WASHINGTON, Nov 18 (Reuters) - U.S. securities regulators considered charging at least six individuals in a 2010 case against Citigroup Inc tied to the financial crisis, but ultimately decided to charge just two, according to an internal watchdog report.

Securities and Exchange Commission staff issued Wells notices to six individuals -- documents that suggested the agency would recommend some action against them -- but charged only the bank's chief financial officer and its director of investor relations.

As part of that case, the bank last year paid $75 million to resolve allegations that it mislead investors about its exposure to subprime mortgage securities.

U.S. District Judge Ellen Huvelle initially refused to approve the settlement, asking in part why the SEC pursued only two individuals in the case.

In the watchdog report, most of the section dealing with why only two individuals were charged is redacted.

But the report, released by the SEC, does provide unusual details about the negotiations that resulted in the charges against the two individuals, and provides some insight into Citigroup's maneuvering to protect its employees.

Charges against the two executives -- particularly then-CFO Gary Crittenden -- came only after extensive communication, and some miscommunication, between the SEC and the bank's defense team.

By September 2009, Citigroup agreed to pay a penalty and accept a fraud charge against the bank that did not include admitting knowledge of or intent to commit wrongdoing.

The case against Crittenden proved much more thorny. SEC staff initially sought fraud charges against him, but Citigroup argued that a fraud charge against its CFO would have "very large implications" for the bank.

One SEC witness, whose name is redacted from the report, recalled that Citigroup was "trying to use whatever leverage they had ... to get us to ... lay off the individuals," and even brought in the chairman of Citigroup's board, Richard Parsons, to talk to the SEC.

Crittenden refused to settle a fraud charge, according to one of the SEC witnesses, because "he held some position in his church" and "wouldn't be able to continue" if he took a fraud charge, the report said.

A phone conversation between SEC enforcement director Robert Khuzami and Citigroup's lawyer, Mark Pomerantz, touched off a series of misunderstandings that led the bank's defense team to believe fraud charges against Crittenden had been dropped.

But as the SEC staff started to reconsider the charges, top SEC officials continued to negotiate fraud charges, confusing Citigroup's defense team, according to the report.

The report said one of the bank's lawyers asked SEC associate director Scott Friestad, "What the heck is going on?"

It quoted the lawyer as saying, "I've known you for 16 years. I don't think I've ever had a call like this in my life from you guys."

SEC staff ultimately decided to pursue a lesser charge against Crittenden. The report determined that that decision was made by enforcement staff, but the reason for it is largely redacted.

The report cleared the SEC enforcement director of allegations that he improperly intervened in the investigation.

A Citigroup spokeswoman did not immediately respond to a request for comment on the report.

(Reporting by Aruna Viswanatha)

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