Citi Uncovers Fraud In Mexican Sub, Revises Q4 Earnings Lower; Calls It A "Despicable Crime"

Tyler Durden's picture


The latest algo-arbing gimmick: report estimate bearing results to get the momentum-ignition algos sending your stock higher... then a month later announce you "discovered" fraud in a subsidiary, which magically cut earnings by $235 million, hoping nobody will notice. This is precisely what Citigroup just did.

From the just released 8-K:

Citi announced today that it is adjusting downward its fourth quarter and full year 2013 financial results, from those reported on January 16, 2014, by an estimated $235 million after-tax ($360 million pre-tax) as a result of a fraud recently discovered in its subsidiary in Mexico. The financial impact will lower Citi’s 2013 net income from $13.9 billion to $13.7 billion. Citi’s 2013 Annual Report on Form 10-K, to be filed with the U.S. Securities and Exchange Commission on March 3, 2014, will reflect these adjustments. Citi also intends to release a revised Fourth Quarter of 2013 Quarterly Financial Data Supplement reflecting these adjustments.


As of December 31, 2013, Citi, through Banco Nacional de Mexico (“Banamex”), had extended approximately $585 million of short-term credit 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. Pursuant to the program, Banamex extended credit to OSA to finance accounts receivables due from Pemex. As of December 31, 2013, Banamex also had approximately $33 million in either outstanding loans made directly to OSA or standby letters of credit issued on OSA’s behalf.


On February 11, 2014, Citi learned that OSA had been suspended from being awarded new Mexican government contracts. Upon learning of this suspension, Citi, together with Pemex, commenced detailed reviews of their credit exposure to OSA and of the accounts receivable financing program over the past several years. As a consequence of these reviews, on February 20, 2014, Pemex asserted that a significant portion of the accounts receivables recorded by Banamex in connection with the Pemex accounts receivable financing program were fraudulent and that the valid receivables were substantially less than the $585 million referenced above.


Based on Citi’s review, which included documentation provided by Pemex, Citi estimates that it is able to support the validity of approximately $185 million of the $585 million of accounts receivables owed to Banamex by Pemex as of December 31, 2013. 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.


While Citi’s review of these matters is ongoing, Citi believes the fraud is isolated to this particular client within the Banamex accounts receivable financing program. Based on its continuing review, Citi will determine whether all or any portion of the $33 million of direct loans made to OSA and the remaining approximately $185 million of accounts receivable due from Pemex is impaired, taking into consideration the impact to OSA and Pemex of the actions and events described herein.


Citi CEO Michael Corbat said, “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.


“Specifically, we have been taking the following actions: first, we immediately began a ‘rapid review’ – throughout Banamex and the rest of Citi – of programs similar to the one at issue here. At this point, we believe this is an isolated incident.


"Next, we are exploring our legal options and coordinating with law enforcement agencies in Mexico. Banamex, in coordination with Pemex, has worked with Mexico’s Attorney General to initiate criminal actions in connection with this matter that, in addition to imposing just penalties on the responsible parties, may allow us to recover damages. We are exploring every available option to recoup the misappropriated funds and we will be relentless in pursuing their recovery.

In conclusion, Corbat is pretend angry. And you don't want to see him pretend angry:

"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,” Mr. Corbat concluded.


Of course, if this fraud ends up not being isolated, any further fraud discoveries will be reported after the next quarter's expectation beating results, only to be revised lower when the stock has already surged even higher on completely made  up number. Ah, New Normal: you are so much fun.

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Fri, 02/28/2014 - 09:58 | 4488446 Terminus C
Terminus C's picture

Yea the head of the Mexican subsidiary will be promoted to CEO of Citi... How's that for "being held responsible"?

Next stop Sec Tres...

Fri, 02/28/2014 - 10:03 | 4488471 TruthInSunshine
TruthInSunshine's picture

Where did "El Chapo" do most of his banking?

They must've had a stellar Q1. But watch out for downward revisions.

Fri, 02/28/2014 - 10:10 | 4488516 Richard Chesler
Richard Chesler's picture

I don't always put my drug money in the bank but when I do....

El Chapo.

Fri, 02/28/2014 - 10:47 | 4488779 TheFourthStooge-ing
TheFourthStooge-ing's picture

North of the border it is known as non-GAAP accounting.

Fri, 02/28/2014 - 11:02 | 4488893 Bindar Dundat
Bindar Dundat's picture

If this was Bitcoin you clowns on ZH would be predicting the end again for "All things we do not have the brains to understand" .

Fri, 02/28/2014 - 11:49 | 4489142 RaceToTheBottom
RaceToTheBottom's picture

GAAP Accounting is now only aimed at producing GAPS in what used to be traditional Accounting to circumvent the law.


