Company Name: Citigroup Inc.
Public Availability Date: February 19, 2008
Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
APPENDIX 3
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 20, 2007
U.S. Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549
Re: Stockholder Proposal Submitted to Citigroup Inc. by Central Laborers'
Pension, Welfare & Annuity Funds
Dear Sir or Madam:
Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), enclosed herewith for filing are six copies of a
stockholder proposal and supporting statement (the "Proposal") submitted by
Central Laborers' Pension, Welfare & Annuity Funds (the "Proponent"), for
inclusion in the proxy materials to be furnished to stockholders by Citigroup
Inc. in connection with its annual meeting of stockholders to be held on or
about April 22, 2008 (the "Proxy Materials"). Also enclosed for filing are six
copies of a statement outlining the reasons Citigroup Inc. deems the omission of
the attached Proposal from the Proxy Materials to be proper pursuant to Rules
14a-8(i)(7).
Rule 14a-8(i)(7) provides that a proposal may be omitted if "it deals with a
matter relating to the company's ordinary business operations."
By copy of this letter and the enclosed material, Citigroup Inc. is notifying
the Proponent of Citigroup Inc.'s intention to omit the Proposal from the Proxy
Materials. Citigroup Inc. currently plans to file its definitive Proxy Materials
with the Securities and Exchange Commission on or about March 12, 2008.
Kindly acknowledge receipt of this letter and the enclosed material by stamping
the enclosed copy of this letter and returning it to me in the enclosed
self-addressed, stamped envelope. If you have any comments or questions
concerning this matter, please contact me at (212) 793-7396.
Very truly yours,
/s/
Shelley J. Dropkin
General Counsel, Corporate Governance
cc: Barry McAnarney, Central Laborers' Pension, Welfare & Annuity Funds
Richard Metcalf, LIUNA
Jennifer O'Dell, LIUNA
Encls.
[APPENDIX 1]
STATEMENT OF INTENT TO OMIT STOCKHOLDER PROPOSAL
Citigroup Inc., a Delaware corporation ("Citi" or the "Company"), intends to
omit the stockholder proposal and supporting statement (the "Proposal") a copy
of which is annexed hereto as Exhibit A, submitted by Central Laborers' Pension,
Welfare & Annuity Funds (the "Proponent") for inclusion in its proxy statement
and form of proxy (together, the "2008 Proxy Materials") to be distributed to
stockholders in connection with the Annual Meeting of Stockholders to be held on
or about April 22, 2008.
The Proposal provides as follows:
[t]he shareholders of Citigroup Inc. ("Company") request that the Board of
Directors and its Audit Committee establish the following policies and
procedures for the Company's relationship with external credit rating agencies:
1. That the Audit Committee shall be responsible for selecting, monitoring,
compensating, and replacing as necessary, the external credit rating agencies
which the Company engages;
2. That the Company shall not employ any individual within one year of that
individual being employed by a credit rating agency:
3. That no employee of the Company may solicit or accept gifts or services from
any credit rating agency with which the Company has or may have a relationship;
4. That the Audit Committee should not approve the retention of any credit
rating agency when that agency has been retained to rate a product or service
that was previously rated by another agency; i.e., so-called "rating shopping;"
5. That the Audit Committee should disclose on an annual basis in the manner it
determines is most cost-effective any and all services provided to the Company
by any external credit rating agencies and the fees paid by the Company for
those services; and
6. That the Audit Committee should annually conduct internal audits to determine
that the Company is complying with these policies and procedures.
The Company believes that the Proposal may be omitted from the 2008 proxy
materials pursuant to Rule 14a-8(i)(7) of the rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Rule
14a-8(i)(7) provides that a proposal may be omitted if it "deals with a matter
relating to the company's ordinary business operations." Moreover, the Proposal
does not raise any significant social policy issues.
