By Pam Martens: August 31, 2012
This week Citigroup, the serial settler of lawsuits on the cheap over wrongdoing, agreed to end litigation over its failure to disclose the full scope of its exposure to subprime debt. The settlement tab — $590 million. Between 2006 and November 21, 2008, the Friday before “Citigroup Weekend,” when the U.S. government had to step in to save the bank, Citigroup’s market value (the worth of all of its common shares in the marketplace) went from $250 billion to $20.5 billion. So the harm done to shareholders, in terms of loss of confidence, was more in the range of $229.5 billion, not $590 million.
The lead law firm was Kirby McInerney LLP. It did a masterful job of compiling and exposing the subterfuge and who knew what and when at Citigroup. We have the Court system to thank for the diminished payout. Court precedents have now made it increasingly harder to prove scienter. In Ernst and Ernst v. Hochfelder, the U.S. Supreme Court described scienter as “a mental state embracing intent to deceive, manipulate, or defraud.”
Public confidence in a banking institution, however, does not rest on scienter. A pattern and practice will do. Based on the following timeline (not an exhaustive list by any means) you be the judge:
September 19, 2002: FTC Announcement — “In the largest consumer protection settlement in FTC history, Citigroup Inc. will pay $215 million to resolve Federal Trade Commission charges that Associates First Capital Corporation and Associates Corporation of North America (The Associates) engaged in systematic and widespread deceptive and abusive lending practices.” The firms were owned by Citigroup.
October 31, 2003: U.S. District Court Judge William Pauley signs a settlement order agreed to by multiple regulators for Citigroup to pay $400 million over issuance of fraudulent stock research.
May 28, 2004: The Federal Reserve announces a $70-million penalty against Citigroup Inc. and CitiFinancial Credit Co. over their handling of high-interest-rate “subprime” mortgages and personal loans.
May 31, 2005: SEC announces a $208 million settlement with Citigroup over improper transactions by its proprietary mutual funds.
June 28, 2005: Citigroup agrees to pay the UK regulator, the FSA, $25 million over its “Dr. Evil” trade to manipulate the European bond market.
March 26, 2008: Citigroup settles a suit with Enron creditors for $1.66 billion over claims it aided and abetted Enron in hiding its debt.
August 26, 2008: California Attorney General Edmund Brown Jr. announces a settlement with Citigroup to return all monies improperly taken from customers through an illegal account sweeping program. According to the Attorney General: “Nationally, the company took more than $14 million from its customers, including $1.6 million from California residents, through the use of a computer program that wrongfully swept positive account balances from credit-card customer accounts into Citibank’s general fund…The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps,” Attorney General Brown said. “When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice.”
December 11, 2008: SEC forces Citigroup and UBS to buy back $30 billion in auction rate securities that were improperly sold to investors through misleading information.
February 11, 2009: Citigroup agrees to settle lawsuit brought by WorldCom investors for $2.65 billion.
July 29, 2010: SEC settles with Citigroup for $75 million over its misleading statements to investors that it had reduced its exposure to subprime mortgages to $13 billion when in fact the exposure was over $50 billion.
October 19, 2011: SEC agrees to settle with Citigroup for $285 million over claims it misled investors in a $1 billion financial product. Citigroup had selected approximately half the assets and was betting they would decline in value. Judge Jed Rakoff refused to approve that settlement and the matter is now on appeal.
February 9, 2012: Citigroup agrees to pay $2.2 billion as its portion of the nationwide settlement of bank foreclosure fraud.
August 29, 2012: Citigroup agrees to settle a class action lawsuit for $590 million over claims it withheld from shareholders knowledge that it had far greater exposure to subprime debt than it was reporting.