Citigroup as Perpetual ‘Victim’ of Fraud: Shades of Parmalat in Oceanografia

By Pam Martens: March 6, 2014

Under the Sarbanes-Oxley Act, publicly traded companies like Citigroup must certify in their filings with the Securities and Exchange Commission that they have adequate internal controls over their financial reporting. Notwithstanding Citgroup’s regular certifications to the SEC that its controls are adequate, we’ve been reading for years now how it claims to be a “victim” of fraud or the “victim” of a wayward employee’s misdeeds.

The latest victimhood to hit Citigroup involves a Mexican oil services firm called Oceanografia. Citigroup’s Mexican banking unit, Banamex, lent $585 million to Oceanografia on the basis of accounts receivables it was to collect on contracts. Citigroup now says it has discovered it is a victim of fraud in that only $185 million of those accounts receivables actually exist at Oceanografia.

Despite all those assurances that it has proper controls for its financial reporting, it had to file revisions with the SEC recently, restating its 4th quarter 2013 and full year earnings downward by a pre-tax $360 million as a result of the mess at Oceanografia.

Citigroup has previously been charged with creating off balance sheet structures to hide the debt of large U.S. firms such as Enron. It has been allowed to pay millions to regulatory bodies and billions to private plaintiffs to settle the charges without an admission of guilt and avoided airing its dirty linen in an open courtroom where the public might get a glimpse of some disinfecting sunshine.

In 2004, Enrico Bondi, the administrator of the bankrupt Italian dairy giant, Parmalat, sued Citigroup in a New Jersey court.  Bondi alleged in court documents that Citigroup committed fraud in its dealings with Parmalat, made negligent misrepresentations and diverted corporate assets, had been unjustly enriched, participated in civil and RICO conspiracies, and had failed to disclose Parmalat’s deepening insolvency to the detriment of other creditors and investors.

Citigroup named one of its Parmalat structures Buconero, Italian for “black hole.” Another structure Citigroup set up for Parmalat sold commercial paper, backed by what turned out to be fake invoices, to U.S. money market funds. Citigroup contends it was “the victim” in all matters.

The Judge in charge of the case, Jonathan Harris, effectively gutted Bondi’s case against Citigroup. He dismissed all of Bondi’s contract and tort claims except for the claim that Citigroup aided and abetted the looting of corporate assets by Parmalat insiders.

Citigroup’s go-to guys for fraud claims against it, the law firm of Paul, Weiss, Rifkind, Wharton & Garrison, not only defeated Bondi’s claims but won a countersuit in a jury trial that awarded Citigroup $364 million.

Back in 2004, a gutsy reporter for Securities Week, Dave Serchuk, reported that Citigroup had bundled essentially worthless Parmalat debt into commercial paper and sold it to money market funds in the U.S.

In late 2007 and 2008, as Citigroup began its spiral toward insolvency, it was discovered that it had created seven Structured Investment Vehicles (SIVs) that were incorporated in the Cayman Island and not consolidated on Citigroup’s balance sheet: Centauri Corp., Beta Finance Corp., Sedna Finance Corp., Five Finance Corp., Dorada Corp., Zela Finance Corp. and Vetra Finance Corp. The SIVs contained approximately $80 billion of what turned out to be mostly toxic debt that brought the company down when a good chunk of it landed back on its balance sheet because it could not be rolled over as commercial paper.

And, somehow, a significant portion of that suspect commercial paper had ended up in what was supposed to be super-safe money market funds in the U.S. – which added to the panic in the markets during the 2008 crisis.

On July 29, 2010, the SEC brought charges against two Citigroup employees for “scripting” announcements to investors to hide $39 billion of the bank’s exposure to subprime debt. The SEC’s order charged Gary Crittenden, CFO during the period of the order, and Arthur Tildesley, head of Investor Relations at the time, and imposed fines of $100,000 and $80,000 respectively.  These individuals were not barred from Wall Street; their collaborators in the debt deception, who were known to the SEC via emails obtained from the firm, were not named in the SEC order or fined.

According to the SEC order, after the men had misled investors, “Citigroup then included a transcript of the misstatements in a Form 8-K that it filed with the Commission on October 1, 2007. The misstatements were made at a time of heightened investor and analyst interest in public company exposure to sub-prime mortgages and related to disclosures that the Citigroup investment bank had reduced its sub-prime exposure from $24 billion at the end of 2006 to slightly less than $13 billion. In fact, however, in addition to the approximately $13 billion in disclosed sub-prime exposure, the investment bank’s sub-prime exposure included more than $39 billion of ‘super senior’ tranches of sub-prime collateralized debt obligations and related instruments called ‘liquidity puts’ and thus exceeded $50 billion. Citigroup did not acknowledge that the investment bank’s sub-prime exposure exceeded $50 billion until November 4, 2007, when the company announced that the investment bank then had approximately $55 billion of sub-prime exposure.”

The decade of hubris at Citigroup landed in the lap of the U.S. taxpayer. To shore up the insolvent bank during the financial crisis, the U.S. government pumped in $45 billion in equity; over $300 billion in asset guarantees; and the Federal Reserve ponied up over $2 trillion in below-market interest rate loans.

Citigroup has now filed a notice with the SEC alerting it to the fact that it has received grand jury subpoenas related to potential lack of controls for money laundering. No doubt the phones are ringing again at the Paul Weiss law firm.

 

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