THE PROPOSAL MAY BE OMITTED UNDER RULE 14a-8(i)(7) BECAUSE IT REQUESTS THAT THE
COMPANY ADOPT A POLICY (i) GOVERNING THE SELECTION, RETENTION AND COMPENSATION
OF VENDORS, (ii) IMPOSES RESTRICTIONS ON HIRING AND PRESCRIBES EMPLOYMENT
POLICIES, (iii) REQUIRES ADDITIONAL DISCLOSURES, AND (v) SEEEKS TO GOVERN
INTERNAL BUSINESS PRACTICES, ALL OF WHICH ARE MATTERS THAT RELATE TO THE
COMPANY'S ORDINARY BUSINESS OPERATIONS
The Proposal requests that the Board of Directors and the Audit Committee
establish specific policies and procedures regarding the Company's relationships
with external credit rating agencies, addressing such issues as the selection of
the rating agencies, compensating them and replacing them, and refusing to
approve the retention of any credit rating agency that "has been retained to
rate a product or service that was previously rated by another agency." In
addition, the Proposal mandates disclosure around these relationships, as well
as restrictions on employment. The Proposal, in requesting the adoption of a
policy governing the relationships with rating agencies, seeks to govern
internal business practices. These matters are core management functions that
fall squarely within management's day-to-day operation of the Company.
In Exchange Act Release No. 34-40018 (the "1998 Release"), the Commission
identified two central considerations underlying the ordinary business
exclusion. The first is that: "Certain tasks are so fundamental to management's
ability to run a company on a day-to-day basis that they could not, as a
practical matter, be subject to direct shareholder oversight. Examples include
the management of the workforce, such as the hiring, promotion and termination
of employees, decisions on production quality and quantity and the retention of
suppliers." The second consideration involves the degree to which the proposal
seeks to "micro-manage the company by probing too deeply into matters of a
complex nature upon which shareholders, as a group, would not be in a position
to make an informed judgment." Decisions related to the hiring and replacement
of vendors, compensation to be paid to them, employment decisions and
restrictions on employees, and disclosures pertaining thereto are core
management functions that fall squarely within the Company's ordinary business
operations.
Decisions related to the hiring or replacement of vendors and their compensation
are core management functions
Citigroup, like most other corporate issuers obtains ratings of its equity and
debt securities in order to enable it to sell its securities. In addition to
ratings of the Company and its subsidiaries, rating agencies rate securities
products that Citigroup issues as issuer. Underwriters of securities generally
insist on the securities being rated by one or more agencies specified by the
underwriters. The underwriters specify the agencies based on what they deem
necessary in order to sell the securities. Certain investors, such as mutual
funds, cannot purchase securities unless they carry the ratings required by the
funds. Fees paid to the rating agencies are set by the rating agencies and are
not publicly available. Given its size and scope, Citigroup may request
thousands of ratings each year from credit rating agencies.
The Proposal, in seeking to have the Audit Committee choose the rating agencies,
compensate them and replace them, would interfere with management's
responsibilities and the need to act expeditiously in many circumstances.
Issuers have little choice but to obtain ratings. Issuers provide information to
the rating agencies about themselves and their products in order to allow
ratings agencies to assign a rating. Issuers pay the rating agencies pursuant to
a standard rate arrangement provided to them annually by each rating agency.
With the sheer number of transactions, the differing requests of underwriters
and investors as to which agencies are to provide ratings and the speed with
which transactions are executed, it would be impractical for a Board or Board
committee to choose, compensate and replace credit agencies. Indeed, it would be
inappropriate for the Board or a Board Committee to be responsible for choosing
or replacing a credit rating agency since that decision is effectively made by
underwriters and investors. Were the Board or a Board Committee to decide that
the Company could no longer use a particular credit rating agency or refuse to
pay its fees, the Company would have great difficulty accessing the capital
markets.
As noted above "retention of suppliers" is an example of one of the core
considerations underlying the ordinary business exclusion. The Staff of the
Division of Corporate Finance of the SEC ("Staff") has consistently deemed
inappropriate for shareholder consideration under Rule 14a-8(i)(7) decisions
regarding relationships with vendors or suppliers. See International Business
Machines Corporation (December 29, 2006) where the Staff declined to recommend
enforcement action against a company that excluded a proposal relating to
"ordinary business operations (i.e., decisions relating to supplier
relationships)" and PepsiCo, Inc. (February 11, 2004) where the Staff declined
to recommend enforcement action against a company that excluded a proposal
relating to "ordinary business matters, (i.e., decisions relating to vendor
relationships)."
The Proposal seeks to have the Board or the Audit Committee micromanage the
Company's transactions with rating agencies in a manner that would be unworkable
and detrimental to the Company. Decisions as to the hiring, replacement and
compensation of credit rating agencies are ordinary business decisions to be
handled by management of a company and should not be micro-managed by
stockholders. The Proposal, in imposing a supervisory role that in and of itself
micromanages the process, seeks to inappropriately micromanage a core business
function of the Company.
