More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
U.S. District Court Judge Jed Rakoff administered a mighty tongue-lashing to the SEC in a proposed settlement with Citigroup the same day his colleague on the bench in New York City Miriam Goldman Cedarbaum dismissed fraud charges against a JP Morgan executive. Orders in the two cases involving bank sales of collateralized debt obligations were issued Thursday.
Rakoff is ordering the parties to provide detailed answers to nine questions by the next scheduled hearing the in the Citigroup case on Nov. 9. Those questions express severe skepticism with the proposed $285 million settlement of allegations the bank dumped toxic CDOs on unsuspecting investors.
The judge’s stinging rebuke to the SEC implied the government agency has acted arbitrarily in reaching its settlement with the bank. Among the questions were challenges to the amount of the penalty and culpability for the fraud.
Question No. 3, for example, is one of several challenging the SEC’s calculations of various penalties: “What was the total loss to the victims as a result of Citigroup’s actions? How was this determined? lf, as the SEC’s submission states, the loss was ‘at least’ $160 million, what was it at most?”
Question No. 7 challenges the SEC on culpability: “Why is the penalty in this case to be paid in large part by Citigroup and its shareholders rather than by the ‘culpable individual offenders acting for the corporation?’ If the SEC was for the most part unable to identify such alleged offenders, why was this?”
Rakoff also asked whether “the SEC’s charges are true,” given that Citigroup neither admitted nor denied wrongdoing, and he challenged the fairness and consistency of the agency’s supervision of financial firms, asking, “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?”
Meanwhile, Rakoff’s colleague in the Pearl Street courthouse just a mile from the SEC’s Manhattan office issued a second major rebuke to the government agency’s handling of its CDO cases by dismissing fraud charges against JP Morgan executive Edward Steffelin. Reuters reports the judge said Steffelin did not engage in fraud or deceit against CDO investors, though she did not dismiss other charges against him in the ongoing negligence case.
CDOs played a starring role in the subprime mortgage crisis, leading to the collapse of Bear Stearns when two of its hedge funds owning the risky mortgage securities lost nearly all their value in July of 2007. Managers of the two funds were arrested on criminal fraud charges that summer but both were subsequently found not guilty of misleading investors. This week’s legal setbacks for the SEC show once again just how hard it is to prove securities fraud particularly in cases involving sophisticated investors.