Courts and Regulators Keep Wall Street’s Dirtiest Secrets

By Pam Martens: April 4, 2013 

In a March 25, 2013 letter to Wall Street regulators, Senator Elizabeth Warren and U.S. Representative Elijah Cummings warned that “Criminal activity should not be shielded by regulators as if it constitutes proprietary information or trade secrets.”  And yet that is exactly how Federal Courts and Wall Street regulators are functioning today – as sealed vaults for Wall Street’s dirtiest secrets. 

Take the case of Abu Dhabi Investment Authority v. Citigroup. Abu Dhabi is a U.S. ally. It invests the surplus cash of the country through its sovereign wealth fund, the Abu Dhabi Investment Authority, known throughout Wall Street as ADIA. In 2010, ADIA charged Citigroup with lying and defrauding it out of $4 billion in connection with a $7.5 billion investment it made in Citigroup when the company was teetering in November 2007. 

ADIA could not bring its charges in an open public courtroom. It had signed on to Wall Street’s kangaroo courts, otherwise known as mandatory arbitration, where the hearings are held in secret and the details and arbitration decision were to remain sealed from public view. All of ADIA’s claims were to be administered and heard by the International Centre for Dispute Resolution of the American Arbitration Association (AAA), a group that substitutes its own “neutral” arbitrators for judge and jury. In the ADIA matter, two of the three lawyers serving as the “neutral” arbitrators worked for law firms which had represented ADIA’s adversary, Citigroup. 

ADIA’s claims were heard in arbitration in New York between May 2 and May 25, 2011. That was one year after the Securities and Exchange Commission (SEC) brought and settled a case against Citigroup for lying to the public about its true financial condition. The SEC charged Citigroup, its CFO, Gary Crittenden, and Arthur Tildesley, Jr., head of Investor Relations, with telling the public that Citigroup had $13 billion of subprime exposure when it knew its true exposure was over $50 billion. 

Why did Citigroup lie? The SEC obtained emails that explained the culture at Citigroup: its executives elected to deceive the public and go with the $13 billion figure because it had never previously disclosed the rest of the $50 billion exposure and an executive asked them not to raise the issue now. 

When the SEC has documented a casual willingness within Citigroup to lie about the true state of its financial affairs, one would have thought ADIA’s case against Citigroup would have been a slam dunk. In fact, ADIA lost in its arbitration against Citigroup. 

On November 8, 2012, lawyers for ADIA went before Judge George Daniels in a Southern District of New York Federal courtroom to present their oral argument to vacate the arbitration decision. At the request of both sides, the Judge had previously sealed the text of the arbitrators’ decision and a great deal of the record in a matter of great public importance: Citigroup had been propped up with over $2.5 trillion of support from the American taxpayer through capital infusions, asset guarantees and low-cost loans. The public had a pressing need to understand how it conducts its business with a U.S. ally and investors in general. 

Exactly how does a lawyer effectively argue his case before a Federal judge when the most important details of his case cannot be stated in a public courtroom? The absurdity of the way Wall Street has been allowed to twist the U.S. justice system into a legal twilight zone is on display in this muzzled presentation by David Elsberg of Quinn Emanuel Urquhart & Sullivan LLP on November 8, 2012 in the ADIA v. Citigroup matter: 

Judge Daniels: …but what is it about what they found that the facts were that you say would have made you win under the Abu Dhabi law when you lost under New York law? 

Elsberg: There’s an enormous amount, your Honor. 

Judge Daniels: Give me the best one you got. 

Elsberg: Yes. For example, let me focus you on one particular fact. In the opinion, the panel found expressly that ADIA made at least a colorable showing that Citi made some omissions of fact, material fact, by speaking incompletely and ambiguously, at least a colorable case. But then the panel went on to say that under New York’s law which implies a duty to disclose, right. 

Judge Daniels: Right. 

Elsberg: New York says you can stay quiet if you don’t have a special relationship. Your Honor, I’m not going to go into more detail about the — I’m not going to say anymore about it now. 

Les Fagen (of Paul Weiss Rifkind Wharton & Garrison LLP, representing Citigroup): It’s a sealed order, your Honor.

Elsberg: It’s a sealed order. 

Elsberg lost his case and the matter is now on appeal – creating winners for all the law firms who will have more billable hours and creating losers out of the American people who are left with an incomprehensible financial system shored up by an incomprehensible justice system. 

