Thursday, May 24, 2012

SEC v Citigroup heats up...

This week, a number of organizations submitted "Friend of the Court" briefs in SEC v. Citigroup Global Markets. (United States Securities & Exchange Commission v. Citigroup Global Markets Inc. - UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, docket number 11-5227-cv.)

The case is now in an Appeals Court after a lower Court Judge threw out a settlement reached between the SEC and Citi.

The National Association of Shareholder and Consumer Attorneys (NASCAT), the Securities Industry and Financial Markets Association (SIFMA), the Business Roundtable, Occupy Wall Street and the US Chamber of Commerce have all either filed or are seeking permission to file briefs in this case.

Of course, industry groups, like SIFMA, believe that, if the lower Court ruling is upheld, the wheels will come off the economy. It will be the official End of the World. (We note that one of the attorneys for SIFMA, Annette L. Nazareth of DAVIS POLK & WARDWELL LLP, spent a decade at the SEC, supposedly protecting the public. Now she serves those she formerly regulated.)

Below, we take a closer look at SIFMA's filing.

SIFMA claims that "The District Court’s Order, If Upheld, Would Have a Direct Harmful Impact on All Participants in the Securities Industry," that "the District Court’s Approach Would Dramatically Reduce the Number of Settled Actions, Particularly in Cases Involving Financial Institutions." This is an absurd claim. In an era of elevated fraud and the resulting increased damage to investors, with the SEC apparently captured by the industry it ostensibly regulates (as Ms Nazareth's choice of employer proves), it is entirely reasonable to reduce the number of settlements, if for no other reason than to send a signal to market participants that fraud levels must be reduced in order to protect the public.

It is also reasonable for a Judge to review and reject a proposed settlement on occasion. They can't all be good. Otherwise, as I said in my Friend of the Court brief, why have a lower Court review at all? SIFMA  assumes all settlements reached between a securities firm and the SEC are perfect, that the very act of reaching settlement implies the public interest is served. Human imperfections guarantee that this cannot be true.

SIFMA also claims that "Reducing the SEC’s Discretionary Ability to Enter into Consent Settlements with Financial Institutions Would Harm All Participants in the Securities Industry." The SEC is charged with protecting the public. To the extent that they uncover and prosecute fraud, the public is protected. If they do not, not only is the public NOT protected, but the industry itself is damaged. As people become more certain that large financial institutions cannot be trusted, they either keep their money under a mattress or they find other ways to transact business, to the long term detriment of the very industry SIFMA represents.

Another laughable claim made by SIFMA is that "The Current Approach to Settlement Benefits the Securities Industry, the SEC, and Investors." No mention is made of the recent $2 billion dollar, taxpayer subsidised loss at JP Morgan or the fraud allegations surrounding the recent Facebook IPO. And remember, investors lost $17 trillion at the height of the financial crisis. I don't know how anyone could make this claim with a straight face.

Finally, SIFMA claims that "The Current Approach to Settlement Leads to Substantial Penalties and Deters Future Violations." We don't know what they're smoking over there, but all we have to say is "Puff, Puff, Pass...."

As Edward Wyatt at the NY Times pointed out, "Nearly all of the biggest financial companies, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America among them, have settled fraud cases by promising the S.E.C. that they would never again violate an antifraud law, only to do it again in another case a few years later." We, too, have been pointing this out since 1998.

I'll have more to say about SIFMA, the $500.00 we made addressing one of their committees, their efforts to, legal or not, "crush" all opposition to securities market regulation, and why they are, well, misguided, in a revised brief I will file with the Appeals Court...

Tuesday, May 15, 2012

SEC v Citi - First response to new briefs

Selected highlights from the Appeals Court Brief filed yesterday by the SEC:

"As one example, the same district judge who rejected the consent judgment here approved a consent judgment in which Worldcom agreed to injunctive relief—and later, a $750 million penalty, one of the largest ever obtained by the Commission—without admitting or denying the fraud allegations in the complaint."

Irrelevant, since they refer to a different time and industry. More importantly, a $750 million dollar fine in 2002 translates into a $962 million dollar fine in 2012. Or a $285 million dollar fine is only $223 million in 2002 dollars.


The SEC notes that "BP resolved charges that it violated the Clean Air Act in connection with the Texas City refinery explosion, which killed 15 people and injured 170, by entering into a consent judgment that ordered it to undertake an array of remedial measures and pay one of the largest civil penalties ever assessed for Clean Air Act violations at an individual facility."

The disaster occurred on  March 23, 2005. Had any Court fully considered the public interest, as the lower Court is attempting to do here, it is likely that BP would not have had the Deepwater Horizon oil spill, "the largest accidental marine oil spill in the history of the petroleum industry."

The SEC's brief also notes that "The district court asked rhetorically how it can “ever be reasonable to impose substantial relief on the basis of mere allegations,” but I suggest the district court was really asking how can it “ever be reasonable to impose substantial relief on the basis of mere allegations,” after a major global financial market crisis caused by recidivist financial institutions using the US dollar's status as global reserve currency to sell fraudulent financial instruments around the world.

The district court did give proper deference to the Commission’s assessments, given the Commission's recent history of not protecting the public interest, given the recidivism noted. The central issue is this: is the SEC “a government actor committed to the protection of the public interest?” The SEC's financial crisis performance suggests the agency has been captured by the industry it regulates. While "the decision to investigate, to prosecute, and to settle is solely an executive function" a district court can examine the investigative, prosecutorial and settlement performance of an agency to determine the competence of an agency in protecting the public interest.

The SEC's brief notes that "The reason is that many, and perhaps most, defendants will not admit to factual allegations because they are concerned about, among other things, the collateral estoppel effect of admissions on parallel private actions." That the SEC is concerned with this at all is evidence that they have been captured by the industry.

The SEC's brief notes that "Without the ability to compromise, the Commission would face a difficult dilemma." The lower Court rejection does not prohibit the SEC from compromising. It hopes to prohibit them from making compromises that are contrary to the public interest.

The SEC notes that "the Commission obtained the injunctive relief it sought in the complaint and monetary relief totaling $285 million, which is more than 80% of what it could have reasonably expected to obtain if it prevailed at trial." I estimate reasonable relief would be in the $3 billion dollar range.