We were very critical of the SEC settlement with Citigroup, negotiated by its head of enforcement Robert Khuzami, over Citi’s failure to report losses on subprime holdings as the market for those holding tanked. In our post “The Wages of Sin: Former Citi Execs Pay Token Fines for Lying to Investors,” we remarked:
A news story today provides further confirmation of the rule by the banking classes in the US, with only token gestures to the rule of law. Per Bloomberg (hat tip Tom Adams), Citigroup is ponying up $75 million to settle SEC charges that the giant bank was not sufficiently forthcoming in the runup to the financial crisis about losses on billions of dollars of subprime exposures….
Yves here. I guess I am a bit thick. In 2007, subrpime exposure was the thing investors were most worried about. Recall that the first acute phase of the financial was in August-September 2007, when the asset backed commercial paper started contracting and money market investors shunned funds that had any taint of subprime.
Recall also that Sarbanes Oxley, passed in 2002, provides that a public company’s principal executive and principal financial officers certify both annual and quarterly financial statements for accuracy and completeness. Section 906 further
contains a certification requirement subject to specific federal criminal provisions and that is separate and distinct from the certification requirement mandated by Section 302.
So….what do we have here? A $75 million fine, imposed on the company…and so coming out of Citi’s coffers, which comes (in theory) from shareholders (but given that financial firms pay high percentages of revenues in bonuses, this fine would have a microscopic impact on pay levels).
More striking is the mere slap on the wrist of the execs involved. The former Citi chief financial officer, Gary Crittenden, who held the job from March 2007 to March 2009, will pay $100,000 of the total $180,000, with Arthur Tildesley, then in charge of investor relations, agreeing to cough up $80,000 to settle charges.
To give you a sense of proportion, Crittenden was Citigroup’s second highest paid officer. From Citigroup’s 2009 proxy:
He also sits on 8 boards. Do the math: this settlement is a mere inconvenience. And note, more important, the failure of the SEC to pursue Chuck Prince (in charge through November 2007). If investors weren’t finding the answers to vital questions in the bank’s financial statements, one could argue the written disclosures weren’t adequate either (it appears the SEC wasn’t willing to pursue this angle).
And Citi virtually thumbed its nose at the charges in its statement:
Mr. Tildesley is a highly valued employee of Citi and is making significant contributions to the company.
As Tom Adams noted:
When people talk about banksters this is what they mean – lying with impunity is not only not problematic, it is critical to career advancement and company “success”.
The message seems pretty clear. Sarbox was intended to curtail phony corporate accounting in the wake of Enron. But why resort to complicated transactions like the energy company’s famed Raptors when Citi shows that mere lying will produce the same results with much less fuss?
Back to the current post. It looks like we aren’t the only people to have found the settlement appallingly light. Per Bloomberg:
The U.S. Securities and Exchange Commission’s internal watchdog is reviewing an allegation that Robert Khuzami, the agency’s top enforcement official, gave preferential treatment to Citigroup Inc. executives in the agency’s $75 million settlement with the firm in July.
Inspector General H. David Kotz opened the probe after a request from U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an unsigned letter making the allegation. Khuzami told his staff to soften claims against two executives after conferring with a lawyer representing the bank, according to the letter….
According to the letter, the SEC’s staff was prepared to file fraud claims against both individuals. Khuzami ordered his staff to drop the claims after holding a “secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend” of his and “who was counsel for the company, not the individuals affected,” according to a copy of the letter reviewed by Bloomberg News.
Yves here. This is why prominent lawyers and other high level fixers earn as much as they do. They have ongoing personal relationships with influential figures and can pull strings when they need to. But how a seasoned and supposedly tough prosecutor like Khuzami ever thought this settlement would pass muster is beyond me. Did he really think no one would notice or care, that this was a sufficiently old matter that any objections to it would die down quickly?
Needless to say, I’m glad to see this investigation move forward, but sadly, this initiative is just about certain to be an exception to the general rule of “banks get their way”.