Decisions related to employment policies and decisions are core management
functions
Employment decisions, also a core management function, are implicated by the
Proposal. The policy requested by the Proposal would prohibit the Company from
employing a former credit rating agency employee within one year of his or her
departure from the rating agency. While no proof of undue influence is cited in
the Proposal, it would appear that the purpose of this restriction would be to
prevent former employees of rating agencies from reaching out to colleagues and
friends at the agency to garner better ratings for their new employers. Credit
rating agencies, in order to preserve their integrity, have requirements
regarding engagements with issuers designed to prevent any rating agency
employee from being able to issue a rating as a result of influence from an
issuer. Certainly prior employment is not the only form of influence that
agencies must guard against. If there are concerns about the integrity of rating
agency employees, they would be more appropriately addressed by the rating
agencies than by imposing restrictions on the Company's ability to choose its
employees.
Along the same lines, the Policy would prohibit the Company's employees from
soliciting or accepting gifts or services from a credit rating agency with which
the Company has or may have a relationship. The Company already has a Code of
Conduct in place with strict rules regarding accepting gifts from clients and
vendors.
As noted above "the management of the workforce, such as the hiring, promotion
and termination of employees", is an example of one of the core considerations
underlying the ordinary business exclusion. The hiring and retention of
employees are routine matters normally left to the day-to-day managers of a
corporation. Indeed, in Cracker Barrel Old Country Store, Inc. (avail. Oct. 13,
1992), the Staff said that it would view proposals directed at a company's
employment policies and practices with respect to its non-executive workforce to
be uniquely matters of the company's ordinary business operations. The Staff
then provided examples of the categories of proposals that had been deemed
excludable on that basis, which included management of the workplace and
employee hiring and firing. In accordance with that view, the Staff has
consistently determined that shareholder proposals relating to employment are
properly excludable from proxy materials. See, e.g. Walt Disney Company
(December 16, 2002), where the Staff concluded that a proposal to recommend and
request that the board of directors consider removing the chief executive
officer from the company's employment and terminating his contract was
excludable under Rule 14a-8(i)(7) as it related to the termination, hiring or
promotion of employees; Wachovia Corporation (February 17, 2002), where the
Staff concluded that a proposal requesting that the board of directors seek and
hire a competent CEO may be excluded as ordinary business as it related to the
termination, hiring or promotion of employees; Merrill Lynch (February 8, 2002),
where the Staff determined that a shareholder proposal requesting the chief
executive officer's resignation may be excluded pursuant to Rule 14a-8(i)(7) as
it related to the company's ordinary business of termination, hiring or
promotion of employees; and U.S. Bancorp (February 27, 2000) where the Staff
held that a shareholder proposal to remove the officers and directors from
office may be excluded under Rule 14a-8(i)(7) as it related to the company's
ordinary business of termination, hiring or promotion of employees.
In addition, by mandating that the Company adopt a policy on the receipt of
gifts by employees from vendors, the Proposal seeks to micro-manage employment
policies. See International Business Machines Corporation (December 29, 2006)
where the Staff declined to recommend enforcement action against a company that
excluded a proposal relating to "ordinary business operations (i.e. decisions
relating to ...developing a code of ethics)".
Decisions as to employment and policies surrounding employee acceptance of gifts
and services are core management functions. By trying to mandate employment
decisions and policies addressed to employees, the Proposal again is seeking to
micro-manage a core business function of the Company.
Decisions regarding disclosure are core management functions
The Securities and Exchange Commission ("Commission") promulgates rules
governing the appropriate disclosure required to be provided by companies in
order to allow stockholders and potential investors to evaluate an investment in
the company based on ample and relevant information. Decisions to disclose
additional information beyond that which is required by the Commission fall
squarely within management's ordinary business judgment. The Proposal requests
that the Company disclose any and all services provided to the Company by any
credit rating agency and the fees paid for those services. This information is
highly confidential and sensitive and relates solely to the conduct of the
Company's ordinary business operations. There are no rules or regulations
requiring disclosure of this information and its disclosure may have an
anticompetitive effect on the Company. As such, decisions as to what constitutes
appropriate disclosure with respect to the fees paid to and services provided by
credit rating agencies relate to the Company's ordinary business operations.
