Courtesy of Pam Martens.
This week Citigroup, the serial settler of lawsuits on the cheap over wrongdoing, agreed to end litigation over its failure to disclose the full scope of its exposure to subprime debt. The settlement tab — $590 million. Between 2006 and November 21, 2008, the Friday before “Citigroup Weekend,” when the U.S. government had to step in to save the bank, Citigroup’s market value (the worth of all of its common shares in the marketplace) went from $250 billion to $20.5 billion. So the harm done to shareholders, in terms of loss of confidence, was more in the range of $229.5 billion, not $590 million.
The lead law firm was Kirby McInerney LLP. It did a masterful job of compiling and exposing the subterfuge and who knew what and when at Citigroup. We have the Court system to thank for the diminished payout. Court precedents have now made it increasingly harder to prove scienter. In Ernst and Ernst v. Hochfelder, the U.S. Supreme Court described scienter as “a mental state embracing intent to deceive, manipulate, or defraud.”
Public confidence in a banking institution, however, does not rest on scienter. A pattern and practice will do. Based on the following timeline (not an exhaustive list by any means) you be the judge:
September 19, 2002: FTC Announcement — “In the largest consumer protection settlement in FTC history, Citigroup Inc. will pay $215 million to resolve Federal Trade Commission charges that Associates First Capital Corporation and Associates Corporation of North America (The Associates) engaged in systematic and widespread deceptive and abusive lending practices.” The firms were owned by Citigroup.
October 31, 2003: U.S. District Court Judge William Pauley signs a settlement order agreed to by multiple regulators for Citigroup to pay $400 million over issuance of fraudulent stock research.
May 28, 2004: The Federal Reserve announces a $70-million penalty against Citigroup Inc. and CitiFinancial Credit Co. over their handling of high-interest-rate “subprime” mortgages and personal loans.
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