Monday, November 28, 2011

SEC's Citigroup settlement blocked by judge - is this the future?

Judge Jed Rakoff has rejected a settlement between the Securities & Exchange Commission and Citigroup, saying that it "is neither fair, nor reasonable, nor adequate, nor in the public interest."

In a ruling that shows his frustration with SEC consent agreements, Judge Rakoff said defendants view the payment of modest penalties without admitting or denying the underlying allegations as simply the cost of doing business. The agreement is a good deal for Citigroup because investors can't rely on the consent agreement in seeking return of their losses.

Judge Rakoff found it harder to discern what the SEC is getting from the settlement "other than a quick headline". He noted that by the SEC's own account, Citigroup is a recidivist; the penalty ($285 million) is "pocket change" for a company like Citi, and the consent judgment does not require the return of money to defrauded investors. The SEC had alleged that Citigroup sold investors mortgage-backed securities that the bank knew would lose value. Citigroup made $160 million in profits while investors lost more than $700 million.

The case has been consolidated with another action and is set for trial on July 16, 2012.

Judge Rakoff, of the US District Court for the Southern District of New York, has questioned other SEC settlements. The New York Times says the key question is whether this decision could help bring to an end the SEC's policy of settling cases without an admission of liability by the defendant.

Friday, November 11, 2011

Whistleblower should be applauded for case against for-profit college company

Former Congresswoman-turned-Washington lobbyist Melissa Hart (R-PA) has a misguided opinion piece in today’s Washington Times (“Justice gets lost in the revolving door -- Current and former public officials team up to plunder for-profit schools"). Among her ludicrous claims is that a qui tam case against Education Management Corp. is “a shocking example of the judicial revolving door” because a former U.S. attorney in Pennsylvania -- who now is of counsel to Phillips & Cohen LLP -- is representing the whistleblower, and the current U.S. attorney in that same office has decided to pursue the case.

Phillips & Cohen is not involved in the case. But Colette G. Matzzie, a Phillips & Cohen partner, posted this comment on the Washington Times website:

“The for-profit schools are the ones who have plundered the United States Treasury to the tune of many billions and left many students with crippling student loan debt and little prospects of gainful employment. One expose after another has revealed the coercive tactics used by many of the for profit schools to get ‘butts in seats’ including compensating admissions recruiters through bonuses and incentives. Quality educational institutions do not need to coerce students to enroll or convince them to stay long enough for their financial aid obligations to kick in. The EDMC lawsuit is one step toward addressing these fraudulent abuses and who better than former prosecutors to lead the way.”

We only wish Hart were correct that “the Justice Department brings with it endless resources to pursue such a case.” Clearly Hart knows nothing about qui tam cases. The Justice Department, unfortunately, has limited resources for qui tam cases, which is why a whistleblower’s choice of an attorney – one with a track record and who has the resources to pursue a case – is extremely important.

Tuesday, November 08, 2011

Firms commit securities fraud again and again, despite penalties and promises

As part of their settlements of securities fraud suits, many large Wall Street firms have signed agreements to never again violate antifraud laws. It may strike some as surprising that a promise not to break the law was required, but a New York Times article makes it clear that neither the promise nor the penalties extracted kept these firms from repeat offenses.

The Times analyzed SEC enforcement actions over the last 15 years and found at least 51 cases in which 19 Wall Street firms broke antifraud laws they had agreed never to violate.


The article points out how small the price of settlement is for many of these firms. The only real deterrent for executives of companies that earn massive illegal profits is to target them personally: through criminal prosecution where called for and through the aggressive use of clawbacks.

Wall Street pays lip service to "compliance" but it's time to put that into action. Bonuses should reflect a reward for legal behavior, not simply an employee's contribution to the bottom line even if that was the result of illegal activities.