by T. GormanPosted on Posted in SECActions

SEC Enforcement got mixed results yesterday. There was an appearance before Judge Rakoff at the hearing on the proposed settlement of its Citigroup case. That action is one of its most important market crisis cases (here). There was also the release of statistics detailing the results of last year’s enforcement efforts. Those statistics are for the first full year since the historic reorganization of the division.

First there is Citigroup. Whether the court will accept the proposed settlement in that case is still unclear. After denying a motion to intervene by a public interest group that proposed to object to the settlement terms, Judge Rakoff convened a hearing and closely questioned the parties according to a report by Reuters. One exchange centered on the request for an injunction as part of the settlement. After noting that the SEC has other injunctions against Citigroup, the court reportedly commented that the injunction is just “for show.”

The hearing concluded with Judge Rakoff stating that he would write an opinion. It is unclear if that opinion will simply detail the court’s concerns and approve the settlement or perhaps pose more questions and raise additional issues. Previously, when considering the SEC’s proposed settlement with Bank of America, the parties significantly altered the terms of the deal in response to Judge Rakoff’s concerns before securing approval.

Second, there are the statistics. SEC enforcement faired better here. For fiscal 2011 the Commission filed 735 enforcement actions, the largest number in the history of the Division. In those actions $2.8 billion in penalties and disgorgement was ordered. Key areas of emphasis include:

Market crisis cases. Last year 15 separate actions naming 17 individuals were filed. The defendants included 16 CEOs and CFOs and other senior corporate executives. Over the last two and one half years actions were filed against 81 individuals.

Insider trading. Last year 57 insider trading cases were filed. This represents an 8% increase over the prior year.

Financial fraud and issuer disclosure violations. Last year 89 actions were brought based on these violations.

Regulated entities. During the last fiscal year the Commission brought 146 enforcement actions related to investment advisers and investment companies. This represents a 30% increase over the prior year and is a record for a single year. An additional 112 cases related to broker-dealers, a 60% increase over the prior year.

The Release also highlights the work of the SEC’s Cross Border Working Group, described as a “proactive risk-based initiative focusing on U.S. companies with substantial foreign operations . .. “ Last year the group brought the first ever stop orders for post-effective registration statements due to the resignation of a company’s independent auditor. The group also brought a subpoena enforcement action against Shanghai-based Deloitte Touche Tohmatsu, CPA Ltd. for failing to produce documents.

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by T. GormanPosted on Posted in SECActions

The battle lines have been drawn over the proposed settlement in the SEC’s action against Citigroup Global Markets, Inc. SEC v. Citigroup Global Markets, Inc., Civil Action No. 1:11-cv-07387 (S.D.N.Y.)(here). Judge Rakoff entered an order posing a series of questions to the parties (here). The SEC has filed a brief essentially arguing for deference to its prosecutorial discretion (here). That filing was followed by a memorandum from Citigroup. A new wrinkle is the request by Better Markets, Inc., a nonprofit, to intervene and object to the settlement.

Citigroup’s memorandum argues four key points in support of the settlement. First, for many of the questions posed by the Court the firm defers to the SEC. Thus for questions about whether the settlement should be based on “not admitting or denying,” if there is an overriding public interest in determining if the allegations in the complaint are true and other similar matters, Citigroup “defers to the SEC with respect to its enforcement policies and practices, and agency decisions . . .” At the same time the firm notes, in a fashion which echoes the SEC’s memorandum, that the court has a limited role and should give substantial deference to the Commission.

Second, Citigroup exercised its business judgment in deciding to accept the settlement. For every litigant there are significant concerns involved in litigating with the SEC. Those are magnified for financial institutions. The impact of litigating with the Commission is well illustrated by the Goldman Sachs case. There Goldman chose not to immediately settle. When the complaint was filed its stock dropped over 10% in the first thirty minutes of trading following the announcement of the filing. Subsequently, the price of Goldman shares fell about 24% in the period prior to settlement with the Commission.

Third, the remedies in the proposed settlement are more than adequate in view of the allegations in the complaint. In this regard “the Complaint alleges that CGMI [Citigroup] negligently failed to provide adequate disclosures to a small number of ultra-sophisticated, institutional investors that purchased Class V securities. . .The Complaint does not allege that shareholders of Citigroup were harmed. . . “ The amounts to be paid by Citigroup, coupled with the procedures which must be put in place, are more than sufficient to guard against any repetition. This is particularly true in view of the fact that a new management team is in charge at Citigroup.

Finally, the proposed settlement is a win-win for everyone: “We respectfully submit that the proposed settlement advances the interest of both the alleged victims of CGMI’s misconduct – through disgorgement of the alleged profits (plus interest), the imposition of a penalty, and the distribution of those funds to the Class V investors through establishment of a fair fund – and Citigroup’s shareholders. . . . the Company’s management elected to resolve this matter through settlement . . .precisely to avoid the potential harm that flows from litigation, including the potential loss of shareholder value . .. “

In contrast Better Markets objects to the settlement. The firm describes itself as “a non-profit organization that promotes the public interest in the financial markets. Better markets advocates for greater transparency, accountability, and oversight. . . “ In moving to intervene Better Markets briefly sketches three key objections to the settlement: 1) It fails to hold employees or senior executives accountable; 2) it imposes sanctions that are “woefully inadequate in relation to the egregious nature of the fraudulent conduct . . .” and 3) “the proposed Settlement will signal an unacceptable tolerance for fraudulent conduct in the securities markets and it will confirm that sanctions imposed in SEC enforcement actions are so minimal that they may safely be regarded as a cost of doing business – and a small cost at that.” The memorandum attaches news articles critical of the proposed settlement including one from Bloomberg citing the fact that Citigroup has settled on similar terms with the SEC in the past. The SEC objects to the proposed intervention.

The hearing before Judge Rakoff is scheduled for Wednesday afternoon, November 9, 2011 at 3:00 p.m.

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