And Non GAAP Accounting is pure breaking the law

Fri, 02/28/2014 - 10:49 | 4488731 Squiddly Diddly
Squiddly Diddly's picture

I will expose my conspiratorial naivete but when I read "sub" in the headline my first thought was of a drug running submarine but it could mean subsidiary.  Reality is messing with my head.  I am starting to think like a banker, financialize the world.  Mu HA HA HA.

Fri, 02/28/2014 - 10:18 | 4488573 Muddy1
Muddy1's picture

If a Mexican subsidiary does something and Citi does a revision it's thos rascally Mexicans.  But whe the US government does it?????????  Not a problem.


Revised Q4 GDP Tumbles 26% From Initial Estimate To 2.4%; Personal Consumption Hit

Fri, 02/28/2014 - 10:32 | 4488664 Hard1
Hard1's picture

Excuse me Mr. Corbat, but your compensation package vs the (dis)service that you provide to society is what can be called Despicable

Fri, 02/28/2014 - 10:08 | 4488510 TideFighter
TideFighter's picture

"Are we MexiCANS or MexiCANT'S?"

Fri, 02/28/2014 - 10:13 | 4488535 monad
monad's picture

Thats how affirmative predation / Glasnost works. Everyone must be armed, every traitor must hang and the FSA must be deported to their countries of origin. If you came here to be Americans in the Constitutional sense you can stay, if you're sucking government tit you can leave or die.

Fri, 02/28/2014 - 10:39 | 4488730 Offthebeach
Offthebeach's picture

So Citi reduces its taxes by tens of millions to pal Fedgov and a quarter of a billion gets laundered in meheeco.

Taxes, fiat are for suckers.

Forward Sheeple!

Fri, 02/28/2014 - 09:58 | 4488451 slotmouth
slotmouth's picture

If the fraud ends up not being isolated they won't report it ever.

Fri, 02/28/2014 - 10:00 | 4488466 madbraz
madbraz's picture

As the fraud is considered "non-recurring", this will eventually be spun as bullish

Fri, 02/28/2014 - 10:03 | 4488483 fonzannoon
fonzannoon's picture

It makes sense that if you are engaging in fraud on such a massive scale you should occasionally admit to a tiny bit of fraud to make people think you are honest. It's kind of like JPM admitting they had 1 day of trading losses...granted they won't even do that.

Fri, 02/28/2014 - 10:14 | 4488545 Rainman
Rainman's picture

Senor Carlos Slim salutes you !

Fri, 02/28/2014 - 10:02 | 4488469 Atlantis Consigliore
Atlantis Consigliore's picture

Mexiwhale, Tunafish?   Stinks from the neck, LOL,......and if you dont bring back the buy money?  Aiiiyyyyyeeee. 

Fri, 02/28/2014 - 10:02 | 4488474 youngman
youngman's picture

Its probably just the drug lords getting their money laundering fees back...

Fri, 02/28/2014 - 10:03 | 4488481 mogul rider
mogul rider's picture

In no way will this citi fraud in mexico spread to the credit market.......

The Yellen..

Fri, 02/28/2014 - 10:03 | 4488484 Dr. Engali
Dr. Engali's picture

Damn rogue traders seem to pop up evey where. It's funny how they aren't rogue traders when the trade is going there way.

Fri, 02/28/2014 - 10:13 | 4488536 Seasmoke
Seasmoke's picture

You never see a degenerate gambler in GA, when he is on a hot streak. 

Fri, 02/28/2014 - 10:17 | 4488551 Dr. Engali
Dr. Engali's picture

Should read 'their way' and 'everywhere'. At least it wasn't Fonz who locked me out this time.

Fri, 02/28/2014 - 10:04 | 4488487 mogul rider
mogul rider's picture

It's only fraud if you admit it....


Fri, 02/28/2014 - 11:02 | 4488896 icanhasbailout
icanhasbailout's picture

or if the person blamed for it just jumped off a roof

Fri, 02/28/2014 - 10:04 | 4488491 madbraz
madbraz's picture

If this was the US Government, the article would be titled:

US Government uncovers subsidiary fraud, revises 4th quarter GDP lower; Calls it "just another day - BTFATH"

Fri, 02/28/2014 - 10:05 | 4488499 monad
monad's picture

Socialism is a tool of organized crime.

Sun, 03/02/2014 - 00:30 | 4495928 bilejones
bilejones's picture

Government is organized crime.

Fri, 02/28/2014 - 10:10 | 4488521 valley chick
valley chick's picture

Where is john corizine? Wake me up when these bastards go to jail.