In Peregrine Pharmaceuticals, Inc. (July 28, 2006), the Staff declined to
recommend enforcement action against a company that omitted a proposal
requesting it to post on its website monthly statistics regarding its clinical
trials. See also AmerInst Insurance Group. Ltd. (April 14, 2005) (proposal
requesting a company to provide a full, complete and adequate disclosure of the
accounting, each calendar quarter, of its line items of Operating and Management
expenses omitted under Rule 14a-8(i)(7)).
Decisions as to disclosure are ordinary business decisions to be handled by
management of a company and should not be micro-managed by stockholders. The
Proposal, in imposing additional disclosure requirements, seeks to
inappropriately micromanage a core business function of the Company.
The policy seeks to govern business conduct involving internal policies
The Proposal, by requesting the adoption of an internal policy, seeks to govern
the Company's business conduct in the area of its relationships with vendors
(hiring, compensating and replacing credit rating agencies) and its
relationships with employees (restrictions on hiring and on employee conduct).
The policy would also require additional disclosures. All of these matters are
internal operations and decision-making with respect to these matters are core
management functions.
The Staff has long recognized that proposals which attempt to govern business
conduct involving internal operating policies, customer relations and legal
compliance programs may be excluded from proxy materials pursuant to Rule
14a-8(i)(7) because they infringe upon management's core function of overseeing
business practices. See, e.g., H&R Block Inc. (August 1, 2006) (proposal sought
implementation of legal compliance program with respect to lending policies);
Bank of America Corporation (March 3, 2005) (proposal to adopt a "Customer Bill
of Rights" and create a position of "Customer Advocate"); Deere & Company
(November 30, 2000) (proposal relating to creation of shareholder committee to
review customer satisfaction); CVS Corporation (February 1, 2000) (proposal
sought report on a wide range of corporate programs and policies); Associates
First Capital Corporation (February 23, 1999) (proposal requested that Board
monitor and report on legal compliance of lending practices); Chrysler Corp.
(February 18, 1998) (proposal requesting that board of directors review and
amend Chrysler's code of standards for its international operations and present
a report to shareholders); Citicorp (January 9, 1998) (proposal sought to
initiate a program to monitor and report on compliance with federal law in
transactions with foreign entities).
The adoption of the policy requested by the Proposal would infringe improperly
on management's ability to oversee business practices. The Proposal, in
requiring adoption of an internal policy that would govern business conduct
seeks to inappropriately micromanage a core business function of the Company.
CONCLUSION
For the foregoing reasons, the Company believes the Proposal may be omitted
pursuant to Rule 14a-8(i)(7).
[APPENDIX 2]
November 13, 2007
Ms. Shelley Dropkin
Corporate Secretary
Citigroup, Inc.
399 Park Avenue
New York, NY 10043
Dear Ms. Dropkin,
On behalf of the Central Laborers' Pension Fund ("Fund"), I hereby submit the
enclosed shareholder proposal ("Proposal") for inclusion in the Citigroup, Inc.
("Company") proxy statement to be circulated to Company shareholders in
conjunction with the next annual meeting of shareholders. The Proposal is
submitted under Rule 14(a)-8 (Proposals of Security Holders) of the U.S.
Securities and Exchange Commission's proxy regulations.
The Fund is the beneficial owner of approximately 59,932 shares of the Company's
common stock, which have been held continuously for more than a year prior to
this date of submission. The Proposal is submitted in order to promote a
governance system at the Company that enables the Board and senior management to
manage the Company for the long-term. Maximizing the Company's wealth generating
capacity over the long-term will best serve the interests of the Company
shareholders and other important constituents of the Company.
The Fund intends to hold the shares through the date of the Company's next
annual meeting of shareholders. The record holder of the stock will provide the
appropriate verification of the Fund's beneficial ownership by separate letter.
Either the undersigned or a designated representative will present the Proposal
for consideration at the annual meeting of shareholders.
If you have any questions or wish to discuss the Proposal, please contact
Jennifer O'Dell, Assistant Director of the LIUNA Department of Corporate Affairs
at (202) 942-2359. Copies of correspondence or a request for a "no-action"
letter should be forwarded to Ms. O'Dell at Laborers' International Union of
North America Corporate Governance Project, 905 16\th/ Street, NW, Washington,
DC 20006.
