Sweet and Tender Hooligan

[giandujakiss]

I posted about this before, but Jonathan Weil says everything better:

Citigroup Finds Obeying the Law Is Too Darn Hard

Five times since 2003 the Securities and Exchange Commission has accused Citigroup Inc. (C)’s main broker-dealer subsidiary of securities fraud. On each occasion the company’s SEC settlements have followed a familiar pattern.

Citigroup neither admitted nor denied the SEC’s claims. And the company consented to the entry of either a court injunction or an SEC order barring it from committing the same types of violations again. Those “obey-the-law” directives haven’t meant much. The SEC keeps accusing Citigroup of breaking the same laws over and over, without ever attempting to enforce the prior orders. The SEC’s most recent complaint against Citigroup, filed last month, is no different.

That the SEC went easy on Citigroup again is obvious. The commission last month accused Citigroup of marketing a $1 billion collateralized debt obligation to investors in 2007 without disclosing that its own traders picked many of the assets for the deal and bet against them. The SEC’s complaint said Citigroup realized “at least $160 million” in profits on the CDO, which was linked to subprime mortgages. For this, Citigroup agreed to pay $285 million, including a $95 million fine -- a pittance compared with its $3.8 billion of earnings last quarter.

On top of that, the agency accused Citigroup of acting only negligently, though the facts in the SEC’s complaint suggested deliberate misconduct. The SEC named just one individual as a defendant, a low-level banker who clearly didn’t act alone. Plus, the SEC’s case covered only one CDO, even though Citigroup sold many others like it.

Here’s what makes the SEC’s conduct doubly outrageous: The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

The SEC neatly avoided that outcome simply by accusing Citigroup of violating a different fraud statute. Not that the SEC ever took the prior injunction seriously. In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.

It gets worse: Each time the SEC settled those earlier fraud cases, Citigroup asked the agency for waivers that would let it go about its business as usual. (This is standard procedure for big securities firms.) The SEC granted those requests, saying it did so based on the assumption that Citigroup would comply with the law as ordered. Then, when the SEC kept accusing Citigroup of breaking the same laws again, the agency granted more waivers, never revoking any of the old ones.

Comments

[ratcreature]

Argh, seriously, why does the "oversight" help them to steal? Do the SEC members get some kickbacks? At least corruption would be understandable... Brecht had it so right when in 1931 he said that the crime of robbing a bank was nothing compared to founding one, but why make it extra easy?

[giandujakiss]

It's somewhere between risk aversion, and unbelievable chumminess among SEC lawyers and defense lawyers. I've linked before about the revolving door between government enforcement and private litigation, and the way that the SEC relies tremendously on Wall Street self-policing. It's really awful.