Court Rejects Indefensible SEC-Citigroup Settlement That Would Have Rewarded Fraud
November 28, 2011
“Federal Judge Rakoff’s rejection of the SEC’s settlement with Citigroup is welcome news to a public waiting for anyone to hold a Wall Street bank accountable for its fraudulent deals. The specifics of the decision are technical, but what it really means is that the cozy business-as-usual relationship between the SEC and Wall Street might finally be over,” said Dennis Kelleher, president and CEO of Better Markets, a nonprofit organization that promotes the public interest in the financial markets.
“The SEC’s proposed settlement was indefensible, but it insisted that the court had to defer to it and approve it virtually without any scrutiny,” said Mr. Kelleher. “The judge rejected the SEC’s demand that the court be no more than a rubber stamp. It said that any settlement had to be supported by facts and be in the public interest, which the SEC argued against.”
“The SEC accused Citigroup of outrageous fraudulent conduct, but then proposed to settle for a slap on the wrist. Citigroup bet against a $1 billion deal it had built to fail at the very time it was selling it to investors, according to the SEC. Citigroup took in more than $600 million and investors lost more than $700 million.”
“For all that, the SEC was fining Citigroup only $95 million, which, as the court said, ‘is pocket change to any entity as large as Citigroup.’ Even worse, it only required Citigroup to disgorge $160 million without any explanation of what happened to the rest of the money. And, maybe worst of all, the SEC continued its pattern of charging only a single low-level employee personally, while allowing all the other managers and officers to get off without any penalty at all.”
“Better Markets urged the court to reject the settlement because it would have rewarded fraud and showed that crime pays,” said Mr. Kelleher. “This is particularly true for a corporation like Citigroup which, as the court noted, is a ‘recidivist,’ having been similarly sanctioned by the SEC several times in the past. Thankfully, Judge Rakoff agreed and is requiring the SEC to take Citigroup to trial and hold them accountable.”
“The SEC’s zeal to wrap up investigations, claim a scalp and get a ‘quick headline,’ as the court noted, must end. The SEC has to get serious about punishing Wall Street for its massive frauds that not only caused enormous investor losses, but also caused the financial system and economy to collapse,” said Mr. Kelleher. “If no one is held to account for any of that, then it is only a matter of time before the same reckless conduct causes the next crash and requires another massive taxpayer bailout of the banks. ”