Judge Overturns S.E.C. Deal

He should be. We all should be. On Monday, the Federal District Court judge rightly by the Securities and Exchange Commission to settle a securities fraud case against Citigroup, saying that was “neither fair, nor reasonable, nor adequate, nor in the public interest.”It’s not only that the money was not enough, though it certainly seems puny compared with the damage done. The S.E.C. charged that Citigroup had not adequately disclosed to investors its role and interest in creating and selling — and betting against — a mortgage-backed investment that was intended to fail. When the investment did, indeed, tank, the bank made $160 million, according to the S.E.C., while investors lost $700 million. – New York Times

The Judge found that the deal did not properly disclose what Citigroup did.  The SEC routinely allows banks and other financial institutions to pay a fine while admitting no wrong-doing.  And the puny fine of $250 million is a drop in the bucket for Citigroup, certainly far below the punishment needed to keep them from withholding information from investors again.

Banks mostly fear consumer/investor lawsuits

For too long the SEC has said it does not have the money or staff to go forward with trials involving complicated financial dealings, especially since the financial institutions being sued have big pockets that can hire a phalanx of lawyers.

This is the problem with the government and Congress.  Congress could either allocate more money to these cases or allow Federal prosecutors to ‘hire’ big law firms on a contingency basis.  Or the SEC could detail their investigations to meet Judge Rakoff’s standards (at least).

The SEC isn’t going to take the chance.  A ruling that finds Citigroup engaged in fraud would be a savior for investors who lost money on a deal full of secret agreements and want to sue Citibank themselves.

Obviously, a negative SEC finding could cause a run on Citibank’s money or incur so many liabilities that the company falls into bankruptcy. The financial institutions have effectively neutered regulation that is supposed to prevent malpractice and fraud in the financial sector.

Or maybe it’s another example of Citigroup being ‘to big to fail’.  If so, it is too big to be in business.







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