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.