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SEC in Negotiations to Settle with Citigroup – May 28, 2009

Dave Patch

According to the Wall Street Journal, the SEC is in early negotiations to settle with the Citigroup over accusations that the company misled shareholders about the company’s exposure to toxic mortgage securities.

The story claims that the Commission is debating as to whether the SEC should heavily fine a company who has received funds under the TARP program.  A question as to what impact this will have on the company and whether the fine would simply be a shell game of government funds.

Buried in the story is a simple concept still open for discussion at the agency.

 “The SEC also is considering bringing cases against individuals related to disclosure of mortgage assets, including top executives, people close to the situation say.”

The operative word is “considering”

There should be no considering involved, it should be a slam dunk.  It was people who led the charge to mislead investors and it should be people who are held personally accountable for doing so.

The investors of Citigroup, and the people of this nation, have taken it on the chin over the activities involved within the bank.  Executives and employees who focused more on their personal compensation put the investors and our countries financial stability at risk and they have, up until now, been richly rewarded for their actions.  It is now time these people are similarly held personally responsible for their activities involving deceit.

Top executives of Wall Street signed off on the company’s financials and the disclosure therein.  Company executives were involved in public statements made by the company regarding the financial status of the company.  How then can their not be personal accountability of these company executives when it is deemed that such financial statements and such public statements were deceiving?

This is one of many crossroads Chairman Schapiro will face in her tenure as SEC Chairman.  Will the critics who have claimed that she would be soft on enforcement be accurate in their perceptions or will the Chairman show the street her toughness and present what changes lie ahead for those that decide to break securities laws and put our capital markets at risk?

A novel approach that I would like to see would be one where shareholders are not the people paying for this fraud by instead all those involved and those who benefitted.

Citigroup the company should be fined minimally for their actions just in keeping with standard agency policies of fining public companies.  We don’t want to set precedent here.  Consider that any fine of substance will simply harm those investors who were already harmed by the deceit itself.  Similarly, with such significant TARP funds invested in the company any substantial fine will likewise offset the intent of the TARP infusion and further impact the stability of the firm.  Either that or the company goes out and seeks additional TARP funds.

But Corporate Executives and individuals who personally engaged in the deception should be fined heavily for their actions and should be banned from operating as an officer for a year.  If this were a smaller public issuer those would be the penalties imposed on the company officers involved in deceiving investors. 

What is the difference between a penny stock executive engaged in a pump and dump and an executive of Citigroup propping up their market through false and misleading filings and public statements?    I would say none other than the car each drives and homes they live.  These actions went directly to the financial well being of these corporate executives who had a vested interest in the company valuations and investor interests.

And then as the executives are held personally accountable for their actions, so too should company employees who likewise benefitted from the risks taken.

Because the compensation structure of Wall Street is based on minimum salaries with the rest of compensation coming via the bonus system, Citigroup and any other firm who settles with the SEC should pay back the investors through a modified compensation structure.

With bonus pools structured around revenues, Citigroup should be forced to reduce their revenue accrual when calculating bonuses each year.  The process could go something like this:

Citigroup would be restricted in paying out bonuses above a certain percentage of total revenues for a period of 5 or 10 years.  The percentage shall be based on the industry average for that year.

Citigroup would then reduce their actual revenues by 10 percent before calculating out the bonus pool.  By reducing the revenue by 10 percent the percentage of money that would otherwise be expensed in bonus will instead is capital available to the bank to improve shareholder value.

The interests here are to benefit investors deceived and while employees may see less compensation, as a shareholder they will benefit from the extra capital available to the bank to invest and increase revenue. 

And while all this may be a slippery slope to take, Chairman Schapiro took this position citing a desire to change the direction and reputation of this troubled agency.  Such focus requires intent to hold people accountable and not just companies because companies are run by people and it is generally those people who deceive others.  I am not sure I ever read a press release or a public filing issued by an actual company but I have read many issued documents and statements released by individuals of that company.

If a CEO can be held accountable for the accuracy of their numbers under Sarbanes Oxley these same executives should likewise be liable for other deceptions made in public filings and releases that injure public investors.  After all, isn’t that exactly what executives get paid the big bucks for; honesty and integrity in the workplace.