A large and loud round of applause for District Judge Jed Rakoff for standing up for the public and refusing to accept the low settlement and terms which would affect pending litigation. show.php?db=special&id=138
Rakoff has been highly critical of the Securities and Exchange Commission (SEC) and its handling of settlements of criminal and civil fraud cases with banks. The banks neither admit nor deny any allegations and essentially, walk away by paying pennies on the dollar.
The New York Times gives a good description of why Rakoff is not pleased with the government not protecting the public interest.
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous,” Judge Rakoff wrote in the case, S.E.C. v. Citigroup Global Markets. “In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.” 78oavjd
Whistlewatch.org ran the below story on October 19, 2011. It’s worth reprinting to show banks are buying their way out of crimes, rubber stamped by the SEC. What is more unsettling is that both are using tax payer money. Meanwhile, bank and investment firm executives continue to be paid nauseatingly high salaries and bonuses as Americans continue to lose their jobs, homes & investments.
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.”