Yesterday, the SEC filed settled enforcement actions against Citigroup and two executives for allegedly misleading investors about the company's exposure to subprime mortgage-related assets. The SEC alleged that "in response to intense investor interest on the topic, Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages."

The SEC's case against Citigroup was filed in federal court, but the actions against Citigroup's former CFO Gary Crittenden and former head of investor relations Arthur Tildesley, Jr., were filed as administrative proceedings. In the APs against the two executives, the SEC alleged that "based on the information that they had at the time, Crittenden and Tildesley each should have known that the statements made during the October 1 Pre-Announcement Call were materially misleading." As such, the SEC alleged, Crittenden and Tildesley were both a cause of Citigroup's violation of Section 13(a) of the Exchange Act for filing an inaccurate report with the SEC.

An article today in the WSJ characterizes the SEC's claims against the executives as a "charge of unintentional fraud," but I think that this is off-base. In fact, I think that there is no such thing as "unintentional fraud," as fraud requires, by definition, an intent to deceive.

As discussed in this recent law firm memo, an administrative action asserting that a settling party was a "cause" of a Section 13 violation may be premised on negligence, rather than intentional or reckless misconduct. The SEC's claim that Crittenden and Tildesley each "should have known" that the statements at issue were materially misleading is an allegation of negligence, not fraud.