Sincerely,
/s/
Barry McAnarney
Executive Director
c: Jennifer O'Dell
Enclosure
[APPENDIX 3]
Resolved: That the shareholders of Citigroup Inc. ("Company") request that the
Board of Directors and its Audit Committee establish the following policies and
procedures for the Company's relationship with external credit rating agencies:
1. That the Audit Committee shall be responsible for selecting, monitoring,
compensating, and replacing as necessary, the external credit rating agencies
which the Company engages;
2. That the Company shall not employ any individual within one year of that
individual being employed by a credit rating agency;
3. That the Audit Committee should require that it pre-approve the retention of
any credit rating agency when that agency has been retained to rate a product or
service that was previously rated by another agency; i.e., so-called "rating
shopping;"
4. That the Audit Committee should disclose on an annual basis the total fees
paid by the Company specific credit rating agencies including services provided
in connection with the issuance or rating of debt as well as any other ancillary
or consulting services; and
5. That the Audit Committee should annually conduct internal audits to determine
that the Company is complying with these policies and procedures.
Supporting Statement:
According to a Citigroup release dated November 7, 2007, our company has
"significant declines" in the fair value of approximately $55 Billion in U.S.
subprime related exposures. "Citi estimates that, at the present time, the
reduction in revenues attributable to these declines ranges from approximately
$8 billion to $11 billion (representing a decline of approximately $5 billion to
$7 billion in net income on an after-tax basis)."
In "How Ratings Firms' Calls Fueled Subprime Mess," (August 15, 2007) the Wall
Street Journal Online stated:
"It was lenders that made the lenient loans, it was home buyers who sought out
easy mortgages, and it was Wall Street underwriters that turned them into
securities....
Also helping spur the boom was a less-recognized role of the rating companies:
their collaboration, behind the scenes, with the underwriters that were putting
those securities together. Underwriters don't just assemble a security out of
home loans and ship it off to the credit raters to see what grade it gets.
Instead, they work with rating companies while designing a mortgage bond or
other security, making sure it gets high-enough ratings to be marketable."
In August 26, 2007 testimony before the U.S. Senate Committee on Banking, SEC
Chairman Christopher Cox stated that the Commission is examining whether credit
rating agencies, "were unduly influenced by issuers and underwriters of RMBS
(residential mortgage-backed securities) to diverge from their stated
methodologies and procedures for determining credit ratings in order to publish
a higher rating."
This proposal will help restore confidence in our Company and in the credit
markets by encouraging the Board to ensure that our Company's activities in this
area are conducted with transparency and integrity by developing policies that
govern its relationship with external credit rating agencies.
[INQUIRY LETTER]
January 24, 2008
Office of Chief Counsel
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: Response to Citigroup, Inc.'s Request for No-Action Advice Concerning the
Central Laborers Pension, Welfare & Annuity Fund's Shareholder Proposal
Dear Sir or Madam:
The Central Laborers Pension, Welfare & Annuity Fund ("Fund") hereby submits
this letter in reply to Citigroup, Inc.'s ("Citigroup" or "Company") Request for
No-Action Advice to the Security and Exchange Commission's Division of
Corporation Finance staff ("Staff") concerning the Fund's shareholder proposal
("Proposal") and supporting statement submitted to the Company for inclusion in
its 2008 proxy materials. The Fund respectfully submits that the Company has
failed to satisfy its burden of persuasion and should not be granted permission
to exclude the Proposal. Pursuant to Rule 14a-8(k), six paper copies of the
Fund's response are hereby included and a copy has been provided to the Company.
Introduction
The Proposal requests that the Board of Directors and its Audit Committee
establish a series of policies and procedures concerning the Company's
relationships with external credit rating agencies. The Company argues that the
Proposal may be excluded under Rule 14a-8(i)(7):
Rule 14a-8(i)(7) provides that a proposal may be omitted if it `deals with a
matter relating to the company's ordinary business operations.' Moreover, the
Proposal does not raise any significant social policy issues.
The Company bears the burden of persuasion that the Proposal may be excludeda
burden it fails to meet. As we will demonstrate, the ordinary business exclusion
has been consistently interpreted by the Staff not to support exclusion of
proposals that transcend ordinary business, which the Proposal clearly does.
The Proposal concerns a matter that clearly transcends the Company's ordinary
business operations so it is not excludable under Rule 14a-8(i)(7)
The Company's request for no-action advice focuses on demonstrating that the
policies and procedures requested by the proposal raise matters that are "core
management functions that fall squarely within management's day-to-day operation
of the Company" such as the selection of the rating agencies, compensating them
and replacing them, refusing to approve the retention of a credit rating agency
when rating agency shopping has taken place, and also providing disclosure
around these relationships.1 However, the Proposal does not address the fact
that the presence of widespread public debate regarding an issue may transform
an issue into one that transcends day-to-day business matters. See Staff Legal
Bulletin No. 14A (July 12, 2002).
