Picture average citizen – Jane Doe, a real estate broker – who is accused of misleading and defrauding her clients by telling them properties that have major defects (which Jane clearly knew but did not disclose) were worth sixty percent more than they really are (given those defects), resulting in Jane making hundreds of thousands of dollars in commissions. And picture the prosecutor who is pursuing her case to allow her to settle without her admitting any liability, allow her to continue her business and pay a $10 fine. Folks would be outraged… up in arms, so to speak. But when this happens at the federal level, with billions at stake, the “punishments” might make the above fine look high by comparison.
At issue is the fine and potential criminal liability levied against Citigroup and two senior managers in connection with their allegedly minimizing to shareholders the company’s exposure in derivatives of bundled subprime mortgages, when they purportedly really knew the risks were accelerating and failure rates climbing. Specifically, the Inspector General of the Securities and Exchange Commission, announced an investigation on January 11th, of the Commission’s chief enforcement officer, Robert Khuzami, as to whether he wrongly overruled staff decisions to prosecute two Citibank officials for fraud. The numbers are staggering, both as to the magnitude of the purported wrong and the minuscule size of the imposed fines.
The January 21st theDeal.com explains: “At issue is Citigroup's $75 million settlement with the SEC in July to set aside allegations that it misled investors about the company's exposure to $50 billion in subprime mortgage assets. The company's settlement was paired with the civil settlements of former chief financial officer Gary Crittenden for $100,000 and investor relations executive Arthur Tildesley Jr. for $80,000… Given the hit Citi’s balance sheet took from subprime assets, the fines seem ridiculously low to a wide range of critics. Among them was federal Judge Ellen Segal Huvelle, who presided over the SEC's case against Citi. In an August hearing, she questioned how the massive size of the understated exposure to loans didn't warrant stronger penalties or more prosecutions. Although she disagreed with it, she eventually approved the settlement.”
The investigation will focus, among many elements, on allegations of secret meetings between Khuzami and a college buddy of his who was the attorney for one of the targeted executives (alleged by a whistle-blower who communicated his feelings through Iowa Republican Senator, Charles Grassley). Put bluntly, this whole investigation looks at a government practice that is all-too-common, that smacks of “special interest” favoritism and untoward government influence, and is even worse when you consider that Citigroup was one of the biggest financial players bailed out under the government’s Troubled Assets Relief Program.
Reactions to the settlement and refusal to prosecute were candid in their challenge: “‘It isn't appropriate for senior SEC officials to secretly meet with lawyers for the other side and then make major decisions without the knowledge of the career government attorneys doing the day-to-day work,’ Grassley complained in comments accompanying the forwarded letter… Boston University law professor Cornelius K. Hurley isn't surprised by the allegations of favoritism. ‘At the time, it seemed like a light sentence,’ he says, calling the alleged understatement of risk ‘an astronomical number… Based on the facts alleged in the complaint, it was nothing,’ he says. ‘It struck me that the elements the SEC alleged deserved much sterner action.’… Neil M. Barofsky, special inspector general to the Troubled Asset Relief Program, recently called the Bush administration's rescue of Citigroup ‘strikingly ad hoc’ and suggested the government needed to develop a more objective process for making those kinds of decisions and ensure institutions are held accountable for their failures.” theDeal.com
I’ll leave you with the official statement from Citigroup and see whether this helps you feel better about how the government treats its biggest and most lucrative residents: “[W]e owe a debt of gratitude to the U.S. Government and the American taxpayer for providing Citi with TARP funds. This program restored confidence in the financial system and built a bridge to sound footing for many institutions. As the U.S. Treasury has announced, the American taxpayers' investment in Citigroup alone netted a profit of approximately $12 billion.” Don’t even ask how much Citi CEO Vikram Pandit earned last year.
I’m Peter Dekom, and when special interests get sufficiently excessive special treatment, occasionally, the people change governments; ask Hosni Mubarak about that one.
Posts
No comments:
Post a Comment