2011-214.htm

This story concerns the 1 billion collateralized debt obligation (CDO) tied to the U.S. housing market by Citi’s broker-dealer subsidiary which misled investors.  Citi bet against the CDO’s making $160 million in fees and trading profits.  $500 million of the assets were included in the CDO Class V III portfolio.  Citi did not disclose the risk to investors.  Here is how Citi higher-ups described the portfolio:

One experienced CDO trader characterized the portfolio as “dogsh!t” and “possibly the best short EVER!” An experienced collateral manager commented that “the portfolio is horrible.”

The SEC commented on the settlement:

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

Citi did not admit or deny the wrongdoing agreeing to a pay disgorgement of $1 million in fees that it received from the Class V III transaction plus $250,000 in prejudgment interest.  What is bothersome about this settlement is the small penalty of $1.25 million.   There is no calculation on the amount of damage the failure of fiduciary duty the debacle caused.  It would seem that if the portfolio was part of a half a billion dollars in assets and Citi held significant influence, the penalty is disproportionate. Of note, Citi has agreed to pay $360 million since July 2010, below.  Compared to the lives harmed, homes lost and damage to the economy, this is an insignificant price to pay.

It’s a little like a guy robbing a bank of $100,000.  When the police show up at the criminals home to make an arrest, the robber invites them in for coffee, cake and a chat.  At the close of a nice chit-chat, the robber hands the police a promissory note for $5,000 payable in the future.  The police leave.  There is no arrest.  The District Attorney posts a note on the bulletin board noting the generous robber paid a $1,000 for tickets to the annual Monopoly Money and Bank Bailout Black Tie Ball.  A political campaign fund-raiser featuring The Bloomberg Buddies.  The robber keeps $94,000.   The bank gets reimbursed by the federal government for the robbery.  The shareholders, investors and tax payers foot the bill.  This scenario vaguely resembles the bank bailout plan.  Amazingly Citi got nervous last week when a few protesters wanted to close their accounts.  No wonder.  They need that money to pay for more tickets to the ball.

We would like to thank the SEC for their hard work.

SEC MONETARY RECOVERIES

Goldman Sachs $550 MILLION

State Street $300 MILLION

Citigroup (10/19/11) $285 MILLION

JP Morgan Securities $209.6 MILLION

Bank of America $150 MILLION

Charles Schwab $118 MILLION

Morgan Keegan $100 MILLION

Citigroup (7/29/10) $75 MILLION

Evergreen $40 MILLION

RBC Capital Markets $30.4 MILLION

Wachovia $11 MILLION

TD Ameritrade $10 MILLION

Credit Suisse $2.5 MILLION

The above represents enforcement actions by the SEC against companies “whose misconduct occurred leading up to or during the financial crisis.”

2011-214-chart-recoveries.pdf

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