As quoted above, the Company does assertirrelevantly, we believethat the
Proposal does not raise any significant social policy issues. Beazer Homes USA,
Inc. raised this argument within the last several months against a proposal
requesting that the company report on its mortgage practices and the Staff
rejected that argument. See Beazer Homes USA, Inc., 2007 SEC No-Act. LEXIS 678
(November 30, 2007).
Both Staff legal bulletins and numerous precedents, as well as a
straight-forward reading of the plain language of (i)(7), make clear that no
such limitation exists.
In Staff Legal Bulletin No. 14A (July 12, 2002) it was noted:
The Division has noted many times that the presence of widespread public debate
regarding an issue is among the factors to be considered in determining whether
proposals concerning that issue "transcend the day-to-day business matters.[]
We believe that the public debate regarding shareholder approval of equity
compensation plans has become significant in recent months. Consequently, in
view of the widespread public debate regarding shareholder approval of equity
compensation plans and consistent with our historical analysis of the `ordinary
business' exclusion, we are modifying our treatment of proposals relating to
this topic.[]....
The analogy to the widespread debate surrounding equity-based compensation is
apt. The subprime crisis that has engulfed the country and dominated news the
last several months, as well as the severe economic and financial crisis that
has ensued, certainly serves to elevate what admittedly once might have been a
matter of ordinary business to anything but that today.
In Verizon Communications Inc., 2003 SEC No-Act. LEXIS 123 (Jan. 23, 2003) the
Staff rejected the company's Rule 14a-8(i)(7) argument and affirmed inclusion of
a proposal that was not related to a significant social policy issue, but
clearly a significant policy issue. The Staff stated:
The proposal requests that the board of directors adopt a policy `stating that
the public accounting firm retained by our Company to provide audit services, or
any affiliated company, should not also be retained to provide any management
consulting services to our Company.'
....
We are unable to concur in your view that Verizon may exclude the proposal under
rule 14a-8(i)(7). That provision permits the omission of a proposal that deals
with a matter relating to the ordinary business operations of a registrant. In
view of the widespread public debate concerning the impact of non-audit services
on auditor independence and the increasing recognition that this issue raises
significant policy issues, we do not believe that Verizon may omit the proposal
from its proxy materials in reliance on rule 14a-8(i)(7).
Just as proposals requesting that boards adopt policies to address potential
auditor conflicts were not found to be matters of ordinary business, neither
should the Fund's proposal seeking to address potential conflicts as they relate
to credit rating agencies.
Another important precedent is provided by National Semiconductor Corporation,
2002 SEC No-Act. Lexis 821 (December 6, 2002) which represents a decision by the
full Commission directing the Staff to reconsider its original decision in favor
of the company seeking to exclude a proposal requesting the board establish a
policy and practice of expensing in its annual income statement the cost of
stock options issued to company executives. The proponent in National
Semiconductor noted, "Regardless of whether the issue of expensing stock options
may once have been portrayed as a mundane matter that reflects no more than a
choice of accounting methods, such is most definitely not the case today."
The issue in the instant case thus is whether the widespread public debate
concerning the subprime mortgage crisis elevates the Proposal such that it
transcends ordinary business matters. Note first that the relationship between
financial institutions such as Citigroup and the credit rating agencies, which
is described in detail at pages two to three of the Company's no-action letter,
is a central player in the subprime mortgage imbroglio.
As the Company notes in its no-action request,
Citigroup, like most other corporate issuers obtains ratings of its equity and
debt securities in order to enable it to sell its securities. In addition to
ratings of the Company and its subsidiaries, rating agencies rate securities
products that Citigroup issues as issuer.... Given its size and scope, Citigroup
may request thousands of ratings each year from credit rating agencies.
As an example of how far-flung and significant these relationships may bethe
following apparently relates to the Company's Romania operationconsider the
following excerpt from Citigroup's website at www.citibank.com/romania:
CAPITAL STRUCTURING ADVISORY
Our services encompass both advice and execution for funding on- and off-balance
sheet transactions, with the focus on helping companies achieve the capital
structure that best supports their business strategy. By structuring financing
to meet investor demand, we also help achieve favorable and cost-efficient
terms.
