“You can’t prosecute a company on the basis of [internal] miscommunication,” Judge Ellen Segal Huvelle told SEC lawyers earlier this week when she refused to approve an SEC settlement that required Citigroup to pay a $75 million fine.

The judge’s challenge represents yet another obstacle for the SEC as it tries to reprimand financial institutions for their role in the financial crisis. For its part, the SEC has charged that Citigroup led investors to believe that the bank’s subprime exposure was $13 billion when it was really over $50 billion.

The judge’s comment, made as part of a discussion with Brad Karp, a lawyer representing Citigroup, is quickly becoming fodder for debate within disclosure circles. According to Citigroup’s attorney, there was a breakdown in communication between Citigroup’s banking and disclosure side.

As reported by The Wall Street Journal: “Mr. Karp said the bank’s CFO was provided with information from business units that, if analyzed, would have allowed him to detect some ‘cracks’ in the mortgages, but ‘he didn’t pick up on that.’”

The “he” being referred to, of course, is Citigroup CFO Gary Crittenden — a seasoned CFO veteran whose job-hopping from Sears Roebuck to Monsanto to American Express has led many of his CFO peers to envy his resume’s wealth of marquee employers.

Then came Citigroup Inc.

If only Crittenden had remained in the more orderly world of washing machines or even fertilizer, he may never have gotten caught in the messy residue frequently emitted by disclosures related to collateralized debt obligations (CDOs).

For their part, Citigroup’s former CFO and Citigroup’s former head of investor relations, Arthur Tildesley Jr., had settled with the SEC without admitting or denying wrongdoing. Crittenden agreed to pay $100,000 and Mr. Tildesley agreed to pay $80,000.

“You’ve focused on two individuals and I can’t for the life of me figure out why,” Judge Huvelle told the SEC lawyers. The judge’s words appear to draw attention back to those portions of the SEC complaint that attempt to trace the tortuous path of Citigroup’s subprime disclosures.

There’s no doubt that disclosure experts will find the SEC Citigroup complaint a valuable teaching document for years to come. As the judge suggests, a number of investor relations executives appear to have helped author Crittenden’s remarks.

Here’s an excerpt:

“In reviewing that draft pre-announcement script, an investment bank officer noted the potential for a listener to the announcement to conclude that the investment bank’s total subprime exposure was only the $13 billion referenced in the draft and in the company’s prior disclosures. A member of the IR team responded that, because the super senior tranches of CDOs previously had not been discussed and because of a request by the investment bank that the IR member understood to be a request not to discuss those tranches, there was no choice other than to let listeners conclude that the investment bank’s total subprime exposure was $13 billion. In response to that assessment, the investment bank officer suggested removing the discussion about the highest-rated tranches so as to avoid eliciting questions about super seniors. Another investment bank executive agreed with that suggestion, and noted that the writedown in the value of the super senior tranches had declined. Following further communications, the script was fomalized. As finalized, the pre-announcement script included a statement that the company held on to ‘most of the highest-rated tranches’ but then did not include disclosure of the amount of the investment bank’s subprime exposure from the super senior tranches and the liquidity puts.” ###