The Securities and Exchange Commission tried to defend its offered $75 million settlement with Citigroup after expressions of frustration and skepticism by U.S. District Judge Ellen Segal Huvelle, according to Kara Scannell’s recent Wall Street Journal article entitled: “Regulators Defend Citi Settlement.” Judge Huvelle reportedly told the parties: “I look at this and say, ‘Why would I find this fair and reasonable?’ You expect the court to rubber-stamp, but we can’t.” The judge may approve or disapprove the agreement.
Judge Huvelle asked SEC and Citigroup lawyers to explain why she should approve the settlement, questioning the paltry penalty as well as the SEC’s decision to only go after two individuals at Citigroup. The SEC was actually quoted as admitting: “The proposed $75 million penalty represents less than 0.3% of Citigroup’s revenue for the most recent quarter, and should not cause an undue negative financial impact on the company’s business, or significant harm to current Citigroup shareholders,” and represents less than one-third of one cent per share. The SEC had alleged that Citigroup misled investors by understating its exposure to subprime securities by nearly $40 billion from July to October 2007.
The two individuals – a former Chief Financial Officer and the then-head of investor relations – each agreed to pay fines of less than $100,000 to end an administrative proceeding that apparently is not subject to federal court approval.
In other recent proposed settlements with big corporations, federal judges have put the government on the defensive, questioning whether the settlements with corporations unfairly punished shareholders (to whom fines and other costs of doing business are passed) rather than culpable individual executives.
The SEC argued that, while the two Citigroup individuals caused Citigroup to make the misleading statements, there was no evidence they intended to deceive anyone. J. Boyd Page, senior partner at Page Perry in Atlanta, commented: “Why else would they misstate Citigroup’s subprime exposure by $40 billion? The proposed settlement amount is a drop in the bucket for Citigroup and the individuals. It is not a deterrent to future fraud. We are only going to establish meaningful deterrents when the penalties imposed for misconduct really hurt the culprit. Under the present approach, fines are just a cost of doing business.”
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