RATING ADVISORY
Citigroup Corporate and Investment Banking / Citigroup Global Capital Markets
Inc. has a dedicated Rating Advisory Group where the majority of senior
personnel are former employees of S&P, Moody's or Fitch. The team has over 40
years of rating experience and is totally focused on ratings, whether it be the
marketing and execution of ratings advisory mandates, or general discussions
with the rating agency analysts on rating issues or trends.
The group provides hands-on rating advice to our clients at all stages of the
ratings process, from the selection of a rating agency, scheduling of meeting
dates, preparation of documentary materials and slide presentations, conducting
rehearsals, attending the rating agency meetings and all necessary subsequent
follow-up.
Unfortunately, more than ample evidence exists of the widespread discussion and
debate concerning Citigroup and the subprime mortgage crisis. First, Citigroup
issued a press release on January 15, 2008, which stated in pertinent part:
Citigroup Inc. (NYSE:C) today reported a net loss for the 2007 fourth quarter of
$9.83 billion, or $1.99 per share. Results include $18.1 billion in pre-tax
write-downs and credit costs on sub-prime related direct exposures in fixed
income markets, and a $4.1 billion increase in credit costs in U.S. consumer
primarily related to higher current and estimated losses on consumer loans.
For the full year 2007, net income was $3.62 billion, or $0.72 per share. See
Schedule A for full year business segment results....
Management Comment
"Our financial results this quarter are clearly unacceptable. Our poor
performance was driven primarily by two factorssignificant write-downs and
losses on our sub-prime direct exposures in fixed income markets, and a large
increase in credit costs in our U.S. consumer loan portfolio.
Revenues were $7.2 billion, down 70%, driven by significant write-downs on
sub-prime related direct exposures in fixed income markets....
....
In markets & banking, securities and banking revenues were negative due to
write-downs and losses related to deterioration in the mortgage-backed and
credit markets, including:
Write-downs of $17.4 billion on sub-prime related direct exposures. These
exposures on September 30, 2007 were comprised of approximately $11.7 billion of
gross lending and structuring exposures and approximately $42.9 billion of net
ABS CDO super senior exposures (ABS CDO super senior gross exposures of $53.4
billion). On December 31, 2007, sub-prime related direct exposures were
comprised of approximately $8.0 billion of gross lending and structuring
exposures and approximately $29.3 billion of net ABS CDO super senior exposures
(ABS CDO super senior gross exposures of $39.8 billion).
The New York Times reported the next day, January 16, 2008, in an article
entitled "Citigroup Loss Raises Anxiety Over Economy":
Citigroup, the nation's largest bank, reported a staggering fourth-quarter loss
of $9.83 billion on Tuesday and issued a sobering forecast....
To shore up their financial condition, Citigroup and Merrill Lynch, which has
also been rocked by the subprime mortgage debacle, both were forced again to go
hat in hand for cash infusions from investors in the United States, Asia and the
Middle East, for a combined total of nearly $19.1 billion.
....
Citigroup's record loss was caused by write-downs from soured mortgage-related
securities and reserves for current and future bad loans totaling $23.2 billion.
Responding to a string of dismal quarters, the bank said it would also lay off
another 4,000 workers, on top of announced reductions of 17,000 employees, and
cut its dividend to conserve $4.4 billion cash annually.
The day before Citigroup's press release, January 14, 2008, the Washington Post
reported that
Current and former CEO's of three major U.S. financial institutions deeply
involved in the widening subprime mortgage crisis were asked on Monday by a
Congressional committee to testify at a hearing next month on their massive pay
and severance packages.
A House of Representatives panel invited Countrywide Financial Corp CEO Angelo
Mozilo, former Citigroup Inc. CEO Charles Prince and former Merrill Lynch & Co
Inc CEO Stanley O'Neal to appear and answer questions on February 7.
Washington Post, January 14, 2008, "Congress panel wants to grill subprime CEOs
on pay." Also on January 15, 2008, the Associated Press reported that "Standard
& Poor's Rating Services slashed its rating on Citigroup Inc.'s credit Tuesday
after the bank reported a $9.83 billion loss for the fourth quarter." ("S&P
Slashes Citigroup's Credit Rating.)
The previous week The New York Times reported:
Citigroup, badly bruised by the sharp downturn in the housing market, is
bringing its mortgage-related activities under one roof.
....
The move is one of the first major actions that Vikram S. Pandit has taken since
being named chief executive in December and could foreshadow another shake-up of
the consumer bank.
