The SEC recently announced a settlement with Citigroup over misrepresentations in its sale of securities from a particular CDO. Basically, this was one of a series of situations where an investment bank designed a CDO to fail -- it was backed by securities that had been picked specifically because they were crap -- so that some investors could bet against the CDO, while the ones who actually invested in it lost their money.
Here is one take on the settlement:
I don't have an online link to the order, but I can quote the relevant bits Here's a link:
Here is one take on the settlement:
[T]he Securities and Exchange Commission announced that it had agreed to a measly $285 million settlement with Citigroup over the bank having misled its own customers in selling an investment it created out of mortgage securities as the housing market was beginning its collapse.Pretty depressing. And it gets worse - these settlements routinely include a clause where the defendant is enjoined from committing any further violations of the securities laws. Except:
In addition, the S.E.C. accused one person — a low-level banker. Hooray, we finally got the guy who caused the financial crisis! The Occupy Wall Street protestors can now go home.
After years of lengthy investigations into collateralized debt obligations, the mortgage securities at the heart of the financial crisis, the S.E.C. has brought civil actions against only two small-time bankers. But compared with the Justice Department, the S.E.C. is the second coming of Eliot Ness. No major investment banker has been brought up on criminal charges stemming from the financial crisis.
To understand why that is so pathetic and — worse — corrupting, we need to briefly review what went on in C.D.O.’s in the years before the crisis. By 2006, legions of Wall Street bankers had turned C.D.O.’s into vehicles for their own personal enrichment, at the expense of their customers.
These bankers brought in savvy (and cynical) investors to buy pieces of the deals that they could not sell. These investors bet against the deals. Worse, they skewed the deals by exercising influence over what securities went into the C.D.O.’s, and they pushed for the worst possible stuff to be included.
The investment banks did not disclose any of this to the investors on the other side of the deals...
By the S.E.C.’s own investigations of and settlements with Goldman Sachs, JPMorgan Chase and Citigroup, and by reporting like my ProPublica work with Jake Bernstein and early stories by The Wall Street Journal, we know that these breaches were anything but isolated. This was the Wall Street business model.
Last week’s S.E.C. complaint makes clear that the low-level Citigroup banker that it sued, Brian H. Stoker, had multiple conversations with his superiors about the details of Class V. At one point, Mr. Stoker’s boss pressed him to make sure that their group got “credit” for the profits on the short that was made by another group at the bank.
Pause, and think about that. The boss was looking for credit, but as far as the S.E.C. was concerned, he got no blame.
The S.E.C. has also devoted adequate resources to the issue. It put together a special task force on structured finance, sending the proper signal of the agency’s priorities both internally and externally. The task force is staffed by bright people, an invigorating mix of young go-getters and experienced hands. Those people have understood for years what was wrong with the C.D.O. business on Wall Street.
O.K., so what is it? Risk aversion.
Based on the major cases the S.E.C. has brought, a pattern has emerged. It is making one settlement per firm and concentrating on only the safest, most airtight cases. The agency’s yardstick seems to be, who wrote the stupidest e-mail?
But the S.E.C is not the G-mail G-man. It is the securities police. Imprudent e-mailing is not the only way to commit securities fraud.
[H]ere’s an open secret: The SEC hardly ever enforces these obey-the-law orders.But! There's one bright spot. Judge Rakoff of the Southern District of New York recently issued an order regarding this recently-announced Citigroup settlement.
In 2006, the SEC fined [a] JPMorgan unit $1.5 million after determining it had defrauded customers who bought something called auction-rate securities from the company. ...The SEC also ordered the company not to violate that section of the law in the future.
As part of last week’s settlement, the SEC accused the same JPMorgan subsidiary of again violating the same section of the law. However, the commission’s complaint didn’t include any allegation that the company had breached its 2006 cease-and- desist order. An SEC spokesman, John Nester, didn’t offer an answer when asked why not. A JPMorgan spokesman, Joseph Evangelisti, declined to comment.
The Court is required to ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest. The Court will convene a hearing on November 9, 2011 at 3:00 pm to assist in this determination.I doubt very much will come of this, but at the very least, maybe it will be embarrassing. And Citigroup might even cough up another couple of million in settlement fees - not that that will even come close to how much they made on this and similar deals.
Among the questions (without limitation) that the Court will want answered at this hearing are the following:
1) Why should the Court impose a judgment in a case in which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?
6) The proposed judgment imposes injunctive relief against future violations. What does the S.E.C. do to maintain compliance? How many contempt proceedings against large financial entitities has the S.E.C. brought in the past decade as a result of violations of prior consent judgments?
7) Why is the penalty in this case to be paid in large part by Citigroup and s shareholders rather than by the "culpable individual offenders acting for the corporation?" Statement of the Securities and Exchange Commission Concerning Financial Penalties, SEC Rel. No. 2006-04 (Jan. 4, 2006). If the S.E.C. was for the most part unable to identify such alleged offenders, why was this?
9) How can a securities fraud of this nature and magnitude be the result simply of negligence?