Reg FD

Citi may be in more legal hot water

April 10, 2014: 4:31 PM ET

The bank may have disclosed a new earnings target to some, but not all, of its investors.

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Citi CEO Michael Corbat

FORTUNE -- Citigroup may be getting itself into more trouble.

In the past week or so, Citi has reportedly been indicating it may not reach a return on tangible common equity -- a key metric for investors -- of 10% by 2015. Citi (C) CEO Michael Corbat publicly set that target in a speech a little over a year ago, his first major presentation since taking the reins at the bank. Now, Citi has reportedly been telling some investors in private conversations that that 10% is no longer doable.

That might seem like a good public relations strategy -- announce an ambitious target as publicly as possible, and tell people you are going to miss it as quietly as possible. It may also be against the rules.

MORE: Citi stumbles in stress test

Since 2000, the Securities and Exchange Commission has barred companies from sharing news (good or bad) to certain investors or analysts before others. The rule is called Regulation FD, for fair disclosure. Recently, the rule nearly ensnared Netflix CEO Reed Hastings for a tweet. The SEC eventually let Hastings off the hook.

"Sounds like the kind of thing that Reg FD was specifically trying to correct," says Duke Law professor Jim Cox, who specializes in corporate and securities law. "Citi is walking a delicate wire."

Citi's shares are down 7% in the past two weeks, around the time the bank is likely to have started telling investors that it would miss its target. It's also around the time the Federal Reserve rejected Citi's proposal to increase its buyback and dividend. Shortly, after that, according to the Wall Street Journal, Citi's investor relations team started telling certain shareholders to lower their expectations, particularly for the bank's return on equity.

Publicly, though, the bank hasn't said anything about revising its ROE target. In a press release after the stress test, Corbat said, "We will continue to work incredibly hard to serve our clients and generate the returns our shareholders expect and deserve." In early March, Citi CFO John Gerspach reiterated that the bank was headed for an ROE of 10% "or higher," but Gerspach said getting there would require stock buybacks in future years.

A Citi spokesman says the bank had clearly conditioned its return target on its ability to buyback stock and pay dividends. "It is completely appropriate to point to these prior public statements in response to questions from investors," says the spokesman.

MORE: What Citi's Mexican scandal says about accounting rules

Shortly after the stress test, CLSA analyst Michael Mayo, who follows Citi, lowered his return target on the bank to 9%. But Mayo says he did it on his own. No one from the bank called him. "Citi clearly stated their assumptions, and buybacks were part of them," Mayo says.

Charles Peabody, a bank analyst at Portales Partners, also has said that it's unlikely Citi would make return targets. Peabody also says he came to that conclusion without any guidance from Citi.

Other analysts seem less certain. Veteran bank analyst Richard Bove of Rafferty Capital says the fact that Citi won't reach its target is news to him. On Wednesday, analysts at Barclays put out a research note in which they said they were waiting to hear if Citi would alter its ROTCE (return on tangible common equity) target.

Duke's Cox says the fact that Citi has tied its return target to buybacks in the past, or that analysts have come to the same conclusion independently, may not let the bank off the hook with Reg FD. He says the "truth in the market" defense has never been tried and "I would guess it wouldn't be successful."

He says having one-off communications with investors could be a red flag to the SEC that Citi could have been conveying new information. Cox says if Citi wanted to lower its ROE expectations it should have put that out in a press release or a filing.

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The good news for Citi is that in the nearly 10-and-a-half years since Reg FD has been on the books, the SEC has brought few cases based on it.

You could also argue that Citi's ROE isn't material. Citi investor Tom Kahn of Kahn Brothers says he didn't get a call from Citi investor relations about a change in the ROE target and hasn't called to find out. "It's meaningless," says Kahn. "Corbat is doing an excellent job, and the stock is cheap."

More important than any disclosure gaffe could be Citi's performance in general. A year after Corbat set the 10% goal, Citi isn't much closer to getting there. The company's return on tangible common equity was 8.2% in 2013.

"What they are saying is that they can't grow their business as fast as their book value," says Bove. "That's an incredible statement, and it's new to me."

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