....
Citigroup has long been a major player in the mortgage business and one of the
biggest issuers of subprime home loans....
The New York Times, "Citigroup Combining Mortgage Operations Into One Unit,"
January 9, 2008. See also The Wall Street Journal, "To raise more capital,
Citigroup is shoving aside its shareholders," January 16, 2008; Business Week,
"This Disaster Was Guaranteed: Money-back assurances on subprime-linked
securities are costing some leading bank billions," Dec. 10, 2007; Associated
Press, "Citigroup will assume control of 7 structured investment vehicles with
$49 billion in assets," Dec. 14, 2007.
Clearly, these events at Citigroup are not matters of ordinary business.
Further, it has become clear that this has become a global crisis. On Jan. 21,
2008, the New York Times features an article entitled "Stock Plunge Worldwide on
Fears of a U.S. Recession." That article noted:
Fears that the United States is in a recession reverberated around the world on
Monday, sending stock markets from Frankfurt to Bombay into a tailspin and
puncturing the hopes of many investors that Europe and Asia will be able to
sidestep an American downturn.
On a day when United States markets were closed in observance of Martin Luther
King's Birthday, the world's eyes were trained nervously on the United States.
Investors reacted with what many analysts described as panic to the multiplying
signs of weakness in the American economy.
Shares of banks led the decline in many countries, underscoring that the
subprime crisis continues to hobble the global financial system.... (emphasis
added).
In an article entitled "Paulson says Bush administration working to combat
subprime crisis," International Herald Tribune (Jan. 7, 2008) it was reported:
The Bush administration is working to combat the severe housing crisis in the
United States, but there is no simple solution, Treasury Secretary Henry Paulson
said Monday, adding that a correction in the housing market is "inevitable and
necessary."
....
Paulson said the country was facing an unprecedented wave of 1.8 million
subprime mortgages that are scheduled to reset to sharply higher rates over the
next two years. He said this raised the possibility of a market failure and was
the reason the administration brokered a deal with the mortgage industry to
freeze certain subprime mortgage rates for five years to allow the housing
market to recover.
....
Paulson and President George W. Bush were both delivering speeches Monday on the
state of the economy. Bush received an update Friday from Paulson, Federal
Reserve Chairman Ben Bernanke and other market regulators about how markets have
been performing following a severe credit squeeze that began in August that
roiled financial markets around the world.
The credit crisis was sparked by raising defaults on subprime mortgages. Those
defaults have already resulted in multibillion-dollar losses at many financial
institutions who bought securities backed by the subprime mortgages that have
gone bad....
To conclude, the Proposal addresses a topic that certainly transcends matters of
ordinary business and the Staff should follow the precedent and deny the
Company's request for no-action relief.
For these reasons, we submit that the Company has failed to satisfy its burden
of persuasion under Rule 14a-8(i)(7) and the Proposal should be included in the
Company's proxy statement.
If you have any questions or wish to discuss the Proposal, please contact
Jennifer O'Dell, Assistant Director, LIUNA Corporate Affairs Department, at
(202) 942-2359.
Sincerely,
/s/
Barry McAnarney
Executive Director
-----FOOTNOTES-----
1 The body of the Company's request for no-action advice cites the Proposal as
including a provision that no employee of the Company may solicit or accept
gifts. This provision was not included in the Proposal submitted to the Company,
a correct copy of which the Company attached to its no-action request. We
believe that the Company inadvertently included the gifts provision that had
been included in a draft version that had been discussed with the Company prior
to submission. We submit that all of the Company's arguments surrounding this
provision that was not included in the Proposal should be disregarded.
[STAFF REPLY LETTER]
February 19, 2008
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Citigroup Inc. Incoming letter dated December 20, 2007
The proposal requests that the board of directors and the audit committee
establish policies and procedures specified in the proposal related to the
company's relationship with external credit rating agencies, including that the
company shall not employ any individual within one year of that individual being
employed by a credit rating agency.
There appears to be some basis for your view that Citi may exclude the proposal
under rule 14a-8(i)(7), as relating to Citi's ordinary business operations
(i.e., the termination, hiring, or promotion of employees). Accordingly, we will
not recommend enforcement action to the Commission if Citi omits the proposal
from its proxy materials in reliance on rule 14a-8(i)(7).
Sincerely,
/s/
Song Brandon
Attorney-Adviser |
