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Judge Nixes Citigroup-SEC Agreement

Is Workplace Ethics An Oxymoron?

I have posted many blogs on ethics in the workplace. After a while you can become quite cynical about the practice followed by so many companies, especially investment firms. Let’s not forget they were responsible for the 2008 financial meltdown. But finally there is hope on the horizon that the guilty may be made to pay for their crimes. I’m talking about the recent decision by U.S. District Judge Jed Rakoff to strike down a $285 million settlement between Citigroup and the Securities and Exchange Commission (SEC) over toxic mortgage securities, saying he couldn't tell whether the deal was fair and criticizing regulators for shielding the public from details of the firm's wrongdoing.

Judge Rakoff said the public has a right to know what happens in cases that touch on "the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives." In such cases, the SEC has a responsibility to ensure that the truth emerges, he wrote. Rakoff said he had spent hours trying to assess the settlement but concluded that he had not been given "any proven or admitted facts upon which to exercise even a modest degree of independent judgment." He called the settlement "neither fair, nor reasonable, nor adequate, nor in the public interest."

The SEC shot back in a statement issued by Enforcement Director Robert Khuzami, saying the deal was all four of those things and "reasonably reflects the scope of relief that would be obtained after a successful trial." I suppose reasonably is the key word since it is well known in legal circles what is reasonable often lies in the eye of the beholder.

The SEC had accused Citigroup of betting against a complex mortgage investment in 2007 through a credit default swap making $160 million in the process — while investors lost millions. Talk about an unethical practice. How would you like to go to Vegas and put $1 million down on a “pass bet” and roll 7 or 11? At the same time you can buy insurance that in case the dice don’t come up that way you recover $2 million in insurance by paying a $100,000 premium. That is the state of casino gambling in the financial institutions that gave us the great recession of 2008.

Holding investment bankers accountable for their despicable actions has become a lost art – or, perhaps, it never was there in the first place. Could it be because so many investment bankers from Goldman Sachs now, or in the past, have run our country’s finances? I warned you of my cynicism.

Let’s go back to the SEC -- the agency that missed the Bernie Madoff scandal even after been warned about it. “The SEC's longstanding policy of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.” Judge Rakoff has it right. What if murderers were allowed to consent to a lesser charge without admitting guilt? Oh, I forgot, that sometimes occurs in plea agreements. At least there is the allocution in criminal courts.

SEC Enforcement Director, Robert Khuzami, said in the Commission’s response that Judge Rakoff made too much out of the fact that Citigroup did not have to admit wrongdoing. He said forcing Citigroup to give up profits, pay fines and face mandatory business reforms outweigh the absence of an admission "when that relief is obtained promptly and without the risks, delay and resources required at trial."

Well, Mr. Director, perhaps the public has a right to know all the facts and, quite frankly, to see those guilty of the worst financial fraud since the last financial fraud be embarrassed in the court of public opinion.  Citi-XMasAfter all, there is no shame in shaming guilty offenders especially when the magnitude of the fraud is so pervasive and has affected so many in our society – the newly unemployed, the recently homeless, and those whose mortgages are now underwater.

Oh, by the way, in July 2010, Citigroup agreed to pay the SEC $75 million to settle charges that the bank hid exposure to more than$40 billion in subprime Collateral Debt Obligations (CDOs). This is financial-speak for toxic assets.

In what the New York Times called “an unusual move” the SEC also charged one current and one former Citi executive for making the misstatements. Former CFO Gary Crittenden will pay $100,000 and Arthur Tildesley - formerly the head of investor relations - will pay $80,000. (I figure that is about 1% of their annual income.) Neither Citi nor the executives admitted to any wrongdoing. Of course they didn’t. Why do the honorable thing and take responsibility for your actions? Again, no criminal charges were filed.

According to Khuzami, Citigroup had boasted in 2007 "of superior risk management skills in reducing its subprime exposure to approximately $13 billion," when in fact, "billions more in CDO and other subprime exposure sat on its books undisclosed to investors."

As for Citigroup, spokeswoman Shannon Bell said: "We are pleased that we have reached agreement with the SEC to put this matter concerning certain 2007 disclosures behind us, and that the SEC is not charging Citi or any individual with intentional or reckless misconduct.” Surprise, surprise!

Blog posted by Steven Mintz, aka Ethics Sage, on December 2, 2011