At least four of Citigroup’s regulators have also aided and abetted the darkness around Citigroup that has stymied transparency and the pursuit of justice against the firm. The former head of the FDIC, Sheila Bair, wrote as follows in her book, Bull By the Horns, regarding the banking subsidiary of Citigroup known as Citibank:   

“On May 26, 2009, our head of supervision, Sandra Thompson, sent a letter to William Rhodes, the CEO of Citibank, notifying him that FDIC examiners had downgraded Citibank to a CAMELS 4, citing the institution’s weak capital and liquidity position and the failure of its management to correct its inadequate controls against excessive risk taking. That same day I received a call from Ben Bernanke [Chairman of the Federal Reserve] asking that the FDIC not downgrade Citi.” 

The public was never let in on the secret that the insured deposit institution that continued to accept the life savings of people around the world held an abysmal CAMELS 4 ranking. 

Likewise, on February 14, 2008, when the top regulator of national banks, the Office of the Comptroller of the Currency, sent a formal letter to Vikram Pandit, then CEO of Citigroup, effectively telling him he was running a rogue operation, the public never learned of this until years later when the document was released by the Financial Crisis Inquiry Commission. The following excerpt from that letter is more than likely information that would have been highly relevant to the Abu Dhabi Investment Authority in deciding whether to invest $7.5 billion in this U.S. financial institution: 

  • The Board and senior management have not ensured an effective and independent risk management process is in place. Risk management had insufficient authority or failed to exercise its authority to constrain business activities. 

  • The Board and ARMC were not provided meaningful or systematic information on material risk and compliance with limits, controls, or concentrations. The Citibank, N.A. Board had no effective oversight role specific to the risk profile of the bank. 

  • It appears management was more focused on short-term performance and profitability along with achieving top industry rankings across many major products rather than on risk or potential loss. Risk was insufficiently evaluated.

  • Over-reliance was placed on credit rating agency ratings without considering the appropriateness of these ratings to specific products or the true risk of the underlying collateral. 

  • The present valuation methodology for CDOs is within the range of current market practice, but needs to also factor in the results of the collateral based approach. Additionally, weaknesses were noted with model documentation, validation, and control group oversight. 

Then there is the willful obfuscation by the SEC. In this December 14, 2007 letter, Gary Crittenden, CFO of Citigroup at the time, responds to questions of serious financial irregularities posed by Kevin Vaughn, Branch Chief of the SEC at the time. Pages 22 through 32 of this correspondence have been completely redacted. Five years later, the material is still redacted on the SEC’s web site because Citigroup, a serial miscreant, wants it kept secret. 

According to press reports out today, next Thursday, April 11, the U.S. Senate will hold a hearing to investigate if  consulting firms like Promontory Financial Group LLC, that were paid directly by the too-big-to-fail banks to conduct reviews of the banks’ housing foreclosure abuses, were corrupted, compromised or simply overwhelmed by the process. 

This is 2013. The epic economic collapse resulting from epic corruption on Wall Street commenced five years ago. Why is our Congress still investigating current patterns of corruption that are identical to those that brought our country to the brink of the Great Depression in 2008? How many times must a rational, reasonably intelligent person ask the same questions before arriving at the epiphany that Wall Street is getting more, not less, corrupt; that reform legislation has been an utter failure.

Wall Street fully grasps that a corporate-funded Congress, captive regulators and a spineless judiciary are the best pals it could ever hope to have on its team.

Related Documents:

Transcript of Oral Arguments in Abu Dhabi Investment Authority v Citigroup, November 8, 2012

OCC Supervisory Letter to Citigroup Detailing Lapses in Risk Management, Dated February 14, 2008

Related Articles:

U.S. Ally Abu Dhabi Levels $4 Billion Fraud Charge Against Citigroup

Meet the Lawyer Who Gets Citigroup Out of Fraud Charges

Update: 10:44 a.m., April 4, 2013: Throughout the above referenced court transcript, the name of the attorney representing ADIA is spelled David “Eisberg.” In checking the bio for David Eisberg at his law firm, Quinn Emanuel, we noticed that only a David “Elsberg” was employed there. A call to the firm confirmed that no David Eisberg was employed at Quinn Emanuel at the time of the oral arguments in 2012 and the employee I spoke with knew of no David Eisberg ever working for the firm. An email and a phone call have been placed with Elsberg asking for verification that he was the attorney that made the oral arguments on behalf of ADIA; a voice mail has also been left with the firm’s press office. We will update this information if, and when, we receive a factual response.

Update: 11:35 a.m., April 4, 2013: David Elsberg has confirmed by email that he made the oral arguments in the Abu Dhabi Investment Authority v Citigroup matter on November 8, 2012. The above article has been updated to reflect the correct spelling.

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