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A Tale of Two Classes of Defendant and Lanny Breuer

January 28, 2013

A Tale of Two Classes of Defendant and Lanny Breuer

By R Tamara de Silva

January 28, 2013

 

"swaying power such as has never in the world's history been trusted in the hands of mere private citizens,...after having created a system of quiet but irresistible corruption-will ultimately succeed in directing government itself.  Under the American form of society, there is now no authority capable of effective resistance." 

Henry Adams writing about the corruption of the Erie Railroad for the Westminster Review in 1870, he described corporate influence growing to the point of being uncheckable with political parties that would sacrifice principle for accommodation.

 

       Last week, the Head of the Department of Justice's Criminal Division, Lanny Breuer, announced his resignation.  His resignation is remarkable only in so far that it draws attention to the enormity of what he would not do.  Under Breuer's watch, leaving aside some high profile and related insider trading prosecutions, not one senior Wall Street executive was prosecuted or even charged (by some accounts- not even investigated) with anything having to do with the worst financial crisis in American history-a crisis that resulted in a bailout of Wall Street banks and the financial sector at a cost to American taxpayers of between $43.32-$59.75 billion.[1]  A day before Lanny Breuer's resignation, PBS' Frontline aired an investigation about the failure of the Justice Department to prosecute a single senior banker involved in the mortgage crisis called, "The Untouchables."  During this same time that the Department of Justice refused to go after a single head of a Wall Street firm, they took a particularly hard line on a torture whistleblower (not the torturers), and many financial criminals responsible for not the billions caused by elite Wall Street firms but between thousands to hundreds of thousands like elderly couples for possible pension fraud, an appraiser in Florida, individuals who committed bank fraud by lying on mortgage applications and other criminals like pot smokers and Aaron Swartz.  It is not that I condone wrong-doing, only a record of selective prosecution on steroids.  Lanny Breuer's Justice Department exposed its full fury to the chubs of the criminal justice systems while systematically saving the titans and whales.

 

Prosecutorial Discretion and Sympathy for the Titan

       One of the reasons, Lanny Breuer gave for the non-prosecution of a senior Wall Street executive is sympathy for employees and shareholders.  In his interview with Martin Smith of Frontline, Mr. Breuer repeated a specific if selective, empathy, wholly at odds with the charge he had been given by Senator Kaufman to investigate and hold to account all those responsible for the financial crisis.[2]   This selective empathy is also wholly at odds with the unbiased way in which most of us naively think justice is administered and prosecutions are sought.  By the way, after this interview aired, Martin Smith states that he was called by the Justice Department and told that they would never cooperate with PBS again.[3] 

       In September of last year, Mr. Breuer admitted his particular empathy towards the plight of the largest of Wall Street banks when he addressed the New York Bar Association and said,

In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects.  Sometimes - though, let me stress, not always - these presentations are compelling.  In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct.  I personally feel that it's my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation.  In large multi-national companies, the jobs of tens of thousands of employees can be at stake.  And, in some cases, the health of an industry or the markets are a real factor.  Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement. 

When the only tool we had to use in cases of corporate misconduct was a criminal indictment, prosecutors sometimes had to use a sledgehammer to crack a nut.[4]

 

 

       It is odd that this same Justice Department did not take sympathy into account in demanding that Aaron Swartz serve 35 years or for that matter, the plight of all smaller defendants.  The omnibus catchall Computer Fraud and Abuse Act ("CFAA") could make criminals of many of us because it seeks to criminalize the use of a computer without authorization but no where defines what "authorization" means. 

       When the government freezes a defendant's assets or seizes property even before a filing of charges making it impossible for them to pay for a decent lawyer (assuming they can even afford one), does it really care how the defendant (before being proven guilty) manages to eat or live in the interim of years it can take from investigation to sentencing? 

       Where was the sympathy for Senator Ted Stevens?  Was it anything but a sheer lack of empathy that led to the career-ending prosecution of a six term Senator and the deliberate withholding of exculpatory evidence in his case?  What about the many cases where defendants are exonerated by physical evidence that the prosecution possessed but did not reveal at the time?  Where is the sympathy for the years or decades of a life that are lost because exculpatory evidence is not released or DNA evidence kits are not processed?  Or is the empathy that Lanny Breuer refers to, as selectively held as its application under Lanny Breuer's tenor suggests?

 

Conflicts of Money

       Money influences prosecutions.  Consider the tale of two men performing the identical act in the criminal law Jon Corzine and Russell Wasenfdorf, Sr.  Corzine was one of President Obama's elite bundlers in 2011 and 2012.  He campaigned heavily for the President as governor of New Jersey, and held private fundraisers for President Obama in his home even after MF Global went bankrupt and $1.6 billion of customer funds went missing in October 2011.  The Justice Department announced that they would not prosecute him.