Fri, 02/28/2014 - 10:30 | 4488658 ArrestBobRubin
ArrestBobRubin's picture

That is gonna be one loooooong nap there VC :-)


Fri, 02/28/2014 - 10:12 | 4488531 bugs_
bugs_'s picture

another citiload of fraud

Fri, 02/28/2014 - 10:13 | 4488537 eddiebe
eddiebe's picture


Fri, 02/28/2014 - 10:15 | 4488549 Seasmoke
Seasmoke's picture


Fri, 02/28/2014 - 10:16 | 4488559 ms8172
ms8172's picture

These CEO's are like the news media. Tell you what you wanna hear and spin it if not!!!

Fri, 02/28/2014 - 10:17 | 4488568 geno-econ
geno-econ's picture

Greed, Tax Evading, Accounting Fraud, Bailouts, Shadow Banking is not permitted by foreign subsidiaries and will not be tolerated !

Fri, 02/28/2014 - 10:20 | 4488584 nakki
nakki's picture

Citi's whole balance sheet is fraudulent. What's $325 million dollars compared to the company being insolvent if real accounting rules applied.

Fri, 02/28/2014 - 10:25 | 4488622 Harry Dong
Harry Dong's picture

what happened to the code of honor among theives?

(couldn't happen to a nicer company /sarc)

Fri, 02/28/2014 - 10:29 | 4488633 Urban Redneck
Urban Redneck's picture

What sort of retard is running Citi?

The Rules of FRAUD CLUB
1st rule- You do not talk about FRAUD Club.
2nd rule You DO NOT talk about FRAUD Club.

Someone might wise up that not only are YOUR FRAUD Club trade receivables overvalued, but that other "assets" on YOUR FRAUD Club balance sheet might also be overvalued, or SATAN FORBID-- OTHER FRAUD Club banks and non-bank financial institutions might engage in the SAME FRAUD Club practices which you are now confessing to.

ALL you had to do was go to your nearest FRAUD Club CENTRAL banker (or his overseas affiliates in extreme cases) and swap your dirty dollars/lies for fresh clean ones- it's called LAUNDERING for a reason. TBTF Dumbfuck.

Fri, 02/28/2014 - 10:27 | 4488635 chdwlch1
chdwlch1's picture

Has the mark-to-market accounting rule been reinstated?  Then who gives a shit what a bank's earnings or balance sheet looks's all fiction!?!?!


Fri, 02/28/2014 - 10:27 | 4488641 marginnayan
marginnayan's picture

Citi Bastards themselves have committed despicable crimes. Look at these fucking hypocrites.

Fri, 02/28/2014 - 10:27 | 4488642 overmedicatedun...
overmedicatedundersexed's picture

as el presidente recently said: " there's not one smigin of crimes at the IRS"...or doj or sec or gs or jpm or citi...and lastly of course corzine. in every human heart there is evil, it's just sociopaths who cannot see evil,normals control it that is why we do not rise up and kill em all, as in the end we then become them.

Fri, 02/28/2014 - 10:27 | 4488644 ArrestBobRubin
ArrestBobRubin's picture

What a laugher.... Citi's whole fucking busines is a Despicable Crime.

Fri, 02/28/2014 - 10:29 | 4488651 esum
esum's picture

and no one verified the validity of the receivables until it reached this amount...... really

Fri, 02/28/2014 - 10:30 | 4488662 esum
esum's picture

a few hundred thou.... half a billion .....child's play.... just ask JPM

Fri, 02/28/2014 - 10:34 | 4488690 LawsofPhysics
LawsofPhysics's picture

yes, yes, another "dispicable crime" that no one will be held accountable for...

Roll the fucking guillotines, nothing changes otherwise...

Fri, 02/28/2014 - 10:40 | 4488735 Doubleguns
Doubleguns's picture

Amazing, its "dispicable" when its done to them, but when they do it to us its a banking fee. 

Fri, 02/28/2014 - 10:45 | 4488765 orangedrinkandchips
orangedrinkandchips's picture



Shit, that is like Oil and Water, no? lol (sarc)

Fri, 02/28/2014 - 11:08 | 4488925 pupdog1
pupdog1's picture

CEO Corbat is shocked to find fraud in Citi.

He's going to fight fraud with the aid of Mexico's attorney general.

Hollywood couldn't make this stuff up.


Fri, 02/28/2014 - 11:41 | 4489096 RaceToTheBottom
RaceToTheBottom's picture

Promote the head of that Mexican division, they are really beating numbers.....

Fri, 02/28/2014 - 11:44 | 4489116 Typing Typer
Typing Typer's picture

Citi does not tolerate failure.

Fri, 02/28/2014 - 11:51 | 4489154 Dollarmedes
Dollarmedes's picture

I don't see why alogs are particularly responsible: if there were no algos involved, wouldn't people have responded in the same way, only slower?

This is just a longer-term pump.

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