Citigroup Inc (C) Revises 2013 Results Downward Due To Fraud In Mexico

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Citigroup Inc (NYSE:C) is revising its full pre-tax 2013 results lower by $360 million due to fraud in its Mexican subsidiary.  The charge to earnings revises 2013 net income to $13.7 billion.

Fraudulent customer accounts receivable at issue

The issue stems from $585 million in short-term loans Citigroup Inc (NYSE:C) provided to Oceanografia S.A. de C.V. (OSA), a Mexican oil services company, through an accounts receivable financing program. OSA has been a key supplier to Petróleos Mexicanos (Pemex), the Mexican state-owned oil company.

When it was discovered that OSA was suspended from being awarded Mexican government contracts, both Cit and Pemex reviewed their credit exposure.  The review found that fraudulent receivables were placed on the books, upon which the loans were based.  Citigroup Inc (NYSE:C) estimates that it is able to support the validity of approximately $185 million of the $585 million of accounts receivables.  This $185 million consists of approximately $75 million supported by documentation in Pemex records and approximately $110 million of documented work performed that was still going through the Pemex approval process. The difference of an estimated $400 million has been charged to operating expense in Transaction Services in the fourth quarter of 2013, with an offset to compensation expense of approximately $40 million associated with the Banamex variable compensation plan.

“Although our inquiry into this fraud is continuing, we have been responding forcefully over the past week by assessing the overall exposure to Citi, coordinating with law enforcement, pursuing recovery of the misappropriated funds, and seeking accountability for anyone involved,” Citi CEO Michael Corbat said in a statement.

Citigroup assures accountability for those who committed crime

“I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls, or violating our Code of Conduct. All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions,” Corbat concluded.

Citigroup Inc (NYSE:C) will release a revised quarterly financial supplement reflecting changes to its fourth quarter of 2013 financial results.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com