SEC Enforcement Chief Khuzami Under Scrutiny Over Citi Settlement

SEC Enforcement Chief Khuzami Under Scrutiny Over Citi Settlement
We were very critical of the SEC settlement with Citigroup, negotiated  
by its head of enforcement Robert Khuzami, over Citi’s failure to  
report losses on subprime holdings as the market for those holding  
tanked. In our post “The Wages of Sin: Former Citi Execs Pay Token  
Fines for Lying to Investors,” we remarked:

A news story today provides further confirmation of the rule by the  
banking classes in the US, with only token gestures to the rule of  
law. Per Bloomberg (hat tip Tom Adams), Citigroup is ponying up $75  
million to settle SEC charges that the giant bank was not sufficiently  
forthcoming in the runup to the financial crisis about losses on  
billions of dollars of subprime exposures….

Yves here. I guess I am a bit thick. In 2007, subrpime exposure was  
the thing investors were most worried about. Recall that the first  
acute phase of the financial was in August-September 2007, when the  
asset backed commercial paper started contracting and money market  
investors shunned funds that had any taint of subprime.

Recall also that Sarbanes Oxley, passed in 2002, provides that a  
public company’s principal executive and principal financial officers  
certify both annual and quarterly financial statements for accuracy  
and completeness. Section 906 further

contains a certification requirement subject to specific federal  
criminal provisions and that is separate and distinct from the  
certification requirement mandated by Section 302.

So….what do we have here? A $75 million fine, imposed on the company… 
and so coming out of Citi’s coffers, which comes (in theory) from  
shareholders (but given that financial firms pay high percentages of  
revenues in bonuses, this fine would have a microscopic impact on pay  
levels).

More striking is the mere slap on the wrist of the execs involved. The  
former Citi chief financial officer, Gary Crittenden, who held the job  
from March 2007 to March 2009, will pay $100,000 of the total  
$180,000, with Arthur Tildesley, then in charge of investor relations,  
agreeing to cough up $80,000 to settle charges.

To give you a sense of proportion, Crittenden was Citigroup’s second  
highest paid officer. From Citigroup’s 2009 proxy:


He also sits on 8 boards. Do the math: this settlement is a mere  
inconvenience. And note, more important, the failure of the SEC to  
pursue Chuck Prince (in charge through November 2007). If investors  
weren’t finding the answers to vital questions in the bank’s financial  
statements, one could argue the written disclosures weren’t adequate  
either (it appears the SEC wasn’t willing to pursue this angle).

And Citi virtually thumbed its nose at the charges in its statement:

Mr. Tildesley is a highly valued employee of Citi and is making  
significant contributions to the company.

As Tom Adams noted:

When people talk about banksters this is what they mean – lying with  
impunity is not only not problematic, it is critical to career  
advancement and company “success”.

The message seems pretty clear. Sarbox was intended to curtail phony  
corporate accounting in the wake of Enron. But why resort to  
complicated transactions like the energy company’s famed Raptors when  
Citi shows that mere lying will produce the same results with much  
less fuss?

Back to the current post. It looks like we aren’t the only people to  
have found the settlement appallingly light. Per Bloomberg:

The U.S. Securities and Exchange Commission’s internal watchdog is  
reviewing an allegation that Robert Khuzami, the agency’s top  
enforcement official, gave preferential treatment to Citigroup Inc.  
executives in the agency’s $75 million settlement with the firm in July.

Inspector General H. David Kotz opened the probe after a request from  
U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an  
unsigned letter making the allegation. Khuzami told his staff to  
soften claims against two executives after conferring with a lawyer  
representing the bank, according to the letter….

According to the letter, the SEC’s staff was prepared to file fraud  
claims against both individuals. Khuzami ordered his staff to drop the  
claims after holding a “secret conversation, without telling the  
staff, with a prominent defense lawyer who is a good friend” of his  
and “who was counsel for the company, not the individuals affected,”  
according to a copy of the letter reviewed by Bloomberg News.

Yves here. This is why prominent lawyers and other high level fixers  
earn as much as they do. They have ongoing personal relationships with  
influential figures and can pull strings when they need to. But how a  
seasoned and supposedly tough prosecutor like Khuzami ever thought  
this settlement would pass muster is beyond me. Did he really think no  
one would notice or care, that this was a sufficiently old matter that  
any objections to it would die down quickly?

Needless to say, I’m glad to see this investigation move forward, but  
sadly, this initiative is just about certain to be an exception to the  
general rule of “banks get their way”.

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