I’m still trying to understand the SEC’s decision making process in deciding to charge Mr. Brian H. Stoker, former Citigroup banker, in connection with a subprime mortgage-related debacle at Citigroup.
In this offering, Citigroup bet against one of its own securities, which subsequently lost most of its value and has since been described using bad words I would rather not repeat here. Citigroup made a bundle in the process and also, unfortunately for Citigroup, brought SEC scrutiny down upon its actions in connection with the deal.
Citigroup itself reached a civil settlement with the S.E.C. in which it agreed to pay $285 million in penalties. This part makes perfect sense to me. Citigroup puts out some less-than-honest materials that allows it to make a lot of money, and consequently other people to lose a lot of money, and the SEC fines them for that.
Then the SEC filed a complaint against Mr. Stoker last October alleging that Mr. Stoker prepared and distributed marketing materials that “did not disclose Citigroup’s role in selecting assets for Class V III and did not accurately disclose to investors Citigroup’s short position on those assets.” The complaint assigned blame directly to Mr. Stoker, “Stoker was Citigroup’s lead structure on Class V III and was responsible for ensuring the accuracy of the offering circular and pitch book.” The catch is that Mr. Stoker was not a C-level executive. In fact, Mr. Stoker was not even a “head of department,” or something of the like. Mr. Stoker was a director in Citigroup’s collateralized debt obligation structuring group and was responsible for the materials used to offer the security for sale.
In other words, he did not really play a big role in Citigroup’s nefarious activities. Not even a medium sized one. He put together materials that supported what his bosses told him to say. Yeah, he probably suspected what was going on, but should he really be the target of an SEC complaint?
The jury tasked with determining Mr. Stoker’s guilt said no. Even though the SEC only charged him with a breach of §17(a)(2) and (3) of the Securities Act, a crime requiring only negligence and having made misleading statements, the jury still did not want to convict him.
This makes sense. Corporations have used this type of defense for decades. All the senior level managers who actually make the decisions can claim that they were not involved in the details. Mid and lower level managers can claim limited authority – they don’t make the big decisions. So who does the SEC hold accountable? Good question.
This question does not have an easy answer. It is why it is so difficult to hold corporations accountable for criminal wrongdoing – you can’t put Citigroup in jail. The jury in Stoker’s trial obviously struggled with this issue. In fact, the jury foreman told Dealbook’s Peter Lattman in an interview that he “wanted to know why the bank’s C.E.O. wasn’t on trial, … Citigroup’s behavior was appalling.”
The jury went so far as to issue a statement with their verdict:
“This verdict should not deter the S.E.C. from continuing to investigate the financial industry, review current regulations, and modify existing regulations as necessary.”
In other words; “go-get-em S.E.C.! Just not this guy.”
So whats the S.E.C. to do? The NY Times points out that “holding only the organization responsible for misconduct is unsatisfying because the result is the payment of a monetary penalty – which comes out of the pockets of shareholders – that can be viewed simply as a cost of doing business.” Until we figure it out, I vote the S.E.C. keep fining away: even Citigroup can understand when a monetary risk outweighs a monetary reward.
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