       It was discovered in June 2012 that Peregrine Financial Group CEO, Russell Wasendorf Sr., like Corzine at MF Global, had tapped into customer segregated funds to the tune of $215 million.  Russell Wasendorf Sr was arrested and criminally charged later same that month.   Same act-missing customer funds that were by law not to touched-but a far disparate prosecution.[5] 

       Under Lanny Breuer, the Justice Department announced it would not go after Goldman Sachs. Goldman Sachs' employees were the second largest single contributor to President Obama in 2008 contributing $1,013,091.[6] Goldman Sachs is also one of the largest clients of Mr. Eric Holder's lawyer firm Covington & Burling.

       Speaking of Covington & Burling, Lanny Breuer worked at Covington along with Attorney General Eric Holder.  Their firm's largest clients were many of the Wall Street banks that were involved in the securitization of mortgage debt that contributed to the financial crisis.

       According to Reuters, Attorney General Holder and Lanny Breuer were expected to recuse themselves (a functional impossibility) under federal conflict of interest laws from Department of Justice decisions related to many of Wall Street's largest banks.  Of course they have not admitted to doing so in any instance of which I am aware.[7] 

 

Abacus and Such

       Goldman's Abacus scheme would fit into the most selective definitions of fraud. Goldman invented Abacus, according to an SEC civil complaint and an investor, to fail so that one of its largest hedge fund clients, Paulson & Co, could short it.[8]  In the meantime, Goldman sold Abacus bonds to many other investors all the while allowing Goldman to take in large investment banking fees from the sale and from the purchase. The problem is, the investors were not aware that Goldman's largest hedge fund client along with Goldman Sachs was betting against them and that as such Goldman Sachs may have a conflict of interest in designing what went into Abacus.  Goldman claimed that somewhere within all the disclosure statements was a reference to all this.   The Department of Justice announced it would not seek any criminal fraud charges against Goldman.  Goldman Sachs settled the civil suit for $550 million, which is not a lot for a company that earns billions of dollars per quarter.

       On November 28, 2011, Judge Jed S. Rakoff rejected what would have been the sixth civil settlement agreement between Citigroup Global Markets Inc. and the SEC since 2003 for $285 million.  Citigroup had sold $1 billion in mortgage-bonds through a vehicle called Class V Funding III, without disclosing that it was betting against $500 million of those assets-in essence offering something to its customers and not disclosing that it would be betting against its customers.  The Department of Justice was not about to seek criminal fraud charges against Citigroup either.

       Civil settlements between the SEC and other parties are alternatively called consent decrees and they are a far cry from criminal prosecution. Nor do they deter misconduct because no admission of wrong-doing is required and the fines are pin money to the banks. 

       It is in the public's interest to prevent fraud upon the market and to prevent the type of financial engineering solely for the sake of fees that can lead to catastrophic losses ultimately borne by society as a whole.  The type of hyperleveraged machinations, not understood by the banks themselves that wind up privatizing profit and publicizing loss. The problem with selective prosecution of financial crime or any crime, is that it undermines the very idea of justice, whose force and majesty lie in its fair and unbiased application.  When the Executive branch's justice department seeks fines from banks which fees are so small as to be written off as a rational and good cost of doing business, while simultaneously pursuing prosecutions against smaller parties and the comparatively disenfranchised, it is no longer dealing out justice.  It is selectively doling out punishments to those not in its favor.@

R. Tamara de Silva



Judge Rakoff Rejects SEC Settlement Agreement with Citigroup

November 29, 2011
Judge Rakoff Rejects SEC Settlement Agreement with Citigroup

By R. Tamara de Silva

November 29, 2011


This is the legal version of an NFL upset alert. On November 28, 2011, United States District Judge Jed S. Rakoff rejected what would have been the sixth civil settlement agreement between Citigroup Global Markets Inc. ("Citigroup") and the Securities and Exchange Commission ("SEC") since 2003. The SEC filed a complaint against Citigroup in October because Citigroup had peddled $1 billion in mortgage-bonds through a vehicle called Class V Funding III, without disclosing it was betting against $500 million of those assets-in essence offering something to its customers and not disclosing that it would be betting against them.

Contrary to press reports of the decision, Judge Rakoff is not being an activist judge or legislating from the bench when by refusing to uphold the $285 million settlement agreement. This Judge was upholding (and not without an insignificant amount of courage), the law. Perhaps even more importantly, his decision is a victory for the separation of powers doctrine.

