issued by ratings agencies and to determine how these changes would affect the value of collateralized debt obligations (CDOs) that Citi held. The Citi group concluded unhappily that significant write-downs would be necessary - a huge blow considering that Citi had announced third-quarter write-downs of CDOs on October 15th and had thought it was past that problem. The group also concluded that it could not determine an estimate for the write-downs until it studied the matter further.

On the next day, Friday, Crittenden told Prince, without specifying any amounts, that significant write-downs would be required. Then, on Saturday, Crittenden and his group bore down on the details and arrived at a range of what the write-downs would be. In response to a Fortune question, Crittenden declined to say what the range was.

But, according to a Wall Street Journal article published a few days ago, Crittenden did tell Prince on that Saturday what the expectation was - "some $10 billion." Fortune included this fact and figure in the e-mail it sent to Citi asking for its response. The answer that came back did not deny that Crittenden relayed that information to Prince.

A further fact about either that Saturday, October 27th, or the next day - this is reported in Fortune's Rubin article - is that Chuck Prince called Bob Rubin to tell him about the losses and say that the CEO thought the only "honorable" action for him to take was to resign. Obviously Prince would not have been expecting to take this drastic step if the expected write-downs were not large.

It is just as obvious that Citi, having determined a probable range for the write-downs, could have announced that information on Sunday, October 28th - one week before it did. It is Fortune's conjecture that the company did not make the announcement because of its totally uncertain management situation: Prince was determined to resign because of the new write-downs, and Citi had no person to pop into his place.

That situation changed during the following week, as plans developed for Sir Winfried Bischoff to become interim CEO and for Rubin to take over as chairman. Rubin did not agree to accept that post until Friday, November 2nd. His assent very probably cleared the way for the bombshell two days later.

But a wish by Citi to make its announcements in an orderly and packaged way, if that was the case, would not seem to excuse it from the need to release material financial news in a "rapid and current" manner.

Correction: An earlier version of this story made an incorrect reference to a Nov. 9 Wall Street Journal article about Citigroup. The Journal's article did not say, as we reported, that CFO Gary Crittenden, when he learned of the massive write-downs that Citi must make, called former CEO Sandy Weill to tell him the news.