Judge Accepts SEC Settlement with Citgroup and makes a couple of funnies

Kudo's to Judge Ellen Segal Huvelle for holding the SEC and Citigroup accountable and for not merely signing off without a few sarcastic yet poignant comments:

1. “If you are so enamored of their proposals, I should have some assurance that they will be in place for a period of time and they will not change them,”
2. “I can’t really in good faith say that this figure is right or wrong.”
3. None of the penalties were likely to prove to be an adequate deterrent,
4. a $100,000 fine is not a deterrent in corporate America to do a better job.”
5. “I’ve never seen Citigroup’s heart. I’ve seen its building, but not its heart.”
6. “They’re supposed to be obeying the law,” she said, “without writing it down.”

By Edward Wyatt
The New York Times
WASHINGTON — A federal judge said Thursday that she would accept the $75 million settlement between the Securities and Exchange Commission and Citigroup over the bank’s failure to adequately disclose its exposure to subprime mortgage debt in 2007.

But Judge Ellen Segal Huvelle of Federal District Court for the District of Columbia told lawyers for the government that she wanted the S.E.C. to certify that the remedies Citigroup claimed to have put in place to prevent a similar failure were adequate and would remain for a given period of time.

The judge also directed that the settlement agreement be reworded to make clear that the $75 million would be used to compensate shareholders who suffered losses because of Citigroup’s misstatements, and she told the S.E.C. and the bank to return in two weeks with new language that did that.

In addition, the bank must return with adequate assurances that the changes it has installed will make it unlikely that the problem will happen again.

“If you are so enamored of their proposals, I should have some assurance that they will be in place for a period of time and they will not change them,” Judge Huvelle told the S.E.C.’s lawyer, Erica Y. Williams.

Judge Huvelle also raised questions about why the S.E.C. did not include senior managers of Citigroup, other than the company’s chief financial officer and director of investor relations, in its case, voicing frustration that few if any of the people who were in charge were being cited or significantly punished.

But S.E.C. and Citigroup lawyers argued that other senior managers were not involved in the decision whether or not to disclose the subprime exposure and did not certify the federal filings that included the information.

The hearing resulted from the judge’s review of a proposed settlement in the S.E.C.’s case against Citigroup arising from the collapse of the subprime mortgage market and subsequent financial crisis. In August, the judge declined to accept the proposed settlement and asked the parties to return with evidence of why it was adequate and why only two Citigroup executives were charged with misconduct.

In July, the S.E.C. charged Citigroup with material misstatements of its exposure to subprime mortgages. The company advised investors in conference calls in 2007 that it held $13 billion in subprime investments when in fact it held more than $50 billion.

The commission also brought administrative proceedings against Gary L. Crittenden, the company’s chief financial officer at the time of the misstatements, and Arthur Tildesley, then director of investor relations, for their roles in the wrongful disclosures. Mr. Crittenden agreed to pay $100,000 and Mr. Tildesley agreed to pay $80,000 as part of their settlements.

Judge Huvelle said that given the S.E.C.’s economic analysis in reaching the $75 million settlement, “I can’t really in good faith say that this figure is right or wrong.”

But, she added, “there is nothing here to address the flawed systems” that caused the company to so vastly misstate its subprime exposure. None of the penalties were likely to prove to be an adequate deterrent, she added.

“Seventy-five million dollars will not deter anyone from doing anything,” she said. Referring to the individual fines, “a $100,000 fine is not a deterrent in corporate America to do a better job.”

Brad S. Karp, a lawyer representing Citigroup, sought to assure Judge Huvelle that the company had significant incentive not to violate securities laws, given that it signed statements promising not to do so and noting that it has changed its entire senior management team since the events of 2007.

Mr. Karp added that because the evidence shows that Citigroup had not intentionally concealed its subprime exposure, “Citi’s heart was in the right place.”

“Don’t overdo it,” Judge Huvelle warned, evoking laughter in the courtroom. “I’ve never seen Citigroup’s heart. I’ve seen its building, but not its heart.”

The judge also rejected the idea that signed statements not to violate securities laws were of little value. “They’re supposed to be obeying the law,” she said, “without writing it down.”