Standard of Review

Civil settlements between the SEC and other parties, or what are alternatively called, consent decrees, are essentially permanent injunctions in that they forbid the party that is accused of violating some part of the securities laws from ever doing so again-often even attaching various conditions and stipulations meant to be honored for all time. The SEC in its filings prior to its last filing (a memorandum in support of a consent order), addressed the legal standard of review required for a court to grant a consent order, except this time when they asked the Court to finally grant the order, they did not fully address the standard of review.

By way of some background, usually, it is the function of the Legislature to make laws that proscribe conduct-not the Judiciary. It is an extraordinary thing to ask a court of law to permanently rule that someone is forever barred from doing something-injunctive relief is an extraordinary remedy because it throws the full weight of the court into what is the de facto making of a law-a judicial order. Breach of a Federal injunction can have criminal consequences-a Federal injunction is no common thing.[1]

The United States Supreme Court established in numerous decisions that there is a four part test courts must use in granting injunctions. Before granting an injunction, a court must determine that the granting of the injunction is at once: 1) fair; 2) reasonable; 3) adequate, and 4) in the public interest (emphasis added). Ebay Inc. v. MercExchange, 547 U.S. 388, 391

The SEC remarkably pled that they need not address the "public's interest," part of the standard of review and that even if they did, they alone could decide that something is in the "public interest." The SEC's argument if followed would abrogate a power given to the court and yet ask the court to stamp its imprimatur and issue an order-thereby making the SEC the judge, jury and executioner.

The Justice Department is part of the Executive Branch and were the Judiciary merely to rubber stamp all settlements entered into between the departments of the Executive Branch and private parties, turning them into judicial orders on the say so of the Executive Branch or other government agencies and departments, the separation of powers would very meaningfully cease to exist. The courts would become in every sense the handmaidens of the Executive and other government agencies, or as in this case, the SEC.

Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a Plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importanc
e. pp. 8-9


What Judge Rakoff did in denying the SEC's request for a consent order was have the courage to point out to the SEC that it cannot alone, ignoring case law, determine the standard of review for the judicial approval of the civil settlement between itself and anyone else.

Settlement agreements between the Justice Department and SEC and private citizens are not like settlement agreements between two private parties in a civil matter or easement dispute. More often than not, the SEC presents an individual or concern with a choice between settling a complaint (not a conviction-we are at the stage of a mere accusation) for a fine or facing criminal prosecution against the full force of the United States Department of Justice and every means at its disposable (unlimited). This is Hobson's choice itself. Somewhat analogous to my accosting a stranger and offering the following choice, "I will beat you to a pulp and it will cost every penny you have to recover medically and years of care or, you may pay me $100,000 and we will pretend this never happened." Of course if it were proven that I did this, I would be unceremoniously tossed in a room not of my choosing for some duration and accused of extortion...but I am not the government. Neither are private civil settlements comparable to civil settlements with the SEC or Justice Department.

Judge Rakoff's Ruling

Judge Rakoff also went on to say in his memorandum and opinion that he would no longer approve of SEC settlement agreements that involved the defendants not providing any admissions of wrong-doing, "because the court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment".

In other words, the courts cannot determine what is fair or adequate about a consent agreement between a government agency and private party without some evidentiary basis or knowledge of the facts.

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free- roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts-cold, hard solid facts, established either by admission or by trials-it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and the truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances

.pp 14-15.


Citigroup is as the Court points out, a bit of a recidivist. Citigroup has signed many settlement agreements with the SEC without admitting any wrongdoing. It is almost a get out of jail for free card for a fee. Surely there is a purpose to these agreements than merely generating revenue for the SEC by making Citigroup part with pin money? Are these settlement agreements, as the Court and Bloomberg's Jonathan Weil have asked, merely considered the "cost of doing business" or some part of a transaction tax on offending financial titans?[2]

If it were in the public's interest to prevent fraud upon the market, then fines should be significant enough to actually deter illegal conduct. If not, prosecutions should be endured and convictions gotten. The historic role of punishment in the criminal justice system has not been just punishment, but deterrence. In the case of the settlement agreement at hand, the actual fine was $95 million with the suggestion that Citigroup pay up to $285 million-this is pin money to a bank with revenue in the billions of dollars-the "cost of doing business" will not deter anyone, nor is its pursuit an enormously wise use of taxpayer funds-certainly not according to a cost benefit analysis. @

R. Tamara de Silva
Chicago, Illinois
November 29, 2011

R. Tamara de Silva is a securities lawyer and independent trader

Any questions about this article should be directed to tamara@desilvalawoffices.com
Footnotes:
1. The power of the Federal court to protect and enforce its judgments is unquestioned. United States v. New York Telephone Co., 434 U.S. 159, 172-73(1977).
2. http://www.bloomberg.com/news/2011-11-02/citigroup-finds-obeying-the-law-is-too-darn-hard-jonathan-weil.html