Academic journal article Social Justice

Sweetheart Settlements, the Financial Crisis, and Impunity: A Case Study of SEC V. Citigroup Global Markets, Inc

Academic journal article Social Justice

Sweetheart Settlements, the Financial Crisis, and Impunity: A Case Study of SEC V. Citigroup Global Markets, Inc

Article excerpt

Abstract

This article highlights the inherent limitations and current failures of securities laws, with a particular focus on the abdication of power by state agents to protect the public interest from financial frauds. Through a case study of SEC v. Citigroup Global Market, Inc., the authors examine the SEC's practice of settling enforcement actions alleging serious patterns of fraud. Here, corporate and bank fraud is successfully moved away from the criminal courts to the civil fraud arena, and then takes the form of "consent decrees" in which the offending party can negotiate a penalty, usually in the form of a modest fine and no admission of liability. This finding is consistent with criminological literature dating back to Willem E. Bonger and Edward H. Sutherland, and, more recently, to the work of Richard Quinney, William Chambliss, and Jeffrey Reiman and Paul Leighton.

Keywords: critical criminology, state-corporate crime, securities fraud, elite power, Securities and Exchange Commission, participatory action research

**********

THIS ARTICLE HIGHLIGHTS THE CASE OF SEC V. CITIGROUP, IN WHICH THE DEFENDANTS accepted a consent decree for fraudulently issuing a collateralized debt obligation (CDO) without admitting or denying guilt. The US District Court judge, Jed Rakoff, rejected the decree, arguing that there was insufficient information to determine whether it was fair, adequate, reasonable, and in the public interest. In this case study, we examine the SEC's practice of settling enforcement actions that allege serious patterns of fraud. We find that corporate and bank fraud is successfully diverted from the criminal courts to the civil fraud arena, taking the form of "consent decrees" in which the offending party negotiates a penalty, usually in the form of a modest fine without an admission of liability. The Second Circuit US Court of Appeals affirmed this process, concluding that what is required is to ensure the decree is procedurally proper. This controversy over the Rakoff ruling allows a discussion of a broad set of issues regarding law and capitalism, and begins with a 2011 lawsuit.

On October 19, 2011, the primary regulator of securities markets in the United States, the Securities and Exchange Commission (SEC), filed a lawsuit accusing one of the world's largest banks, Citigroup Global Markets, Inc. (Citigroup), of securities fraud over mortgage investments. The complaint alleged that following its early 2007 realization that the mortgage-based securities market was weakening, Citigroup created a billion-dollar fund known as Class V Funding III (Class V) that allowed it to dump questionable CDO assets on misinformed investors. CDOs are financial tools used by banks to repackage individual loans into a product that can be sold to investors on the secondary market. These packages often consist of auto loans, credit card debt, mortgages, or corporate debt. The term "collateralized" is used because the promised repayment of the loans is the collateral that gives the CDO its "value." The SEC charged Citigroup's principal US broker-dealer subsidiary with misleading investors about a $1 billion CDO tied to the housing market in which Citigroup bet against investors as the housing market showed signs of distress (see SEC Enforcement Actions 2013).

The risky bets of Wall Street firms have had a dramatic and negative effect on the United States (see, e.g., Schumer 2007). They were central to the unprecedented siphoning off of money from the middle and lower-middle classes by elites (the one-half of one percent by income). In 2008, the US financial markets experienced a series of cataclysmic events that still affect the economy in 2015. "Many factors influenced the global meltdown, including flawed financial policies, law-breaking, greed, irresponsibility, and not an inconsiderable amount of concerted ignorance and outright stupidity" (Pontell, Black, and Geis 2014, 1). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.