SEC Reverses Itself, Claims No Need to Serve the Public Interest in Citigroup Settlement
November 7, 2011
The Securities and Exchange Commission has reversed itself in court filings today in its proposed settlement with Citigroup, and now says it has no obligation to serve the public interest when settling cases.
"In its court filings today, the SEC directly contradicts itself and now claims no obligation to serve the public interest when settling cases, even cases for serious violations of the securities laws which caused massive losses and huge profits to big banks that inflicted those losses," said Dennis Kelleher, President and CEO of Better Markets, a nonprofit organization that promotes the public interest in the financial markets that is asking the court to let it intervene in the case to protect the public interest.
When asking the court to approve the settlement two weeks ago, the SEC trumpeted how it was serving the public interest and how the court is required to ensure that any settlement serves the public interest. In fact, the very first argument the SEC made to the court on Oct.19, when it filed the proposed settlement was: "The standard for judicial review and approval of proposed consent judgments in [SEC] enforcement actions is whether they serve the public interest." This was also the very last argument the SEC made in its filings to the court on Oct. 19: "[T]he [SEC] submits that the proposed consent judgment is fair, adequate, reasonable and in the public interest."
"Today, the SEC contradicts itself and is arguing on page 1 that the entire test for the SEC is whether the proposed settlement is 'fair, adequate and reasonable.' In fact, it goes out of its way to argue that it simply does not have to show -- and the court does not have to find -- that the proposed settlement is in or serves the public interest," Mr. Kelleher said.
"The SEC is now claiming that it can settle any case, no matter how serious the fraud, no matter how many billions investors have lost, no matter how much money the wrong-doer has pocketed, without any obligation to serve or protect the public interest when cutting a deal to settle a case. And, it is arguing courts have no duty to do so either. Given that the SEC settles so many of its cases, the public interest is going to be left out," Mr. Kelleher said.
This reversal is overwhelmingly important for two reasons.
First, the SEC is also arguing that the court has a very, very limited role in reviewing and approving SEC settlements. "In fact, the SEC is basically arguing that the court is little more than a rubber stamp for SEC settlements. That simply cannot be the case, particularly if no one has the duty to serve the public interest," Mr. Kelleher said.
Second, the SEC has still provided so little information for anyone to determine whether or not the settlement is a sweetheart deal for a large, wealthy, powerful, and well-connected Wall Street bank or justified by the facts. The SEC has stated that Citigroup had "net profits of at least $160 million" and investors lost more than $700 million, but never discloses the actual or ranges amounts or any other information. "This information is critically important to determining whether the disgorgement and fine are fair, adequate or reasonable, not to mention (as the SEC no longer does) in the public interest," Mr. Kelleher said. For example, if Citigroup had net profits of more than $600 million, disgorgement of only $160 million and a fine of only $95 million would be inadequate and unreasonable.
"Without knowing the actual revenues and losses it is impossible for anyone, including the SEC, to determine whether the settlement is proper. Moreover, no one will ever know if Citigroup actually disgorged its ill-gotten gains or if these amounts will deter anyone, as the SEC claims," said Mr. Kelleher.
"Without that information, this settlement appears to reward fraud and means crime pays. That is a message the SEC and the public cannot afford," said Mr. Kelleher