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Judge Huvelle: “Why Would I Find This Fair and Reasonable?”

Posted by Larry Doyle on August 18, 2010 2:09 PM |

Wall Street has a funny way of meting out justice. All too often, investors are left with little more than ‘caveat emptor’ when it comes to engaging large Wall Street institutions. Beyond that, the SEC and FINRA are often critiqued for being more closely aligned with the industry than with investors. I was reminded of this fact when reading last week that the SEC settled with Citigroup for a token $75 million regarding Citi’s disclosure, or lack thereof, of its sub-prime holdings in the midst of our economic crisis.

My ‘sense on cents’ view of the world made me think that Citi got off awfully cheap for having misrepresented its financial positions. If $75 million is all it costs for misrepresentation of financial documents, then America should ready itself for a whole lot of misrepresentation. Thankfully, a judge threw a quick yellow flag on the field while indicating that this play needed further review.

The Wall Street Journal highlights this story in reporting, Judge Won’t Approve Citi-SEC Pact:

A federal judge refused to approve the Securities and Exchange Commission’s $75 million settlement with Citigroup Inc. over the bank’s disclosure of subprime-mortgage problems, saying she is “baffled” by the proposed pact.

The move by U.S. District Judge Ellen Segal Huvelle represents another challenge for the SEC as it tries to punish financial institutions blamed for the financial crisis.

The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives.

“I look at this and say, ‘Why would I find this fair and reasonable?'” the judge told both sides at a 90-minute hearing. “You expect the court to rubber-stamp, but we can’t.”

How is it that the SEC can so blatantly miss the target on situations such as this? Are they so far ‘off key’ in understanding what is fair and just? Do they run these situations up a judicial flagpole prior to dispensing this so-called justice? How can investors regain a sense of confidence and protection when a judge, such as Judge Huvelle, so quickly and emphatically responds by throwing out the SEC ruling?

For those who care to review the 2-page brief provided by Judge Huvelle, thanks to a regular Sense on Cents reader for providing us with the SEC vs Citigroup brief. Judge Huvelle asks the pointed questions which America deserves answered.

In light of everything that has transpired on Wall Street and throughout our nation, American investors and our citizens at large truly deserve so much better from the SEC. If Mary Schapiro and team are trying to convey a message that they are working hard on the American public’s behalf, then they need to work a lot harder than this. Sense on Cents is not making that unilateral statement. All one needs to do is read Judge Huvelle’s brief to come to that simple conclusion.

Comments and constructive criticisms encouraged and appreciated.

Larry Doyle

In the spirit of full disclosure, I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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  • ROB

    Unfortunately, this is more of the same from the SEC. The workers that commit the fraud are never liable even when their actions are no different than going to a bank teller and handing over a note that says “give me all your money.” Not disclosing their subprime liabilities allowed these executives to collect bonuses they knew they didn’t deserve, thereby ripping off any C shareholder in the process. Oh, lets not forget almost bring the world’s economy to its knees.

    Now the SEC thinks that $75 million to be paid by the shareholders is justice? If these senior executives/managers were forced to do real jail time for ripping people off maybe then their buddies would learn. However, this current settlement is a joke, one that has the people who committed fraud laughing all the way to the bank.

  • Lou

    Well the simple fact is regardless of the size of the fine, it is taxpayer money that has gone into this institution and it will be taxpayer money coming right back out.

    The real penalty should be in terms of aggressive personal fines and suspensions so the rest of Wall Street wakes up and listens.

    The message the SEC has sent to the rest of the industry remains nothing more than ‘business as usual.’

  • disenchanted

    I fully agree with Lou. If this were a small firm, every supervisor and exec would be part of this settlement, and the brokers that were involved would also pay for their sins. As long as the “good old boys club” remains in charge, nothing will change. It sounds to me like we finally got a Judge that is independent. Maybe she can talk some sense into Judge Rakoff.

  • Sweet Ebony Diamond

    Lloyd Blankfein & other Wall Street doorknobs will go down in history for their stupidity. This 100% Caveat Emptor idea is so wrong.

    When someone is selling something they must disclose all that they know about the investment (or whatever they are selling).

    The buyer then makes a decision based on these disclosures and their knowledge (which is where Caveat Emptor comes in).

    A transaction involving a pharmaceutical is a good example of the disclosures required by a seller.

    The seller can withhold information but if they are found to have withheld the information then they are busted.

    Lloyd & his Big Short are busted.

  • TeakWoodKite

    My view is the colluded powers tha be want the story to go away. Principles and persistance is not in thier moral Lexicon.

    The Judge is spot on.

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