While other banks appear to be extracting themselves from the subprime thicket, Citigroup Inc. continues to find itself tangled in the weeds. Now the Securities and Exchange Commission has been pulled in as well.

On Jan. 11 the SEC's inspector general revealed that his office is investigating whether the agency's director of enforcement, Robert Khuzami, wrongly overruled staff decisions to prosecute two Citibank officials for fraud. The investigation was prompted by a letter from an anonymous whistleblower that Sen. Charles Grassley, R-Iowa, forwarded to the agency. The tipster claimed Khuzami dropped the charges without consulting staff members after he was contacted by a college chum who represented one of the two executives.

"It isn't appropriate for senior SEC officials to secretly meet with lawyers for the other side and then make major decisions without the knowledge of the career government attorneys doing the day-to-day work," Grassley complained in comments accompanying the forwarded letter.

At issue is Citigroup's $75 million settlement with the SEC in July to set aside allegations that it misled investors about the company's exposure to $50 billion in subprime mortgage assets. The company's settlement was paired with the civil settlements of former chief financial officer Gary Crittenden for $100,000 and investor relations executive Arthur Tildesley Jr. for $80,000.

Given the hit Citi's balance sheet took from subprime assets, the fines seem ridiculously low to a wide range of critics. Among them was federal Judge Ellen Segal Huvelle, who presided over the SEC's case against Citi. In an August hearing, she questioned how the massive size of the understated exposure to loans didn't warrant stronger penalties or more prosecutions. Although she disagreed with it, she eventually approved the settlement.

Boston University law professor Cornelius K. Hurley isn't surprised by the allegations of favoritism. "At the time, it seemed like a light sentence," he says, calling the alleged understatement of risk "an astronomical number."

"Based on the facts alleged in the complaint, it was nothing," he says. "It struck me that the elements the SEC alleged deserved much sterner action."

Hurley says the settlement and others that have drawn criticism could also hurt the SEC with judges. "Of late, judges have been looking more closely at SEC settlements," he says. "It used to be a rarity. Not so now. The SEC has to have that in the back of their minds."

All of this comes against the backdrop of continuing suspicions and resentments about the financial bailout. Neil M. Barofsky, special inspector general to the Troubled Asset Relief Program, recently called the Bush administration's rescue of Citigroup "strikingly ad hoc" and suggested the government needed to develop a more objective process for making those kinds of decisions and ensure institutions are held accountable for their failures. "Unless and until institutions like Citigroup can be left to suffer the full consequences of their own folly, the prospect of more bailouts will potentially fuel more bad behavior with potentially disastrous results," he said.

After the inspector general's investigation was revealed, the SEC was quick to deny any untoward action had taken place. "The settlement appropriately held the company and individuals accountable. It was the product of a thorough investigation and a careful evaluation of the evidence and the applicable law," says SEC spokesman John Nester, adding the agency would cooperate with the inspector general's review.

In a statement, Citigroup declined comment on allegations the anonymous letter raised but addressed Barofsky's report. Citi describes itself as "a fundamentally different" company. "We have bolstered our financial strength, overhauled our risk management, reduced our risk exposures, defined a clear strategy and made Citi a more focused enterprise by returning to banking as the core of our business. Today, Citi is operating on a very strong foundation.

"As we have said before," the statement says, "Citigroup was well-capitalized and liquid in the fall of 2008, but faced uncertainty resulting from dysfunctional markets and a declining stock price. The government's investment removed that uncertainty."

Some observers of the Citigroup bailout suggest that the scrutiny will keep coming, given the litany of criticism since the bank began receiving what amounted to a $45 billion infusion from the government and additional guarantees totaling nearly $300 billion.

The critics, of course, have questioned why government money should have been used to rescue a bank that made bad business decisions and suggested that the rescue delivered a dangerous message to bankers that they wouldn't suffer consequences when risky loans went bad -- the government would always step in.

"As Citi CEO Vikram Pandit has said," Citi's statement adds, "we owe a debt of gratitude to the U.S. Government and the American taxpayer for providing Citi with TARP funds. This program restored confidence in the financial system and built a bridge to sound footing for many institutions. As the U.S. Treasury has announced, the American taxpayers' investment in Citigroup alone netted a profit of approximately $12 billion."

But talk of Citi's transformation may be premature. Barofsky warned in his report that the institution remains too big to be allowed to fail, making future bailouts of big banking companies no less likely than when the crisis unfolded nearly three years ago.