This week, Citigoup agreed to pay $285 million to settle a complaint from the Securities and Exchange Commission for defrauding customers through a $1 billion portfolio of mortgage-related investments. The bank chose many of the investments precisely because they knew they would fail, and bet against them accordingly—all without informing their customers.
While it amounts to the third largest settlement reached in the four years since the housing market began to decline, it’s a drop in the bucket for the banking giant. The settlement amounts to just seven and a half percent of the profits Citigroup earned in the third quarter of 2011 alone (a total of $3.8 billion). On the particular deal for which they were sued, investors lost millions while Citigroup cleared $160 million in profit.
Some, including the federal district judge who must approve the pact, Jed Rakoff, are expected to decry the ruling as a slap on the wrist. Judge Rakoff has a history of being tough with financial institutions. In 2009, he rejected a settlement between Bank of America and the SEC over the “too big for honesty” bank’s disclosures before its acquisition of Merrill Lynch. Judge Rakoff eventually approved a higher settlement, after he learned more about the methods Bank of America used to impede full disclosure
A similar game seems to be afoot regarding the Citigroup case, for which Judge Rakoff has already raised some questions he feels have not been answered. To summarize, his concerns were:
- Citigroup has not admitted any wrongdoing. How can we know whether the judgment is fair without the transparency necessary to understand the crime?
- The amount of the settlement was not determined using the losses incurred by investors, so exactly how was the $285 number reached?
- Why does the agreement impose injunctive relief against future violation? How could the SEC ensure compliance with such an agreement?
- Where’s the accountability? The shareholders of Citigroup are being penalized while the responsible individuals are not even mentioned in the agreement. If the point is to address “control weaknesses,” why are none of the details of how and why Citigroup decided to sell mortgages it was betting against included?
It’s this last point that has the most resonance. There’s no amount of money that the SEC could request that Citigroup can’t easily afford. At the very least, the system that allowed for such fraudulent and predatory practices should be exposed and the people involved should be held accountable. By attacking Citigroup the institution, the people involved with the specific scheme are allowed to go without even a monetary slap on the wrist.
There’s also the possibility that if Rakoff can drag some of these details into the light, perhaps it will open up the possibility for criminal charges to be brought against the executives responsible. In the years since we’ve learned that this type of fraud had become fairly common, few if any senior executives in the involved banks have been charged with anything criminal.
The frustrating reality is that, if anything, banks have learned that there are no consequences for risky, irresponsible, and in some cases, dishonest practices.
In the words of Judge Rakoff “how can a securities fraud of this nature and magnitude be the result simply of negligence?”